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Another article that makes interesting reading. I have hilighted some parts because they could be rather pertinent in regards to the NZ market.
I know it is long, sorry about that.
Time to weigh up your property moves
December 14, 2003
The party's over for real estate - careful planning is what's needed now, writes David Potts.
So we have it from the horse's mouth. Inner-city unit prices are dropping, but outside Sydney and Melbourne it's still boom time, Reserve Bank governor Ian Macfarlane says.
If you're highly geared into inner-city property, you should be selling pronto. On the other hand, if you're a buyer, it'll pay to wait for prices to drop further. Or look at the other capitals and regional areas where there's still time to ride the trend up.
Where to now?
It was once said of Alan Bond that he had a problem owing the banks $1 million, but when he owed them $10 billion they had the problem, although I might have miscounted the number of noughts.
You can say the same thing about the Reserve Bank and property prices. If property prices stabilise or edge down a bit, you've got a problem. If they crash, the Reserve has a problem.
But Macfarlane pinpointed the start of falling prices about 18 months ago in Melbourne and six months ago in Sydney, which is about the time he hinted rates could drop. How come we couldn't see the property bubble had burst months before the first rate rise? And what pricked it?
The reason we missed the turn is that median prices seem to keep going up when, in truth, we're not comparing like with like. First home grant buyers dropped out some time ago, which meant there were fewer sales at the lower end of the market. That pushes the median — which is nothing more than the halfway point between the highest and lowest sale — up even if nothing's rising.
It just looks as if it's rising because higher-end properties now are inadvertently being compared with the lower end then. Add the hype from agents, and the fact that there are still streets and suburbs where prices are rising, and no wonder property looked on a continuing roll. The good news for investment property holders, especially if highly geared, is that rents should start rising. Except possibly in the inner city, where there's a glut.
The interest rate equation
You might have noticed that Reserve Bank governor Ian Macfarlane was widely reported as "hosing down" speculation of another interest rate rise in February. He said he wanted to "hose down" the view that interest rates were in neutral at 5.5 to 6 per cent (a mortgage rate of 7.5 to 8 per cent).
No wonder. The idea of a target mortgage rate would have been anathema to the Reserve Bank, but investors need to keep two things in mind.
First, if all the forecasts are right and the economy will be booming along next year, nobody will care whether interest rates are neutral or not. The Reserve would have already shifted into tightening gear.
Second, the Reserve probably doesn't have the foggiest idea yet of what it'll be doing in February, let alone May or whenever. Remember, it was only a few months ago that it was hinting that it might, maybe, perhaps cut rates a little bit.
All we know for certain is that rates won't drop and, as a well-paid legal eagle would say, the balance of probabilities is an increase.
Mind you, since Macfarlane spoke, the US Federal Reserve has dropped a subtle hint that it, too, will be raising rates next year.
One way to save could be to refinance a mortgage or perhaps fix part of it. And pay off other, non-tax-deductible debt.
Since 2004 is an election year, you can also count on a tax cut. If you opt to sell, don't dither. "Prices must fall if (auction) clearance is to return to its long-term average,'' said John Wakefield, of property analysts CPM Research.
By the way, the biggest drop in auction clearance rates has been for houses, followed by semis and, again contrary to what you've probably read, units.
Consider whether an auction is the best way to go in this new market. Auctions work best for unique properties and in a booming market.
New Investors
If you're thinking of buying an investment property, then patience will be a virtue in Sydney and Melbourne. Elsewhere, you may need to be quick since the smaller capitals are still on the way up. Mind you, it's probably a good thing that Sydneysiders and Melburnians have to look further afield. Buying an investment unit just around the corner from where you live is not what you would call diversification.
You also need to weigh up the respective virtues of property, shares and international funds. Property prices have peaked and are likely to slide. The sharemarket, on the other hand, appears to be in an updraft. Then there are international share funds.
While their returns are being hit by the appreciating Australian dollar, you'd have to wonder how high it can go considering our huge balance of payments deficit. It's already soared almost 35 per cent this year, so it must be due to run out of puff soon.
Don't think property is the gentler market compared with shares. Property prices plunged in 1989 and kept falling into the early to mid-1990s.
Whatever the inflation rate is over the next few years, it won't be much. Neither market is expected to make spectacular capital gains in the next few years.
Just as shareholders need to keep an eye on dividends, which are likely to make up about half any earnings next year, property investors need a good rent. First home buyers have things moving in their favour. Higher interest rates make it easier to save for a deposit. And prices are falling. Choose somewhere close to the city that has transport, shops and workplaces and is close to a park, beach or recreational facility. It's not your house that grows in value, but the dirt under it. So get as much land as you can.
Good news for buyers and renters
Head for the city if you're renting, because that's where the desperate landlords will be.
Fortunately, buying will become easier. Although the cost might be higher, at least the mortgage should be smaller.
To get an idea of how likely the Reserve is to lift rates again, and how often, keep an eye on wage growth (anything more than 3.5 per cent a year will start alarm bells),
The unemployment rate (the more it drops, the more likely rates will rise) and the growth of household credit.
It's generally agreed by economists that it takes seven to 10 years before home ownership is better than renting.
And here's a tip. Don't think that just because inflation is dropping, prices won't rise much or could even drop.
Unless the sharemarket takes up the slack, the end of the property boom will put a hole in the State Government's stamp duty collections. That means a raft of price rises in essential services next year.
Negative gearing
Don't. Your borrowings should be less than your rental return as capital gains are not guaranteed.
Home ownersMost borrowers are paying off more than they have to. Still, it's worthwhile to check what rate you're paying. There are cheaper home loans around than the standard variable 7.07 per cent.
If you switch to something cheaper, and keep your same level of repayments, you'll ride through this round of rate rises. On the other hand, if you've gone in over your head — that is, you bought in the past two years — you'll be feeling the squeeze.
Making savings elsewhere to bump up your cashflow probably won't be possible, so one option is to convert your mortgage into interest-only. Although you'll only be marking time, it could get you out of a temporary cash squeeze. Set your repayments a bit above the minimum monthly interest so you're eating into it.
Don't fix your rate unless you can get it below the variable rate you're paying now.
Upgrade or renovate
At least stagnant or falling property prices make it easier to decide whether to upgrade or renovate. We all know somebody who's renovated only to find it was much more expensive than they bargained for. Not to mention more stressful.
The economics have changed in favour of upgrading, despite the waste of stamp duty. That's because of the tight labour market, and even shortages in some trades, plus flat property prices raising the danger of over capitalising. Allow 7 to 10 per cent of the price of the newhouse in changeover costs.
This story was found at: http://www.theage.com.au/articles/20.../1071125714796
Regards
Another article that makes interesting reading. I have hilighted some parts because they could be rather pertinent in regards to the NZ market.
I know it is long, sorry about that.
Time to weigh up your property moves
December 14, 2003
The party's over for real estate - careful planning is what's needed now, writes David Potts.
So we have it from the horse's mouth. Inner-city unit prices are dropping, but outside Sydney and Melbourne it's still boom time, Reserve Bank governor Ian Macfarlane says.
If you're highly geared into inner-city property, you should be selling pronto. On the other hand, if you're a buyer, it'll pay to wait for prices to drop further. Or look at the other capitals and regional areas where there's still time to ride the trend up.
Where to now?
It was once said of Alan Bond that he had a problem owing the banks $1 million, but when he owed them $10 billion they had the problem, although I might have miscounted the number of noughts.
You can say the same thing about the Reserve Bank and property prices. If property prices stabilise or edge down a bit, you've got a problem. If they crash, the Reserve has a problem.
But Macfarlane pinpointed the start of falling prices about 18 months ago in Melbourne and six months ago in Sydney, which is about the time he hinted rates could drop. How come we couldn't see the property bubble had burst months before the first rate rise? And what pricked it?
The reason we missed the turn is that median prices seem to keep going up when, in truth, we're not comparing like with like. First home grant buyers dropped out some time ago, which meant there were fewer sales at the lower end of the market. That pushes the median — which is nothing more than the halfway point between the highest and lowest sale — up even if nothing's rising.
It just looks as if it's rising because higher-end properties now are inadvertently being compared with the lower end then. Add the hype from agents, and the fact that there are still streets and suburbs where prices are rising, and no wonder property looked on a continuing roll. The good news for investment property holders, especially if highly geared, is that rents should start rising. Except possibly in the inner city, where there's a glut.
The interest rate equation
You might have noticed that Reserve Bank governor Ian Macfarlane was widely reported as "hosing down" speculation of another interest rate rise in February. He said he wanted to "hose down" the view that interest rates were in neutral at 5.5 to 6 per cent (a mortgage rate of 7.5 to 8 per cent).
No wonder. The idea of a target mortgage rate would have been anathema to the Reserve Bank, but investors need to keep two things in mind.
First, if all the forecasts are right and the economy will be booming along next year, nobody will care whether interest rates are neutral or not. The Reserve would have already shifted into tightening gear.
Second, the Reserve probably doesn't have the foggiest idea yet of what it'll be doing in February, let alone May or whenever. Remember, it was only a few months ago that it was hinting that it might, maybe, perhaps cut rates a little bit.
All we know for certain is that rates won't drop and, as a well-paid legal eagle would say, the balance of probabilities is an increase.
Mind you, since Macfarlane spoke, the US Federal Reserve has dropped a subtle hint that it, too, will be raising rates next year.
One way to save could be to refinance a mortgage or perhaps fix part of it. And pay off other, non-tax-deductible debt.
Since 2004 is an election year, you can also count on a tax cut. If you opt to sell, don't dither. "Prices must fall if (auction) clearance is to return to its long-term average,'' said John Wakefield, of property analysts CPM Research.
By the way, the biggest drop in auction clearance rates has been for houses, followed by semis and, again contrary to what you've probably read, units.
Consider whether an auction is the best way to go in this new market. Auctions work best for unique properties and in a booming market.
New Investors
If you're thinking of buying an investment property, then patience will be a virtue in Sydney and Melbourne. Elsewhere, you may need to be quick since the smaller capitals are still on the way up. Mind you, it's probably a good thing that Sydneysiders and Melburnians have to look further afield. Buying an investment unit just around the corner from where you live is not what you would call diversification.
You also need to weigh up the respective virtues of property, shares and international funds. Property prices have peaked and are likely to slide. The sharemarket, on the other hand, appears to be in an updraft. Then there are international share funds.
While their returns are being hit by the appreciating Australian dollar, you'd have to wonder how high it can go considering our huge balance of payments deficit. It's already soared almost 35 per cent this year, so it must be due to run out of puff soon.
Don't think property is the gentler market compared with shares. Property prices plunged in 1989 and kept falling into the early to mid-1990s.
Whatever the inflation rate is over the next few years, it won't be much. Neither market is expected to make spectacular capital gains in the next few years.
Just as shareholders need to keep an eye on dividends, which are likely to make up about half any earnings next year, property investors need a good rent. First home buyers have things moving in their favour. Higher interest rates make it easier to save for a deposit. And prices are falling. Choose somewhere close to the city that has transport, shops and workplaces and is close to a park, beach or recreational facility. It's not your house that grows in value, but the dirt under it. So get as much land as you can.
Good news for buyers and renters
Head for the city if you're renting, because that's where the desperate landlords will be.
Fortunately, buying will become easier. Although the cost might be higher, at least the mortgage should be smaller.
To get an idea of how likely the Reserve is to lift rates again, and how often, keep an eye on wage growth (anything more than 3.5 per cent a year will start alarm bells),
The unemployment rate (the more it drops, the more likely rates will rise) and the growth of household credit.
It's generally agreed by economists that it takes seven to 10 years before home ownership is better than renting.
And here's a tip. Don't think that just because inflation is dropping, prices won't rise much or could even drop.
Unless the sharemarket takes up the slack, the end of the property boom will put a hole in the State Government's stamp duty collections. That means a raft of price rises in essential services next year.
Negative gearing
Don't. Your borrowings should be less than your rental return as capital gains are not guaranteed.
Home ownersMost borrowers are paying off more than they have to. Still, it's worthwhile to check what rate you're paying. There are cheaper home loans around than the standard variable 7.07 per cent.
If you switch to something cheaper, and keep your same level of repayments, you'll ride through this round of rate rises. On the other hand, if you've gone in over your head — that is, you bought in the past two years — you'll be feeling the squeeze.
Making savings elsewhere to bump up your cashflow probably won't be possible, so one option is to convert your mortgage into interest-only. Although you'll only be marking time, it could get you out of a temporary cash squeeze. Set your repayments a bit above the minimum monthly interest so you're eating into it.
Don't fix your rate unless you can get it below the variable rate you're paying now.
Upgrade or renovate
At least stagnant or falling property prices make it easier to decide whether to upgrade or renovate. We all know somebody who's renovated only to find it was much more expensive than they bargained for. Not to mention more stressful.
The economics have changed in favour of upgrading, despite the waste of stamp duty. That's because of the tight labour market, and even shortages in some trades, plus flat property prices raising the danger of over capitalising. Allow 7 to 10 per cent of the price of the newhouse in changeover costs.
This story was found at: http://www.theage.com.au/articles/20.../1071125714796
Regards
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