20 Feb Feb 2012 Newsletter
Our February 2012 Newsletter is now out.
In this issue I cover:
– Property Vs. Shares
– House and Land Considerations
– Getting to Know non-Banks
Welcome to our February newsletter,
The cash rate remains the same this month after the Reserve Bank of Australia (RBA) decided the
current rate of 4.25 per cent is “appropriate” for the time being.
The February 7 decision, marking the first Board meeting for the central bank in 2012, followed two consecutive rate cuts in the lead up to Christmas.
While the announcement surprised a few mortgage and property industry pundits, with many economists having expected a 0.25 per cent rate cut, Deloitte Access Economics’ Chris Richardson said he wasn’t surprised to see the Reserve Bank “err on the side of caution”.
“The rate cuts haven’t necessarily stimulated the property market as the RBA would have hoped,” he said. “So the Board may prefer, moving forward, to leave rates on hold and see what happens in Europe.”
RBA governor Glenn Stevens said acute financial pressures on banks in Europe had eased considerably during the latter part of 2011, as a result of the actions of policymakers.
“Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made,” he said.
Europe’s problems will undoubtedly continue to influence the Reserve Bank’s cash rate decisions; however, developments in Asia are also expected to play a role, as will the level of consumer confidence locally.
The history of previous easing cycles shows rate cuts do not guarantee an improvement in sentiment, however, according to Westpac’s chief economist, Bill Evans.
“Since 1994, we have seen 20 rate cuts including December 2011’s. On 12 occasions, the [Westpac Melbourne Institute Consumer Confidence] Index has increased following the rate cut and on eight occasions it has fallen,” he said.
“The likely explanation is that survey respondents’ concerns over the reasons behind the rate cut may overwhelm the perceived benefits of the cut itself.”
In other words, while a rate reduction may be good news for home loan costs, concerns that a rate cut points to bad news, in terms of economic conditions, do tend to weigh on Australian households.
So while the decision by the Reserve Bank to leave rates on hold this month may be disappointing news for many home buyers and investors, it actually points to a more stable, more positive outlook for the economy – which has to be good news for everybody.
Of course, the Reserve Bank will continue to monitor conditions, both domestically and internationally, and further rate cuts this year are certainly not out of the question, according to many industry analysts.
“The Reserve Bank clearly maintains an easing bias – a bias to cut rates,” said CommSec chief economist Craig James.
Whatever the outlook for the cash rate, if you’d like to discuss your home financing plans and arrangements, please feel free to get in touch.
Sincerely, Nick Foale
Property versus shares
There is a great divide between investors who favour property and those who favour shares.
In reality, however, there are pros and cons to both asset classes.
Both certainly have a good track record in terms of returns, with shares and property beating more conservative asset classes such as cash or fixed income for the past 10, 20 and 25 year periods, according to research by global financial services firm Russell Investments.
Russell Investments’ research highlights that in the longer term, shares and property deliver similar returns and chosen well, both can provide very lucrative returns at that.
That said, fundamental differences between the two asset classes can have a major impact on their overall investment potential.
One major difference to keep in mind is the opportunity for leverage.
Generally, loan to valuation ratios (LVRs) for property are much higher than those for shares. For property, you can borrow as much as 100 per cent of the property’s purchase price while for shares it is much harder to borrow at a high LVR.
For some blue chip shares, investors can borrow up to 75 per cent LVR, but for many shares the opportunities for leverage will be significantly lower or non-existent.
In other words, the power of leverage is much greater with property, which means you can maximise your dollar further.
For example, with $30,000 and a 95 per cent LVR loan, you could potentially purchase a property worth $600,000. Without the opportunity for leverage your purchase potential for shares could be limited to just $30,000.
Another significant difference is the high transaction costs associated with property, which makes it a much less flexible asset than shares. A share transaction can cost less than $20 a pop and can be executed in a matter of minutes.
Shares might therefore be a better choice for investors who want or need access to their cash at a moment’s notice.
But while property may have limitations due to its transactional requirements, it does offer greater freedom and control in terms of being able to add value.
The value of a share is at the mercy of a company’s performance and the market’s response, but savvy investors can use renovation to add value to an investment property.
Moreover, property’s high transaction costs make it less subject to volatility. In just one day, a share portfolio can shrink dramatically. Because shares are so easy to buy and sell, investors are often quick to offload them during times of uncertainty.
At the end of the day, your own individual goals and timeframes should influence your asset selection, as will your comfort and familiarity with each asset class and your motivation and ability to learn more about both.
Irrespective of your preference, you’ve got to select well. This means due diligence to ensure you get the best possible return, taking into account your risk profile, financial position, timeframe and personal goals.
House & land considerations
If you’re in the market for a new home, a house and land package can offer a relatively straight forward option.
Without a doubt, building a property from scratch can be an intimidating task. A house and land package offers a popular solution for home buyers who would like all of the benefits of a new home – without the hassles.
At heart, a house and land package is basically an off-the-shelf home, but there will be varied degrees of scope with which to tweak the design and inclusions, according to your personal taste and needs.
Certainly, the biggest appeal of a house and land package is the convenience it offers.
Unlike doing it yourself, there will be no need to deal with architects, builders and tradies. Instead, the developer will take care of everything for you.
That said, you’ll still have a degree of choice with regards to colour schemes, bench tops, floor coverings and so on, depending on the developer, the package and of course, your budget.
Another advantage of a house and land package is that it will usually come with a ‘fixed’ price, which can reduce the danger of a budget blowout, all too common among owner-builders.
Furthermore, most developers offer a guaranteed build time, so it’s easier to time your living arrangements.
While there are certainly advantages of choosing a package, you’ll still need to proceed with caution and make the relevant considerations.
For example, while a ‘fixed’ price can make budgeting easier, you need to carefully assess exactly what is included in that price. Different builders will offer different inclusions so you’ll need to know what you’re getting in order to avoid any nasty surprise expenses.
Also be sure to do your due diligence to ensure you make an informed selection. Conduct thorough research of what’s on the market so you know what types of options are available, what your price guidelines are, what should be included for what price and where packages are available. Conduct your research online initially but be sure to hit the pavement and visit a range of villages and sites. The more research you do, the better versed you’ll be to make a smart decision.
Once you’ve narrowed your search it’s also important to know what terms and conditions will apply to any purchase, and where there are any warranties or structural guarantees in place.
And don’t forget, it’s imperative you do your due diligence on the property developer, to ensure who you’re dealing with is trustworthy and reputable.
Getting to know non-banks
They offer you home loans just like a bank and yet they are not a bank. Well, exactly what are they?
Let’s start at the beginning. Non-bank lenders first appeared on the home loan scene in the early 1990s.
Their chief point of difference to banks is quite simple; they are not authorised deposit taking institutions (ADIs). In other words, they can more than happily lend you money, but you cannot deposit your money with them.
Non-banks source their home loan funding from wholesale banks and capital markets – which big banks also use as part of their funding mix, alongside customer deposits.
Initially, non-bank lenders looked predominantly to beat the big banks on price, successfully undercutting the banks’ interest rates by two per cent or more.
During the depths of the Global Financial Crisis (GFC) however, non-bank lenders fell out of favour with borrowers as the global shortage of funds squeezed the sector’s customer proposition within an inch of its life. Wholesale funding costs soared, making it virtually impossible for them to sustain their price advantage.
But today it is a different story. Non-bank lenders have since reinvented themselves and are again on the front foot. While capital market conditions are still challenging, they are improving. Moreover, many non-banks now source their wholesale funds from banks themselves.
For anybody thinking about making a property purchase, non-bank lenders are certainly worth consideration. While they may no longer have their sharp price advantage, they still offer competitive pricing as well as an attractive customer proposition.
Many non-bank lenders look to deliver where many bigger banks traditionally fall short. From personalised customer service to fast approval times, non-banks are working hard to provide a real bank alternative.
In particular, many non-banks are more willing to lend to borrowers with more complex situations or blemished credit records, which makes them an appealing option for many. Their product ranges are also quite broad or more specialist than the major banks’.
As with any financial commitment, borrowers considering going with a non-bank lender should do the relevant due diligence to ensure they are happy with their decision and confident the lender and the relevant product will meet their individual needs.
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