17 Aug August 2012 Newsletter
Welcome to our August newsletter
Earlier this month, the Reserve Bank of Australia (RBA) chose to leave the official cash rate on hold at 3.50 per cent, taking a ‘wait and see’ approach to rates, as many economists predicted.
While the RBA appears to be erring on the side of caution, the decision to keep rates on hold can be seen as an early indicator of a stabilising economy especially for retail sales and house prices.
Reserve Bank governor Glenn Stevens said inflation was expected to be consistent with the Bank’s target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the Bank’s stance on monetary policy remained appropriate.
“In Australia, most indicators suggest growth close to trend overall,” Mr Stevens said. “Labour market data show moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low.”
This was reflected in national median house prices for last month, with significant price increases both in Sydney and Melbourne.
Statistics released by RP Data show that over the three months to the end of July, capital city dwellings have posted an increase of 0.2 per cent.
RP Data’s research director Tim Lawless said the July results were heavily influenced by improving values across the most expensive capital city markets.
Furthermore, new research reflected in the ING DIRECT Financial Wellbeing Index shows home owners are also becoming increasingly comfortable with their home loans repayments, with households continuing to pay down debt ahead of time.
New South Wales home owners are the most comfortable, with 62 per cent ahead on their mortgage repayments – the highest of any mainland state.
The national figure remains strong, with 48 per cent paying down long-term debt earlier.
So, what does this mean for borrowers with an existing home loan and those planning to enter the property market?
The data indicate that the Australian economy has gained some momentum, and yet consumers are still cautious, with most using any interest rate cuts to pay off more of their mortgage rather than spend the money.
If you would like help navigating the sea of current financing options, or if you want to get together to discuss any of your financial concerns or aspirations, please feel free to contact me.
Sincerely, Nick Foale
Inner city appeal
Backed up by the power of research, there is no reason why you can’t add an inner city pad to your investment property portfolio
If you’re looking to purchase an investment that offers high rental yields and strong capital growth, then the inner city markets could be a good place to start.
Over the past decade, markets close to CBDs have seen some of the best performances in terms of capital growth.
And since they also have some of the tightest rental vacancy rates, you can be sure you will have little to no trouble securing a tenant willing to pay a generous rent.
Inner city locations are often seen as a goldmine for investors due to their close proximity to transport hubs, places of work and study, restaurants and entertainment – many of which can be difficult to find out in the suburbs.
The big sting for investors searching for an inner city property, however, is often the price tag associated with these sought after locations.
Don’t let this deter you. The capitals’ inner city markets can offer affordable options for investors seeking maximum leverage from their portfolio. You do, however, need to know what you are looking for.
A recent report by the leading investment magazine Smart Property Investment found 20 inner city locations where investors could crack the market for $300,000 or less.
But how can you find these properties? Research, research and more research is the only answer.
One common mistake made by investors is failing to look beyond median house prices.
While median house prices certainly hold their weight in terms of a research tool, far too many investors will make their purchase decisions based solely on these figures.
In order to gain an accurate picture of house prices in any given market, you will need to asses these figures in conjunction with a full spectrum of local sales results.
Be sure to analyse all sales figures from the market in which you are interested – from the most unaffordable property sold to the cheapest. This level of diligence should allow you to cluster together several streets and locations that offer affordable options in even in the most expensive inner city suburbs.
This method can also be applied to any suburb you are considering as an investment location – not just those in the inner city.
Before making your move, however, it is also important to take into account an area’s vacancy rates, stock on market and location within the CBD as well as looking for the factors, such as population growth, that would in turn support capital growth for a property.
All of these factors will have a direct impact on the type of tenant your property is likely to attract and the amount you are likely to earn in weekly rent.
Can versus should
Just because you can afford to buy something, does that mean you should?
It’s a question we frequently need to ask ourselves, and it’s a particularly important one to consider when it comes to borrowing money to purchase property. Just because you have been approved for a loan does that mean you should borrow the full amount?
Borrowing capacity
Once your financial commitments have been evaluated by your lender, they will tell you how much you can borrow – your ‘borrowing capacity’ – but it is important to assess this amount carefully.
It’s not the straightforward guide that it might look like.
While a lender may be willing to lend you one amount, it’s important to consider carefully how large a mortgage you can personally manage. It may actually be less than your borrowing capacity.
With interest rates decreasing, the cost of borrowing has become more affordable. But the financial environment changes constantly and what you can afford today might not be what you can afford tomorrow.
It is also wise, when assessing your capacity to borrow, to include a buffer for interest rate increases of a percentage point or two – because things never stay the same.
Mortgage stress
‘Mortgage stress’ is commonly defined as the need to spend more than 30 per cent of your monthly income on home loan repayments. This may well put extra strain on your income and lifestyle.
While this figure may be a useful guide, it will not necessarily mean the same to every income level and every home buyer or investor.
Instead, you need to think about your own propensity to take on debt and what level of debt might be too stressful for you.
Lifestyle factors
When considering how much debt you want to take on, you need to take a look at your lifestyle and how willing or able you are to make adjustments to the way you live.
If you’re happy to curb your spending, you may be able to manage a larger debt, but if overseas holidays and dining out are high on your agenda, you may need to compromise on your property price tag.
First time choices
Should you enter the property market now, or later?
Most first-time property investors find themselves facing the challenge of coming up with sufficient funds for a deposit and so will be torn between two options:
Do they enter the market now and borrow a hefty portion of the property’s value? Or should they bide their time so they can put together a larger deposit?
Keep in mind that the choice you make now can impact greatly on the profitability of your investment, so it pays to consider the relevant factors carefully before entering the market.
With property values relatively flat – at least for the moment – and lenders offering considerable discounts across many home loan products, it might be enticing to enter the market now, regardless of how much money you have saved.
Many lenders now offer loans of up to 95 per cent of the value of the home, allowing you to enter the market with a deposit of just five per cent.
However, it is important to assess your financial situation first. Ask yourself, can I afford to meet the repayments if interest rates increase, as well as put aside some money for emergencies?
Don’t forget that with a deposit of less than 20 per cent, it is highly likely you will be required to pay lender’s mortgage insurance (LMI) to protect the lender if you are unable to meet the repayments.
While it will take longer to save a large deposit, there are some advantages in doing so – including being able to avoid paying LMI.
Being able to put down a larger deposit will also help minimise your monthly mortgage repayments.
However, while you save for that deposit you may be missing out on house price growth and investment returns, and the cost of your potential purchase will likely increase in the meantime.
There is no right or wrong decision here – it is up to you and it depends on your own, unique financial position. The best thing to do is to weigh up your options carefully.
If you’d like help assessing your options, come and speak to us. We can assess those options – including calculating the numbers – and can help you get a better picture of what the best opportunities are for you.
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