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This video is part of our Negative Gearing video series.
You’re currently watching Video 3. Video 1: What is Negative Gearing and Why It’s NOT a Strategy? – Watch here Video 2: Labor’s Negative Gearing Policy Blunders (Part 1) – Watch here
Hi Ben Kingsley here. In part 2 of this series of Labor’s Negative Gearing Policy Blunder, I’m going to explain to you why we think not only rents are going to increase but also property prices are going to fall. This comes down to the concept of demand and supply.
Let’s have a look. So here, we have a price axis and we have a quantity axis here. In theory, what you’ve got to understand that when there are high demand and low supply, prices go up. When there’s high supply and low demand, property prices or value goes down. We have this curve here that indicates demand and then we’ve got this curve here for supply. When a property market is in balance, they call that equilibrium or any type of market in balance, they call that the equilibrium.
Now understanding that concept we need to go back and have a look at our buyer behavior and what’s going to happen in terms of demand assumptions. In a lot of the modelling, people who think that there’s not going to be a lot of significant change they’re assuming that the investors are going to keep doing what they’re doing. Problem with that is the investor is looking for a return on their investment and ultimately they can choose to invest in property or they can choose to invest in alternative investments to get the best bang for their buck. So if we think about it like this, we still think that the 70% of owner-occupiers will stay in the market and they’ll continue to buy their mixture of new and existing properties.
But the challenge of what we saw in part 1 of this video series is what do these 30% investors do now? We learned in Part One that effectively 45% of them are currently buying new property and 55% of them are buying existing property. Why are they buying existing property? Well in a lot of cases they’re buying existing property because it gives a better return than the new property does. In fact, there was some research that came through from BIS Oxford Economics. What they found is when you’re buying high-rise off-the-plan apartment, and this has been the performance in the last few years, since 2011, we saw in Melbourne that out of those people who bought off the plan apartments, 66% had zero or negative equity. Meaning they’ve made a loss. That is our problem.
That’s basically two out of three.
Now when we look at the Brisbane market, we saw in almost one in two. 48% had zero or negative equity. Zero or negative equity! 48%! One in two. Melbourne is two out of three. Now since 2015, what you’ve got to understand is this was a booming property market in Sydney at the time in terms of their off-the-plan purchase. So our good friends in Sydney also experienced 23%. One in four had zero or negative equity.
Now let’s put that into context here. Of those 45% who have bought, a lot of them aren’t going to experience very good returns. The smart investors who have bought the 55% of existing, they’re actually going to do okay in terms of their returns. So if we think about that, what’s the demand of this?
Effectively half or thereabouts, what are they going to do? Where are they going to divert their money? Are they going to go into shares? And then that effectively reduces the demand for property.
Of those people who might potentially decide, “No I want to buy new”, well the results aren’t great. And once that message gets out there and it becomes common knowledge that investing in new stock and off the plan stock doesn’t deliver good capital growth or good returns in general, they might also decide to deploy their money elsewhere. And the Labor understands this and the reason why we know they understand this is because as part of their property policy offerings, they’ve got a thing that they’re doing called Build to Rent which is an initiative for the big end of town big business to start investing in building stock for renters. Now because they understand that if the demand pulls away, that’s where you’re going to see property prices fall. Secondhand properties will exist under Labor’s policy whereby once they’re not new, no one will necessarily touch them. So we’ve got this big fall away of demand and that’s putting pressure on prices and that’s why prices will fall.
If you think about it, 30% of the marketplace. If they decide to go or a lot of them decide to get out, that’s where we’re going to see an issue in terms of prices. Now there will be still some smart money that goes into some good existing areas where land is tightly held and it’s in limited supply which will get good capital growth, for those people looking for existing and can afford to supplement that. Understanding negative gearing means if the government’s not going to help you in the short term, you’re going to have to provide that surplus income yourself to cover those losses in the earlier stages but let’s circle back here.
This Build to Rent initiative from the Labor Party is offering a 50% tax break. So the big end of town is going to get a tax break of 50% off! Yet the mum and dad investor, they’re going to get a tax hike in terms of capital gains of an additional 50%. Not sure that’s fair if Labor’s talking about a fair go.
Now the reality of that though, is that they need to understand that there are literally tens and hundreds of thousands of people around the country coming and going in terms of the rental pool. So this Build to Rent policy, what are they going to build? Well, they have to build volume because the economics won’t stack up for them in terms of just building one house here, one house there. They’re gonna build medium and high density Apartments. So the reality for people is that the demand for these rental properties is going to get contracted. If you think about it, demands are going to go high for rental as supply starts to dwindle. Anyone who wants to live in a house or a townhouse, they are potentially going to pay higher rents but if you want to go live in one of these high-rise apartments that potentially could be oversupplied, we start to break down the different market segments. You might get cheap rent there but you may not want to live there. And if you’re a family, these types of properties may not necessarily accommodate you as a best fit so who’s going to provide that accommodation if the investors have gone?
That’s what you normally see and that’s why we saw during the 1985 to 1987 period when negative gearing was abolished. We did see in terms of the absorption of rental, the rental stock at the time was starting to absorb. Vacancy rates were dropping and rents were starting to go up. That was certainly the case based on the REIA’s data, the Real Estate Industry Association of Australia. It wasn’t perfect across every capital but it didn’t really have enough time to mature so there are people out there arguing that rents didn’t go up everywhere. Yes but if you start to see vacancy rates coming down and certainly for houses, there was a real spike in terms of demand, rental price is going higher. We also saw through some data from SQM research that construction fell by 27%. That’s again an indication when you think about it, if 45% of all investors are currently buying new, they are already adding to that pool. Now Labor is telling us they’re going to move this, incorrectly with wrong data, they were going to move this from 7% to 22% to get their spike in construction.
That’s not going to happen either.
So this is the other challenge that Labor has with their policy. It changes buyer behaviour. Investors are getting smarter, they’re more informed with their data. They can find these types of reports, they can see the performance of that type of asset and they can say to themselves, “Well I don’t necessarily think I want to buy brand new because I’m not getting good bang for my buck.” The price and the value is already factored in the profits with the builder or developer. It may not necessarily be with the investor. And then the second-hand market, doesn’t exist! So trying to sell that property to potentially an owner occupier when the vast majority of owner occupiers want a little bit of dirt, bit of terra firma, they want land so they won’t necessarily be buying that stock.
This has serious ramifications for not only renters but also homeowners and if you think about how that flows through the economy it’s really important and that’s what I want to finish on with.
I want to finish on what the threat, what the Masters Builders said. The Masters Builders Association and they like new construction by the way. They’re in the business of helping builders get jobs and get construction happening. Their research showed some staggering problems. They said there’ll be 40,000 less dwellings built under this policy. They also talked about potentially around sort of up to 30,000 less jobs. So less dwellings, less jobs and an $11.2 billion impact to the economy.
This is what we talk about in terms of direct and indirect consequences of policies like this. The marketplace understands itself. Everyone’s on a level playing field and even if you grandfather negative gearing for existing owners and investors, the problem is you can’t guarantee that you will protect their values if you destroy the buyer demand and the buyer behavior that’s going to exist in the marketplace.
So the policy has a big question mark in my view. It’s not good.
It’s not good for investors now, won’t be good for investors in the future.
It’s not good for homeowners who are caught up in this mess because remember they have no say in this but they’re also going to be impacted by property prices falling. They didn’t buy into that.
This was macro policy. And then for renter’s, same thing. Limited rental stock and higher rents are going to be paid. Construction falls away, there arre direct and indirect jobs associated with that.
So we always say to Labor.
Rethink this policy. It’s not a good one. There is an answer somewhere in here but it’s not in the way in which you’ve designed this policy.
Thanks for watching.
This video is part of our Negative Gearing video series.
You’re currently watching Video 3. Video 1: What is Negative Gearing and Why It’s NOT a Strategy? – Watch here Video 2: Labor’s Negative Gearing Policy Blunders (Part 1) – Watch here
This video is part of our Negative Gearing video series.
You’re currently watching Video 2. Video 1: What is Negative Gearing and Why It’s NOT a Strategy? – Watch here Video 3: Labor’s Negative Gearing Policy Blunders (Part 2) – Watch here
Hi Ben Kingsley here. In this negative gearing series, I’m going to talk to you in two parts about Labour’s huge blunder when it comes to their negative gearing policy. Let me explain to you a couple of things here we need to understand about the marketplace.
The property market is made up of two main buyers. We have the owner-occupier and they represent about 70% of the marketplace and then we’ve got the investor and the investor traditionally represents about 30% of the marketplace.
Now, why is that important to understand?
Well, we’ve got to understand the supply and demand story here but we also need to understand exactly what they buy. What did the 70% buy and what – the 30% buy because this is where the huge blunder has occurred in regards to the policy design. Let’s talk about this.
So in terms of the new buyers, the owner occupiers versus the investor. The owner occupiers buy about 15% new. That means the properties are newly built or house and land or in the middle of the construction process. That’s about 15%. That obviously means that 85% would be existing property. That’s what they’re buying.
Now in terms of the investors… This is where the big problem is in regards to the modelling that all of Labor has done. The Parliamentary Budgeting Office, the Treasury and the Grattan Institute have got incredibly wrong. Now what we needed to understand is of that 30%, how are they broken down? Let’s take a look at that.
So we spin this out here and we say well in terms of the new property, what Labor was telling us, via the PBO, is that it was around sort of less than 10% was new. Which would mean that obviously, 90% would be existing. They called that a policy failure and they said no one’s buying new investment properties. We’re going to fix that with our policy because what they’re saying is, they’ll still keep negative gearing on brand new property but won’t allow it on existing property.
But wait! There’s a catch there.
Now the data from the industry suggest that if they had asked the industry and same with the Grattan Institute, if they had have done rigorous research they would have found out by asking the subject matter experts exactly what the mix is. It turns out that the mix looks more like this… The industry data is telling us that in terms of the new portion, that is around 45%. Which means the existing portion would be around 55%.
Now, why is that a big deal?
Well if you think about it, the modelling that Labor and the Grattan Institute did in terms of talking about how it’s going to have a minor effect on property prices and do nothing really around rent… Well, that’s where they got it wrong. Because in the modelling that Labor has used assumed that it was going to move from 7% new up to 22% new and that was going to provide an economic boost. They talked about creating around 23,000 to 25,000 new jobs. They talked about the economic benefit being around that sort of $32 – $35 billion in their forward estimates in revenue this policy would bring in because the market was going to shift from buying existing property to buying new property.
Problem is… We’re already buying 45% new.
If we’re moving to that 22%, actually meant that it’s half of what’s actually happening today. So are we going to get that building boost, that building boom that Labor has promised? The construction led boom of new jobs. No.
If the PBO and Labor are right, it’ll actually mean a contraction in the economy. It would actually mean we would move from almost half of what we’ve got today. That’s a problem and what has happened has meant that both the Labor party and the Grattan Institute have now had to step back from their positions. They’re now asking for that remodelling to be done and what could come of that is… that remodelling could show zero benefit in terms of changing negative gearing. If you think about it, it’s a pretty good call that it may not do anything because if we’re moving from a so-called mysterious fake number of 7% to 22%, how are you going to get that boost especially when it’s already 45% today?
That’s the first blunder that Labor talks about when it comes to their negative gearing policy. In the next video, I’m going to talk about the second part of their blunder in terms of buyer behaviour and what will happen to the buyer if they introduce this policy.
Thanks for watching.
This video is part of our Negative Gearing video series.
You’re currently watching Video 2. Video 1: What is Negative Gearing and Why It’s NOT a Strategy? – Watch here Video 3: Labor’s Negative Gearing Policy Blunders (Part 2) – Watch here
Hello, Ben Kingsley here. There’s a lot of discussion and debate around property at the moment and Negative Gearing. So I thought I’d set the record straight in this series of short videos around What Is It and What Type of Impact that’s going to have on the Marketplace if there’s going to be some changes made to negative gearing.
I want to start with the basics in understanding what it is and how does it work. Let’s take a look.
So we’ve got effectively, money coming in and that money coming in is what we refer to as obviously the rent that we get. Let’s say we get $20,000 in rent for the year. Now, what’s our money going out? Our money going out over here would be things like holding costs. Let’s put those holding costs in and what can these things be? You know, maintenance and repairs. We’ve got repairs and we’ve got, maybe property management fees as examples. Now let’s say as an example, that’s $1,000 for the year. So if we own the property outright, we had $20,000 coming in and we had $1,000 going out. We would have an income of $19,000. Now that $19,000 is added to our income tax for that year and we pay tax on that income. So we are going to pay tax.
Now that’s NOT negative gearing.
That’s just a property that doesn’t have any other costs associated with it but what if we introduced some other costs? What other costs are there and this is where the gearing comes in. Let’s start understanding the concept of gearing… we’re going to use that word.
Gearing is effectively mean that we borrow the money. We’re going to borrow to invest and in this particular case, we borrow a bit of money and the interest costs… Let’s say that was also $20,000 for the year. The other type of costs that we might also be able to write down or write off is a thing called depreciation. Depreciation works with the assumptions that fixtures and fittings and the building itself, is going to deteriorate over time. So we’re able to write those off. It’s not actually a physical cost that we have to pay but it helps in terms of being able to claim that cost against your income for that year.
Let’s say in this particular case we had $5,000. That would mean if we got the $1,000, the $20,000 and $5,000, then we had $26,000 in claimable costs. Okay. So that would mean if we had $20,000 coming in for rent and $26,000 going out, we would be operating that property at a loss for that year. That loss would simply be $6,000. THIS is the negative gearing piece.
We’ve got the gearing coming in here, the property is running at a loss and we’ve made this $6,000 loss. Now, we were able to offset that $6,000 against our PAYG income or our pay-as-you-go withholding income. Different people are on different marginal tax rates and that will be affected. So let’s say hypothetically, that marginal tax rate is 50%, the highest you can possibly get for ease sake. That would mean that there’s $3,000 that we would be able to claim back but there’s still $3,000 that we’ve completely lost.
So if anyone’s thinking about investing in property and continuing to run at a loss, well they’ve got rocks in their head.
Because that’s not good management. That’s not good investing.
What we need to understand is that negative gearing is only a moment in time and you can understand that the interest cost would be adjustable by how much you borrow. If you borrow more, you might have higher interest costs early but if you borrow less, that interest cost could be low which I demonstrated in the first example where we had no interest cost at all. The property was positively delivering income.
Ultimately, we have to pay tax on that income. If we were to draw a diagram of time and value, we would start to see how it looks like over the years. So we go time here in years and then we look at a midpoint which is our break-even point. That’s zero dollars and we might have -$5k, -$10k and up here we have $5k. I’m going to keep it going because it’s really important to understand this. We’ve got $10k, $15k etc. You might start off where you are in negative territory, and then you move through as you pay down that debt, the rent goes up. Inflation plays a role in that. So if we think about our break-even point and you’re still going on over time, we have a period where we are in negative. Running the property a loss which would mean we’d be able to have some tax refunded to us. So there’s a tax refund here in terms of offsetting other income or tax that we’ve paid. When it passes that line and goes to neutral or positive, it means we have tax payable.
And this is what many people don’t understand or are missing the point.
You don’t invest in property to run it at a loss. You invest in property to make a gain over time. The tax refund that you’re getting earlier on helps you from a cash flow point of view and it helps the typical mum and dad from investing. High-income earners in some cases can run properties at losses so, it’s not going to stop the high-income earners from continuing with this strategy but if you were to ban negative gearing for mum and dad investors, then ultimately you’re going to have a series of consequences. Both intended and unintended associated with that. Which means less investment and also means less rental accommodation available. And ultimately, this means higher rents. But I’ll explain that in one of the upcoming videos.
To close off, this is what negative gearing is with the final point around the taxation story.
When we think about tax, there’s a couple of taxes that we pay. We get a tax refund when we experience a loss for that year but what tax are we paying? What tax do property investors pay?
In terms of what’s tax payable, well there’s quite a bit. I’m going to try and squeeze them all in here, but obviously, from a state level, we have stamp duty. Now stamp duty is a one-off, so we pay that as a one-off cost but when you own investment properties, you also pay land tax and that land tax is every year. Then from a Federal point of view, we also have other costs in taxes that we have to pay such as, it’s part of our income tax. Once it becomes positive, we pay income tax. And then if we sell that property, we pay a lot of capital gains tax. So you’ve got capital gains tax as well as the income tax that you will have to pay each year.
It’s crucial to understand that a property investor adds a significant amount of tax revenue at both the State and Federal level. The negative gearing portion of that time is only early and then over that period of time, it becomes positively geared.
Now you might say people are just speculating in property.
We disagree with that.
You invest in property for the long term, you don’t invest for two or three years. That’s too expensive to do, and as we have seen at the moment, property prices don’t always go up. The longer you hold that property, the better position you’re going to be in. That’s the concept of gearing. Adding gearing which is really the biggest cost you have in terms of the interest that you’re paying.
If interest rates are lower, that cost basis is lower. Some properties can also move to positively geared earlier if that interest cost is lower. It’s important to understand there are quite a few moving parts to this, but the fundamentals are this:
You invest in property for LONG TERM passive income to supplement your superannuation and your retirement income. And that will mean that you’ll be less of a burden on both the State and Federal Governments because if you can self-fund your own retirement, then you’re in a greater position to enjoy life. But also be less of a burden on the tax person.
This time, we thought we’ll share some of the links that would help investors in finding out more about the zone their desired property is in.
Please bear in mind that we are NOT a property zoning expert so some of these links might be updated or changed in the future. It is imperative to consult experienced and professional advisor such as your solicitor, town planner or Local Council if you’re concerned of the zoning of your desired property.
BASIX (Building Sustainability Index) assessment – BASIX certificate required when building new of renovating greater than 50k. Ensure work is within BASIX targets and NSW home benchmarks. BASIX certificate is attached with development application for submission to council.
Local Environment Plans (LEPs) – guide planning decisions for LGA’s through zoning and development controls providing framework for the way land can be used. Proposals submitted to DP&E to determine if they have merit to proceed.
At the May board meeting, Governor Lowe and the Reserve Board — well, I would have loved to have been a fly on the wall here because I’m sure this would have been a serious consideration— but they kept the cash rate on hold.
That’s right. For the 34th consecutive month, the cash rate is going to remain on hold.
Now, does that mean that we’re going to see the cash rate staying at this level? I predict not.
I suspect the only reason why they didn’t move on the cash rate was probably something to do with the federal election that’s going to take place in the next week or so.
It’s important to understand that the economy is still not in good shape. The reason for this, which we saw, came out in the inflation data.
In the first quarter of this year, we saw zero inflation. Now, most commentators and forecasters predicting around 0.3/0.4% for the quarter, taking the annualised rate of inflation between 1.6/1.8. But what we did see was zero inflation, which meant that the annualised rate of inflation is currently sitting at 1.3%. This is well outside the bandwidth of 2 – 3%, which is what the RBA has been saying they want to get to over a gradual period of time. But if it’s going in reverse, that is not a good sign.
We looked at the unemployment story for March — we saw a flat story around unemployment. That would have been another reason why they’ve probably held off, and also the pending tax cuts that are also going to be coming through, which will take effect from 1 July; putting more money in people’s pockets.
The reality is though: the economy is deteriorating quicker than most people have expected.
And there is a fair reason for that.
The fair reason is in relation to what’s happening politically. The uncertainty is not good, in regards to business investments. Businesses are sitting back, looking at both parties, and saying they’re not happy around the Liberal Party, in terms of their chaos and disorganisation, but they do run a good economy, versus the Labor Party with the uncertainty of all of these new tax charges that are going to flow through and take money out of the economy. So it’s important to understand that, in regards to why businesses are sitting back, going “This is no good”, this is seeing the economy slow down quicker than we’d all hope to do.
Some of the other data that we want to talk about, in terms of globally — we have some interesting stories there.
Firstly, the US, some good GDP numbers. We saw GDP currently growing annually at 3.2%. The other big news out of the US was the Fed Reserve’s Jerome Powell — and he may have been looking at the GDP numbers as well as the employment story in the US, which is still pretty strong — when he spoke around what his intentions were with their with the US interest rates. The story is this: he doesn’t see a need for a rate cut. The markets were expecting him to say that there will be a cut, and that’s obviously led to the stock market performing pretty softly over the last few days after hitting their record highs again. But he’s also saying that he thinks that inflation will improve and the economy is in an okay/good position — not as bad as some people were hoping, in terms of reducing the cash rate over there.
Back home, in terms of our credit story.
It’s not a good one, in regards to housing credits. So we did see 0.2% growth in March and that has meant that the annual rate of growth in credit for housing is sitting at 4%. If you think about population growth and all these people coming in, this is how bad that number looks.
It hasn’t been this low since the data was first created back in 1976. That’s 42 years ago.
So that is obviously a story in itself and it would be playing in the back of the minds of the RBA as well; in terms of trying to stimulate the economy.
What has forced the economy to slow, which we’ve obviously seen, has predominantly been dwelling prices; the house price correction that we’re seeing nationally. We did see 0.5% fall for capital cities annually, which has moved to 8.4%. This is the highest fall that we’ve seen — even bigger than the GFC period — since the data set began in 1980. It has been led by Sydney, which is now down 14.5% and Melbourne, down 10.9%.
What led to this correction in property prices has predominantly been the interference in the market place by APRA.
Now, I commented and praised them for the interference, which essentially quelled the amount of investors that were currently in the market place because it was unsustainable. But that job was done almost 9/10 months ago when the market started to flatten out. The job’s done.
So, Wayne — who heads up APRA — if you’re listening… please listen to me and drop the assessment rate.
It’s crazy having an assessment rate at 7.25% — it should be down around 6.5; 6.75 at worst. In this way, from a borrowing power point of view, borrowers would be able to borrow up to 5% more, which means that, potentially, they’ll be interested in buying into a marketplace. This will stabilise the property market because, at the end of the day, this has been a manufactured correction by you (Wayne) and by APRA — so please make sure that you listen to that story. We’re now starting to hear calls from CEOs of banks, in regards to this same message that I’ve been rabbiting on about for nine months or so now.
That is an important story. And the other story is…
How many rate cuts we are going to see?
It really comes down to politics. We talked about this before, in regards to what businesses hate — businesses hate uncertainty. They want direction. They want certainty. They want policies that are about growth and aren’t about slowing the economy. This is the challenge we have.
In my personal view — and I’m on record many times talking about this — if we do see a Labor government, I suspect we’re going to see a deteriorating economy. I suspect we’re going to see even further rate cuts.
I think if the Liberal National Party get in — and that will be a surprise — I think business confidence will rebound quickly because it is a little bit of “business as usual”. Whereas the uncertainty around the policies Labor is proposing, especially if we focus in on negative gearing and capital gains tax — just really shocking policies. They do nothing for growth. They do nothing for jobs. They do nothing for the economy overall. All they do is put pressure on house prices and over the medium term, they’ll put pressure on rents increasing. So not a good policy position to be in. Hopefully cooler heads will prevail if Labor is victorious on the 18th of May.
So, lots of detailed news. Make sure you tune in next month when we know what’s going to be happening.
But there are changes afoot, and it’s going to happen sooner rather than later when it comes to the cash rate.
Why use a Buyers Agent? What is a Buyers Agent Fee? Is a Buyers Agent Fee worth the money? How do Buyers Agents get paid? Is it really necessary? Find out the answer to all of these questions and more as Bryce Holdaway answers the pressing question in his latest How to Video, Why Should You Use a Buyers Agent?
Hi folks, today I want to consider Why you should use a Buyers Agent … and it’s something I have done now for the last twenty years and so I obviously think there is a lot of benefit in using one. I want to demonstrate to you a few things I think you should consider if you’re deciding whether to do it yourself or whether you should use a Buyers Agent.
So, let’s have a look at a few things that a Buyers Agent can help you avoid.
They can help you avoid buying the wrong asset.
And this is really important because if you buy the wrong asset it’s crucial you realise that down the track it’s going to cost you money. So let’s have a look at an example:
Let’s say we were going to buy a $500,000 property, and we checked the performance. If, let’s say, you could get 5% compounding capital growth and, let’s say, a Buyers Agent could just beat that by 1% — so 6% compounding growth. What difference would that make?
Well, in five years, by buying a property at 6% rather than 5% compounding growth, you’d be in front by $30,972, which is pretty good right? It’s about 2 ½ times what a typical Buyers Agent’s fee would be for that transaction. But it actually gets better. Because for the one-off fee you pay to get a Buyers Agent, over time it starts to look very, very good. After 10 years, you would be in front $80,976 for simply buying a property with a 1% difference in compounding growth over time.
But THIS is where it gets really exciting — because the idea of buying real estate with an investment-savvy mindset is to buy and hold for the long term. So, lets have a look at what this looks like after 25 years…
… You would be better off by $452,758!!
… And this is just from buying a property that does better by just 1%!
Now, why is that important? Well, I can’t tell you the amount of times I have had a conversation with someone who has said, “I’ve been meaning to buy an investment property for the last 6 months, 12 months, 5 years…” — some people have even been waiting their entire life — and the impact is quite significant.
If we have a look at a $500,000 property overtime. If we were to buy this property after 25 years it looks something like that. But if we were to wait just 5 years — and get the same trajectory — that difference there is a whopping $542, 368! It is just enormous.
So if you were to buy the wrong asset and procrastinate… that’s almost $1 million that would be out of your pocket. Just from doing those two things. And all that is, mind you, is starting 5 years later. So the compounding of time is so important because a lot of the time, for most people, the biggest growth doesn’t happen in the early years — it’s when it starts to get exponential towards the end where it makes a significant difference.
Now the third thing I want to talk about is…
If you DON’T use a Buyers Agent, you may pay too much.
Now here’s a couple of things to think about in terms of what a Buyers Agent does — and, really, there’s a subsection.
The first part is they do research and planning.
What that means, is that if location does 80% of the heavy lifting for an investment asset, the idea is we will find the right location based on our experience and based on the data to make sure we give you the best chance of getting a property that does at least 1% better, or more, in the compounding growth outcome.
So, research and planning really comes down to: what location am I going to buy in, and what’s sort of property are you going to be buying — is it going to be a house, is it going to be a townhouse, is it going to be an apartment, is it going to be a flat, is it going to be a villa… is it going to be any number of all of the different property types that you can have?? And this all comes down to the preplanning before the actual buying.
Now, the second thing is the property search.
So, once we’ve determined what it is we’re going to buy, in which location and what property type, it really comes down to looking on market for all of the properties. But there’s also a scenario where we can look off market. And we see A LOT of properties — quite a lot of them we reject, but the way, because they’re not suitable for clients. But we see so many properties off market where the agent rings us and says, “Hey, look. This property’s for sale. It’s not going to the general market. Do you have a client that might be interested in it?” So we can do that. We can act quickly because it’s pre-planned in advanced. And our client can buy the property without any of the general market ever seeing it. So you can either get “on market” or “off market”
And the third thing we do is the negotiation.
Whether this is private sale or turning up at auction. And in both cases, there is an art and a science to get a property for the best value that we possibly can.
So you can see that there is quite a bit that goes on for a Buyers Agent, in terms of behind the scenes before they get to the bricks and mortar.
Paying too much really comes down to negotiation. But there’s also some real prep work in advance that we need to think about.
But the question still remains… “Should I get a Buyers Agent?
Yes, you will pay a Buyers Agent Fee. You will either pay a fixed fee or a percentage of the purchase price — they’re generally the two options for a Buyers Agent fee available.
… and what impact will that have on me if I DO pay the fee?
For me, the conclusion is very, very simple. And, yes, clearly there is a bit of self-interest here given the fact that I am a Buyer Agent. But just this (Bryce points to the first point), just making sure you buy the first asset, even if it’s just with a 1% better compounding growth, and only at the 5 year mark, you make the fee back, and then some. And sometimes when you buy a property, it’s not until 10 years down the track that you realise it was the wrong one, and you can’t actually get that time back — and what we’ve seen from what we’ve just done, if you procrastinate and just lose 5 years, it makes a huge difference!
It’s really, really simple. I think you should strongly consider using a Buyers Agent. Because this (Bryce highlights the Buyers Agent Fee), BUT over here is the value you get.
Price is what you pay. Value is what you get.
In this situation I think it’s pretty clear that the value you get certainly outweighs the cost of engaging a Buyers Agent.
Today Governor Lowe and the Reserve Board met for their April board meeting and they kept the cash rate on hold at 1.5%. No surprises there in the lead up to an upcoming election — we’re only a month or so away from the Federal Election.
I want to start looking globally first — so let’s do around the grounds globally.
The US market — so there’s definitely been some changes and sentiment shifts in regards to the confidence in the US market, and this has been led by the GDP numbers that we’ve seen come out of the US. When President Trump introduced the tax cuts, we definitely saw a bounce in business confidence over there and, obviously, in business returns and record share market prices.
We saw GDP running at around 4% at its peak — and this has since declined. We saw the Q4 result over in the US where the GDP number was 2.5%. If we look back to the Q3 number, the annualised rate of growth was sitting at around 4.3% — so we’re definitely seeing a cooling in that market place. That’s potentially also led to the Federal Reserve forecasting or signaling that there’ll be no more rate rises throughout 2019.
Finally in the US, we then circle back to the big trade negotiations between the US and China. We’ve definitely seen the language weakening — the tough talk we saw from President Trump is now being watered down, and we’re starting to see some more collaboration in those trade talks. I think that’s also meant that the businesses and business confidence around the US are probably better than it would have been, given that the US trade heavily and so does China. It’s only good for the world economy.
The other mess that we see over in the world at the moment is really the Brexit situation going on between Britain, or the United Kingdom, and the European Union. So it’s a complete mess. It’s pretty clear now that a lot of people who voted in that referendum probably didn’t realise that they were being sold a pup. So, a very difficult situation over there — a lot more politics to play out there before we see a resolution. But one thing’s for sure: this uncertainty is not good for global growth, so hopefully, we can get some type of conclusion in the not-too-distant future.
The first thing I really wanted to talk about is really the labour market. If we didn’t have a Federal Election next month, and we were looking at a more deteriorating labour market, we would probably be seeing a rate cut this month— but we don’t have that situation. In fact, the February unemployment rate came in at 4.9% — that’s the lowest in 7 ½ years! It certainly shows that it’s not a bad result; we’re seeing most people gainfully employed in Australia. Though, if we look forward and we look ahead — and this is where we’re seeing a lot of economists talk about rate cuts — the problem is what I am about to explain now. The jobs that we created throughout February were 4,600 new jobs — so that’s not a big number. It’s an important number to get us down to 4.9%, but it’s not a big number.
The other bit that I want to talk about is the skilled vacancies. This is an area that we should be looking at because we want people in skilled jobs, higher paying jobs, which is good for the economy — more income coming in, more spending going out; and this grows the economy overall.
Again, not showing positive signs here. So let me explain this…
In February, we saw the skilled vacancies rate of – 0.9% — so that wasn’t a great result. But that’s on the back of the January data, which was revised down from a positive 1.9% to a -0.5 % — so that has meant that the annualised paced of skilled vacancies has fallen from a -0.7% of 1% to a -2.7% in February — so that also means that there’s that confidence piece coming into play.
Overall, jobs at the moment are good — forward thinking about the confidence in the economy isn’t quite there, so let’s expand on that further and start to have a look at some of those key drivers in this area. It’s a consumer confidence story. Consumer confidence for March, which is from the Westpac Melbourne Institute index, saw a fall of 4.8% in its March reading. This then moved down to a reading of 98.8, now that’s down from a February reading of 103.8 and that means there are more pessimistic views out there than optimistic views. And this has really been led by the surprise GDP decline that we saw in the second half of last year. This has been the trigger for that concern. So that’s what we’re seeing, in terms of consumer confidence.
In regards to the consumer spending story, we turn our attention over to the retail sales for January. We did see a rise in retail sales of 0.1% — consensus for January, given we had such a poor December, was a 0.3% rise, and we just didn’t get there. So we were disappointed with this number, and it has meant that the annual retail growth is sitting at 2.7%, which is well below its long-term average of 3.7%. The contributing factors to this has been put down to things like the slowing housing market, the wealth effect, general household debt, people being more concerned about paying debt down in these uncertain times and wage growth. That’s also a story that needs to play out further, in terms of NAB’s business confidence survey — we did definitely see a deterioration in both conditions as well as the confidence in the market. Conditions fell from a +7 to a +4 — and confidence fell from a +4 to a +2. Both of these levels, even though they still appear in the positive, are below their long-term averages. So that’s not also a good sign for the broader economy and for jobs growth. Again, that’s why we’re seeing a lot of economists predicting that we’ll see a rate cut inside this year; possibly two.
Let’s now turn our attention to housing data.
We did see some interesting data coming out. So the ABS released their quarter fall, which is the December quarter data, and that showed a fall of 2.4% for that Quarter. This means that the annual pace of the national housing market — remember though: there’s always markets within markets — but the national housing market is -5.1%. This is down from a -1.9% in Quarter 3. We did see a lot of media noise around this story; but remember that’s the December Quarter.
We do expect that we’ll see a bounce in existing property stock around Australia as people try to lock in their negative gearing benefits and their capital gains benefits. This, of course, is based on Labor’s policy and based on the assumption that Labor may get into power. So we probably will see a floor inside the property market because of this reason.
What happens after the 1st of January is anyone’s guess — but we’ll talk more about that into the future.
I also want to go through some interesting lending data — and this is also why I worry about Labor’s policy. In January, owner-occupier loans and refinancing data for owner-occupiers dropped by 2.6% — and that’s the lowest level since February 2013. Now, if we exclude the refinancing figures — it’s down 1.2%, or 14.7% year-on-year. If we drill a little bit deeper — and this is why I think the policy is a pup — t the owner-occupied finance on new dwellings has been the hardest hit. This fell in January by 9.5%. So this is Off The Plan or house and land packages stuff. This is the biggest decline since October 2008 — and it’s down 27.6% on a year ago.
So you might think, “Well Labor will fix this because it’s going to introduce an incentive to buy new.”
The problem is no one wants to buy second-hand after it’s bought new. So the reality is, investors won’t play in this space. The bounce that Labor is hopefully anticipating, realistically, I don’t think is going to materialise as people start to understand that the new stock — the Off the Plan and the house and land packages — don’t grow in capital growth as well as the existing property stock.
It’s food for thought when you start to think about the housing market, and what you’re going to do in regards to your own situation. If you’re in a position to move forward on buying an existing property now, if Labor gets in, they’ve still got to get it through the Senate — I think that’s going to be a challenge. Because as more and more people realise that it’s not necessarily a solid policy and it has problems, then hopefully we’ll see some changes to that policy that will be more in line with not taking a sledgehammer to the property market, which is what this policy will do.
Finally, I want to turn to Budget night. We’re hearing from treasurer Josh Frydenberg tonight and we’re going to see a “cash flash” — pretty simple, right? We’re going to see a one-off payment coming into the people’s hands, we’re going to see tax cuts, and that’s going to be part of stimulating the economy. I think is another important reason why we saw the Reserve Governor, Dr Phillip Lowe, hold and not drop the cash rate this month. He wants to see how these tax cuts will flow through and then also see what happens to the job market if Labor gets in, which I’ll talk about more.
So, interesting time. We’ll see Bill Shorten’s reply on Thursday, in terms of what their plans are for the economy and where they’re going to spend their money. But, yeah, definitely an interesting period, which leads me to my final summary and some ideas.
Where do I see the cash rate heading?
I’ve got a couple of scenarios here. Firstly if the Liberal’s pull off a stunning election win — an unpredicted election win — I think we will see a bounce in business confidence and potentially we will maintain strong jobs, jobs growth, which will mean if we do have to put one cut in there — just to stabilise the property market — that’s probably all we may need. If Labor gets in, and given the feedback that we’re seeing from the Small Business Council and from the business associations of Australia, about their concerns of some of Labor’s policies, I suspect that will flow into jobs. And that story could see probably one, possibly two, rate cuts. Again, I have that on the back of jobs and also on the back of the property market in terms of these uncertainties and the unintended consequences that will come from Labor’s policy.
So, they’re my predictions. Form your own view; but that’s basically where I see it when it comes to what’s going to be happening with the cash rate over the course of 2019.
Is it true that Rent Money is Dead Money? Bryce Holdaway explains the one exception to the rule, which can actually work MORE in your favour, in his latest How To Video.
Watch time: under 4 mins. Read time: 2 minutes.
Today I want to talk to you about a common question that comes up, “Is rent money dead money?”.
My suggestion is that this is a very good marketing message from builders — because they want to sell you brand new stock! And if they sell you the myth that “rent money is dead money”, well, then hopefully you’ll believe it and you’ll start to buy their stock.
The question should be… “Is it actually real that ‘rent money is dead money’?”.
Personally, I would say to you that rent money is only dead money if you don’t invest the surplus you get from renting. By way of example, let’s have a look at two scenarios…
This scenario here is Rent, and this scenario here is Buy.
Clearly, if you were to rent a lifestyle over here, it’s much cheaper because the rent you’re being charged is less than the mortgage repayments. And over here, if you were to buy, you’ve got to pay rates as well. So there’s a lot of extra expenses — and hence, there’s a difference you save by renting instead of buying
So the question, “Is rent money dead money?” becomes it is IF you don’t invest this surplus.
This scenario is typically more common with Generation Ys than the Baby Boomers simply because Generation X and Generation Y don’t want to give up their lifestyle and move further out to where they can afford to live. Hence, the term “rentvestor” has come into the vernacular over the last 5-10 years.
Basically, what Renvesting means is, “Hey, I’ll go and find the location where I’ll have a great lifestyle and rent there, and then I’ll use my money to buy an investment grade property in another suburb. This way I’m actually trapping the surplus that I save from renting versus buying and putting it into another asset — it could be shares, it could be some other form of business that I’m interested in or it could be property.”
For me, the question really comes down to, “Do I want to rent my lifestyle or do I want to buy my lifestyle?” Because there’s a huge difference.
One thing to think about buying real estate is you’re actually renting, in a way, the dollars from the bank in the early part of the loan.
If you think about it, in the early days what you’re paying is largely interest — it’s not until you get to the end of the loan where you start paying back some of the principle. So you principally are renting, in a very abstract way, from the bank. So, it’s really a comparison of, “Do I want to have the lifestyle I want or do I want to buy the lifestyle I want?”
The important thing is this: if you are not trapping the surplus and putting it to good use somewhere else, in my opinion that is where rent money can be dead money. However, if you are buying other assets with the surplus, well then, rent money could definitely be a very, very good strategy for you to do in your circumstances.
The conclusion is very simple — are we talking about a full stop, or are we talking about a comma? Because “Rent money is dead money.” I would agree with, but “Rent money is dead money, unless you’re investing the surplus in something else” makes a huge difference!
On the first Tuesday of March the Reserve Governor and the board met, and they kept the cash rate on hold once again.
But certainly what a difference a month makes when it comes to what’s likely going to happen in the economy moving forward and what’s going to happen to the cash rate! In a minute, I want to talk more about what Bill Evans said in his predictions for TWO cash rate reductions over the course of 2019. But first we need to understand what’s going on…
The Reserve Governor and the board need to make sure they bring some type of stability in terms of how they control monetary policy — and what they do is they can’t move from a signaling of a tightening bias straight away to a signaling of a reduction bias, or a bias towards lower rates.
The RBA need to move slowly to that bias.
And we saw that again in regards to the Reserve board minutes and in the monetary statement they released later in the month, signaling their intentions to go to that neutral bias. Now that also meant the GDP — Gross Domestic Productivity — is going to be changed. They were forecasting in 2019, growth of around 3.25% — that has been adjusted down to only 3% and we’ve also seen some adjustments in the 2020 year. Through signaling from that tightening bias to the neutral bias to that easing bias, has meant that we are going to be in a position where the cash rate is going to be challenged.
If any of you listen to our podcast, The Property Couch, you would have heard in Episode 221Dr Andrew Wilson talk about his belief that the cash rate may drop as early as April.
We saw Bill Evans, the Chief Economist of Westpac, talk about a potential rate cut in August, and then another one in November. Now what’s his reasoning behind that?
I went and had a read of the statement they released last month — and it was quite interesting reading. They were talking about the broader economic momentum in the economy, and this broader economic momentum in the economy slowing down. They moved form a 2.6% growth forecast in 2019 down to a 2.2% forecast for growth in 2019 and also 2020. So when they pushed that through their models, that also meant it wasn’t sustainable for the long term growth we try to achieve, which is between 3 – 4%, and also to try and get inflation in between that 2 – 3% range. We haven’t been able to do that yet with low inflation.
We did see some good numbers come out in February in regards to unemployment – so we saw the unemployment rate stay steady at 5%, we saw a greater participation. But to surprise, we also saw 39,000 new fulltime jobs get created — so that was a positive. We think unemployment in the near term is actually looking reasonable. We also saw the Consumer Sentiment Index move back to a bias of a positive outcome as opposed to a negative bias that we saw at the end of last year and in January’s numbers. So there is a slight movement — it is only slightly-marginally more optimistic than pessimistic, but it is a movement.
So we then had to understand what Bill Evans and his team of economists there at Westpac were trying to do — and what they were talking about inside the housing market were three main things…
The first one was certainly a slowdown in construction. And that slowdown in construction is certainly going to flow down into GDP and the amount of money moving around in the economy. They also started to look around at the unemployment story. And they also started looking at the amount of credit that was being lent to both owner-occupiers and investors. And with that they saw a double-digit decline in loan approvals. This also meant that their models saw further price falls this year in 2019. So if you put all of these numbers together, and they’ve come up with a bias that there will be a need to ease the cash rate once, possibly twice.
What could be a catalyst for a cash rate drop NOT to occur and for us to stay in a neutral bias?
If APRA was to look at their policy settings around the assessment rates that they used for borrowers, and if they were to ease that off the 7.25% rate that they currently have the banks locked into — and reduced that to say 50 basis points that will allow borrowers back into the market. So we are talking not only about owner-occupier borrowers but also about investor borrowers. That will stimulate a little more growth but, of course, we don’t want to overdo it — so if it’s got to be cautious. If they do that, the Reserve Board may not need to do anything as we may see the property market start to stabalise more quickly than a lot of people anticipate. So most forecasts are saying that the property market will continue to decline in 2019 and maybe into 2020.
Auction Clearance Rates for February were surprisingly better than what they were at the end of last year.
They were terrible at the end of the year — basically, buyers had abandoned the market place. But we are starting to see Auction Clearance Rates for Melbourne and Sydney in some areas as high as 60%, 65%, 70 %. But overall across the broader areas of Melbourne and Sydney markets, around that 55%- 60%. So if we see those Auction Clearance Rates around that type of level, I suspect we won’t see to many price falls further, and we’ve probably come out to the bottom.
If we do see some shocks to the system, such as a change in Government and confidence in the business sector start to diminish, and these leading to the unemployment rate going further — as that is what Bill Evans and his team believe; that the unemployment rate could move back to as high as 5.5% — really leaving the RBA no choice but to provide more stimulus into the economy by dropping the cash rate.
Again, it’s an interesting time.
I can’t see a cash rate reduction before the election.
If one does occur, it means the economy and the signallying in terms of all the mechanisms that we’re measuring such as employment, GDP, inflation, wage growth occurring… that’s not going to happen.
Coming up to the political election, both parties are going to be offering tax cuts. Those tax cuts could also be enough of a stimulus to get people out spending more. So very much a consumer story, very much a wealth effect story that we’ve been talking about of the last few months. So it is interesting times!
I think you can certainly say with confidence that there will be no more movements in your mortgage rates over the course of the next 12 months.
But if we do see the cash rate change, hopefully we’ll see the lenders pass that onto you, so you should get a little bit more in your back pocket.