Property Newsletter – August 2012

The WA Investor’s Guide to the Latest Census Data

What does the latest census tell us about growth in WA and how the state has performed compared to the rest of the country? Are the foundations set for future price growth?    

The first round of data has recently been released from the 2011 census and we now better understand who we are, how we have changed since the last census in 2006 and how we compare to the rest of the country. For property investors focused on the WA market, the figures make very interesting reading.

Most property investors understand the importance of population growth for driving the demand for housing, and, in this area, WA is in a league of its own. The resident population of WA is now 2,239,169 – up from 1,959,086 in 2006. This is an increase of 14.3 per cent, the same growth recorded for the Perth metropolitan area.

The rate of WA’s population growth is particularly large when you consider that it seems to be accelerating.  After growth of 2.1 per cent in 2010, the 2011 calendar year saw the population grow by a whopping 2.9 per cent. This is more than twice the national average of 1.4 per cent and miles ahead of Queensland (1.5 per cent), another resource-rich state. What’s incredible is that despite Queensland having a population almost twice that of WA, our population increased by more people – the first time in history this has happened.

In fact, of the 20 fastest growing local government areas (with more than 1,000 people) in Australia, 17 of them are in WA including 9 out of the top 10!

The major areas of population growth are concentrated on the fringes of the city and rural areas of Western Australia, where there is plenty of land to develop. According to the latest census data, the local government area with the biggest growth in WA is the City of Wanneroo, which has seen an increase of 41,136 people or 37.1 per cent.

Property investors should be aware that while population growth is important for capital growth, population hotspots don’t necessarily make good investment candidates. The reason is that these areas tend to have a ready supply of available land, which has the effect of containing prices. We almost always invest in established areas of Perth for our clients that have a very limited potential supply of new properties.

Along with our incredible population growth, rents have also soared in WA.  Over the past five years, the median weekly rent has increased to $300 from $170 in 2006, a jump of 76.5 per cent. Compare this to the national growth of 49.2 per cent and it gives you some idea of the pressures on the WA market.

Some might assume that the colossal rental growth in WA was due to the extraordinary rents for property in the north-west of our state. However, it’s easy to dismiss this idea when you look at what has happened in Perth. The median weekly rent in Perth has increased over the past five years to $320 from $180 in 2006, which is an increase of 77.8 per cent.

Incomes, which also play a role in the demand for property, have grown as well since the last census. Median total family income has increased from $1,290 per week to $1,781, equal to 38 per cent growth.

The figures from the latest census definitely make encouraging reading for any investors focused on the WA and particularly the Perth market. While many were expecting WA to lead the nation in a number of key indicators, few anticipated just how much the disparity would be with the rest of the country.

I believe the future definitely looks bright for the real estate market. With our accelerating population growth, improving affordability, an undersupply of new housing and an extremely tight rental market, it won’t be long before we lead the nation in another area – growth in property prices.

Perth Set to Become the Leading Property Market in Australia

The report ‘Residential Property Prospects 2012-2015’ released by BIS Shrapnel at the end of June is forecasting Perth to experience 22 per cent growth in the median house price by 2015 to become the strongest performing capital city in Australia.

WA is set to record the strongest growth in property prices over coming years, ahead of all other states and territories. The latest report released by BIS Shrapnel, Residential Property Prospects 2012-2015, reports that properties in the resource-rich states of Western Australia, Queensland and the Northern Territory are already showing signs of recovery and are set to improve further over the next three years.

Perth is predicted to experience the strongest growth in median house prices of 22 per cent by 2015, about 7 per cent growth each year with compound increases. Brisbane is forecast to closely follow at 20 per cent, Sydney at 17 per cent and Darwin at 15 per cent. Lower interest rates and accelerated population growth are indicators that conditions are starting to improve in these capital cities. 

Western Australia’s strong fundamentals will underpin the growth phase, according to BIS Shrapnel senior manager and author of the report, Angie Zigomanis.

“With unemployment in the state already leading the nation at 3.8 per cent in March 2012 and economic and income growth to continue to strengthen, the first stages of a turnaround should appear in 2012/13 before stronger price growth emerges in 2013/14 and 2014/15 as economic growth approaches a peak”, he said. 

“If you’re in a position to get into the market, the next 12 months presents a period where buyers will still be in a better negotiating position, after this it will then become more difficult for buyers,” he said.

The report, however, predicts a two-tiered national market with the remaining states and territories lagging behind with only minor growth due to underperforming economies and excess supply.   

Property Management – Cheap is Not Always Cheerful

Many agencies are offering cut-price property management fees and some investors are being tempted. But be warned; choosing a property manager based on the lowest fees comes with risks and, for many, may end up being a costly mistake. 

Property management is an important part of keeping your investment property safe and secure, so it pays to choose your property manager carefully. But with a number of agencies trying to lure investors with ultra-cheap management rates, some investors are basing their decision on fees alone, which could end up proving costly.

When it comes to property management, as with a lot of things in life, you often get what you pay for. While a very low management rate may seem attractive, most investors soon learn that it costs them more in the long run.

Agencies that offer discount rates usually use these rates as bait to attract new business, then sting investors with many extra and overpriced services. Once you add these additional items into the mix, the cheap rate isn’t so cheap anymore and owners end up paying the same price for a budget agency than they would have with a superior one. Worse still, if owners don’t opt for the extra services, such as regular inspections, the condition of the property may suffer.

Agencies that offer cheap rates have to make many sacrifices to make the business profitable. One area where this is often apparent is in the number of properties serviced by each property manager. Property managers in these agencies are often inundated looking after hundreds of properties and are too busy to properly service any individual property. This leads to high staff turnover.

The other area sacrificed is in staff training. With profitability wafer-thin, these agencies cannot provide their staff with the ongoing training and education needed to keep them up-to-date with legislation and changing market conditions. This too can contribute to higher staff turnover and the staff’s lack of knowledge can leave owners out of pocket.

At the end of the day, it is not feasible to expect a high quality service with all the necessary inclusions for next to nothing. Owners need to ask themselves, are we willing to risk the security and performance of one of our most valuable assets for the sake of potentially saving a couple of hundred dollars a year?

Property Tax Tips: Calculating Depreciation

When you purchase a property, how do you figure out what price you paid for the depreciable items (e.g. carpet, appliances etc)? There are a number of options.

Firstly you can specify it in the contract (for example, the purchase price of $450,000 includes $1,000 for appliances, $3,000 for carpets etc). You cannot dramatically over inflate the figures (e.g. say $20,000 for appliances and $30,000 for carpets) as this will not be accepted. In addition, the seller may have negative tax consequences from including these figures in the contract, so normally prices for depreciable items are not included in the contract. Also, a buyer may not be aware of all the items they can depreciate.

Secondly you can make your own reasonable estimate of the value of the assets included in the purchase price. The ATO says that any reasonable value should reflect the age and condition of the asset (i.e. if the stove was 15 years old, you cannot use a brand new replacement value as the estimate). The difficulty for most people is that they wouldn’t know everything that is available for depreciation and would miss some items if they did it themselves. Also if you are audited you run the risk that your own estimates will be highly scrutinised.

The third and most common option is to obtain an independent valuer to value the items purchased for the purposes of depreciation. The ATO has said they will accept reports from Quantity Surveyors as being satisfactory evidence for valuations. Depreciation is a complicated area and most people need the help of their accountant or a depreciation consultant to claim the correct amounts.

Finance: Getting Past 1 Investment Property

Many people ask us why the average investor doesn’t get past 1 investment property. 

Research done some time ago by the Australian Bureau of Statistics shows that most investors only purchase one.

  • 93.5 % of people do not own any investment property;
  • 4.0% own one investment property;
  • 1.49% own 2-4 investment properties; and
  • Only 0.1% own 5 or more properties.

In recent years, these figures have changed, but still the vast majority of people do not own a substantial number of investment properties and very few own 5 or more investment properties.

If you understand the mindset and strategy of the average investor, then you will know why.

The average investor will usually put down 20% as a deposit on a property.  They decide to start saving for an investment property and this may take many years of saving (we will assume 5 years in this example).  In addition, they will also require funds for stamp duty, which can be as high as 5% of the purchase price, and also borrowing expenses, (fees and charges, and stamp duty on the mortgage).

That purchaser will usually pay market value for the property, then rent the property out and wait for capital growth to generate equity.  Typical investors don’t understand what drives capital growth and property profits, and they will usually select properties with average capital growth rates.

In the first year, the purchaser may only just break even, as the price of the property may rise enough to cover the stamp duty on purchase.  In many cases where capital growth is moderate, it may be 2 years before a property has increased enough in value for the purchaser to cover the costs of stamp duty and other settlement and borrowing costs.

In the third year the purchaser finally starts to make some profit.  The average investor has waited 7 years from the time of deciding to purchase an investment property to actually generating any profit!

In order to buy another property, the purchaser normally needs to generate another 20% equity.  In a moderate growth area, this may take another 5 years or more.  They will only be in a position to buy a second investment property 12 years after first making that decision to invest.

In a large percentage of cases, the average investor will get dissatisfied with the returns on the property and not even get to the stage of considering a second property investment.  Many will sell within the first 5 years and re-join the ranks of people who own no investment property.

Smart investors understand that there are ways to speed up the process. If you understand how to access your equity to purchase more property and purchase high growth properties, you can build a substantial property portfolio much more quickly than you think.

Property Acquisitions: Stale Property

When a property has been sitting on the market for over a month it begins to go ‘stale’. Once this occurs people will start to think that there may be problems with the property. Eventually the property will be classed as a lemon and it will become more difficult to sell, but it could be a great time to buy.

There are 15 strategies to purchase property below market value. One of these is purchasing stale properties.

In many cases this happens because the owner has listed the property for more than it is worth. Even as the owner drops the price, the perception that there are problems with the property will still remain.

After 3 months on the market the property is now considered stale. The agent would have likely lost enthusiasm and the owner will have become despondent.

The three month mark is a good time for the bargain hunter to get to work. If you have a stale property and a highly motivated vendor, these are the perfect components to get you a property at a significant discount to market value. It’s one of the many methodologies we use to find great properties at good prices.

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