Property Newsletter July 2012

•The Housing Shortage is a Local Story

•What is Market Value?

•Preparing for the Unexpected Purchase

•Suburb Snapshot – Morley

•The Implications of Diabetes

•Getting the Most out of Your Investment Property

•Time is Money

•The Reality of the Average Australian Investor

The Housing Shortage is a Local Story
The Housing Shortage is a Local Story and WA is the One telling it. According to figures from the Housing Industry Association (HIA), half of the 30 local government areas with the most chronic undersupply of housing are in Western Australia. Whether or not there is a shortage in Australia is hotly contested, but the figures make for interesting reading.

The breakdown of the rest is Queensland (7), Northern Territory (3), Victoria (3) and one each in NSW and South Australia.  Of the 15 WA areas mentioned, 9 are in Perth and 6 are regional areas including the South West town of Manjimup, which tops the list on a per head basis.  The area with the biggest shortage in absolute terms is Joondalup, about 16 kilometres north of Perth. Joondalup has a shortage of 3,955 houses or a shortage intensity of 2.38 houses for every 100 people.

The other areas in the Perth metropolitan area with under supply are Subiaco, South Perth, Claremont, Melville, Fremantle, Cambridge and Vincent.  HIA senior economist Andrew Harvey says the mining boom and strong population growth are largely to blame for WA’s strong representation on the list.  “The population growth for mining related and engineering construction related to mining is just massive so it’s no surprise at all,” he said.

What is Market Value?
Being able to determine a property’s market value is a useful skill when it comes to investing in property. Ray explains the concept of “market value,” and how to spot an investment bargain.  Astute investors always keep a careful eye on property values in the areas in which they are interested in. This way, they can avoid paying too much for a property and can always be in a position to distinguish a bargain.

So what is market value? In general terms, the market value of a good or service is the price at which a willing, but not anxious, buyer will pay to a willing, but not anxious, seller for that good or service.  For products which are plentiful, transacted often, and are largely the same as each other, determining market value is relatively easy. But property is typically not like this. Each property tends to have features that make it unique in the market – its location, size, age, etc. Even two properties side by side on the same street will be valued differently if they differ in size or age. To make things even trickier, property is typically not transacted very frequently, making it hard to compare a property you are interested in to a similar one that has sold recently.

Fortunately there are a number of information sources available to make your estimates of market value as accurate as possible. It’s also a good idea to drive through the neighbourhoods you are interested in and check with real estate agents the prices that recently-sold properties fetched.

There are many situations in which a property can be purchased under the market price and if you are able to get a good estimate of market value you will be able to identify the bargain buys. It will also prevent you from over-paying for a good investment property.

Preparing for the Unexpected Purchase
Being unprepared for the unexpected purchase can prove costly in the long run. But there’s an easy way to avoid the heartache and stress.

There is a funny thing about property buyers. They often tackle the property search in a very rational way, with a commitment to view many properties until one eventually ticks all boxes. But when buying a property, particularly a home, emotions will always play a key role, which means there is always the chance of a spontaneous purchase.

Think about the buyer who notices a house – the dream home – while walking one day to the local shops and makes on offer that very evening. Or, what about the casual auction attendee who makes a winning bid after seeing the property for the first time just minutes before.

You never know when the right property will come along, so you need to be prepared from the very beginning, especially when it comes to finance. You need to have a clear understanding of your borrowing capacity, the type of products that suit your needs and, importantly, what sort of documentation you may need to obtain on short notice.

This is why I strongly recommend buyers seek out advice from their finance broker before even stepping foot into a home open, to help avoid any unwanted surprises in the event of a spontaneous purchase. A competent finance broker can quickly assess the buyer’s circumstances and make recommendations that best meet the buyer’s needs.

A finance application can be an involved process and there are intricacies that most people just aren’t aware of. Also, policies can change regularly, which can throw up unexpected hurdles. The biggest stumbling block tends to be the documents that a borrower needs to produce, such as tax returns and statements. It can take time for the borrower to gather all the paperwork that is required, a stressful situation when the property is already under offer and the finance deadline is looming.

Finding the right property can be an exciting moment but being unprepared and making uninformed decisions can end proving costly in the long run. Speaking with your finance broker early in the piece will help you avoid the potential heartache and stress and make sure you are prepared for an unexpected purchase.

Suburb Snapshot – Morley
Our bi-monthly Suburb Snapshot section shares our tips on the best suburbs to keep a watchful eye on for your next investment purchase. In this month’s issue, we’re going to profile the changing suburb of Morley.

Morley is a well located suburb approximately 7 kilometres northeast of Perth’s central business district and 7 km from Perth Airport. It sits within the City of Bayswater local government area and is surrounded by the suburbs of Bassendean, Bayswater, Bedford, Beechboro, Dianella, Eden Hill, and Kiara. Morley residents have a wide choice of local schools and access to 31 parks, which cover 6% of the total suburb area.

Morley was established in the late 1950s and over time has become a major shopping and commercial centre. In 1961, it was the home to Boans, Western Australia’s first single unit shopping centre and the largest of its time in Perth. Today Morley is home to Centro Galleria, Perth’s second-largest commercial shopping centre, which was constructed in 1994.

It doesn’t have a train station, but Morley is well serviced by a comprehensive bus network making it a significant regional hub for bus transport. Average travel time to the Perth CBD from the Morley bus station, by bus, is approximately 15 minutes.

The suburb provides excellent access to the major arterial roads of Morley Drive, Tonkin Highway and Guildford Road and is only 2 km from the Ashfield Industrial Precinct, which is marked for future expansion.

Households in Morley are primarily couples with children and the predominant dwelling type is houses, which generally sell from the low $300,000’s to the high $600,000’s. Property listings typically stay on the market for around 80 days, similar to the overall market average, and there are around 320 sales per year.

The future looks very bright for Morley. The Western Australian Planning Commission’s ‘Directions 2031 and Beyond Strategy’ identifies the Morley City Centre as a Strategic City Centre. This is because it is already an important employment node and strategically located to capitalise on existing and future economic and population growth.

Building on the principles of Directions 2031, Council endorsed the Morley City Centre Masterplan in October 2010 following widespread community consultation. The Masterplan provides a vision for an attractive and prosperous city centre, with increased business and employment opportunities, enhanced lifestyle options such as cafes and restaurants, and more housing choices. According to the Masterplan, developers will have significant redevelopment opportunities, with the potential for buildings up to 12-16 storeys in the centre.

Some of the major projects outlined in the Masterplan include creating a new central park on Russell Street, improving the look and accessibility of bus services, upgrading streetscapes and public spaces, and making streets more pedestrian friendly.

December 2011 saw the opening of Morley’s Coventry Square, Perth’s biggest markets complex and billed as a new tourism precinct offering 179 stores and restaurants in a 2ha indoor building. This development, which took 3 years to complete and cost $60 million, marks a significant turning point in the transformation of Morley with $3.5 million also spent on road upgrades around the markets.

As more aspects of the Masterplan begin to take shape, over time Morley should become a more desirable place to live and the demand for property in the area should grow. It is a suburb that should be on most investor’s radar.

Key statistics

Growth rate (1 year average) -2.1%
Growth rate (5 year average) 1.4%
Growth rate (10 year average) 10.8%
Population 18,564
Median age of residents 38
Median weekly household income $980
Percentage of rentals 24%

Source:, May 2012

Getting the Most Out of Your Investment Property
Is your rental property performing to its full potential? Clare Christiansen explains the simple steps you can take to ensure you are getting the maximum possible return from your property investment.

No matter what your situation, property investing is about generating wealth. Although the rewards are typically realised over the long-term, the question is what can you do now to put more cash in your pocket?  The good news is there are many things you can control to help improve the cash flow on your properties.

Here are three simple ways to ensure your investment is performing at its best:

Increase the rent
It sounds rudimentary, but you’d be surprised how many landlords are reluctant to do so because they have a fantastic long-term tenant or empathise with the plight of their tenants. Although this is understandable, the fact of the matter is that owning an investment property is like owning a business; you’re in to make a profit.  So if your property is not achieving market rent, this is the first area to focus on.

If your rent is already fair and reasonable for your property’s current state and the market, look at ways in which to make the property more attractive as even a fresh coat of paint can make all the difference. Also consider installing a dishwasher or air-conditioning, these mod-cons may allow you to charge an extra $10-$25 per week in rent. However, you want to be sure that the “payback period” of investing in these items is not too long.

Decrease the vacancy rate / increase the occupancy rate
With current demand, most investors probably have little concern with vacancy issues. If your property is sitting vacant in the current market then you need to reassess the rent you are asking. Sometimes lowering your rent to a more competitive rate, even though it puts less in your pocket per week, over the longer term, it pays off in less vacancy time where you are receiving no rent at all.

Maximise your deductions
One of the most critical aspects of improving your cash flow that is often overlooked is maximising deductible expenses. Deductions you can claim immediately include advertising for tenants, bank charges, body corporate fees, council rates, land tax, insurance, legal costs, repairs, and cleaning. There are also deductions you can claim over a longer period which include borrowing expenses, declining value of depreciating assets and capital works. It is well worth the small expense to obtain a Tax Depreciation Schedule which outlines the depreciation allowances that you are entitled to on your property and submit this with your tax return.

Time is Money
Many property developers are so eager to jump into a project that they forget to take the time and look at the big picture. This is especially true when it comes to making important decisions in regards to project management, consultants, finance, and builders or architects.

When making these types of decisions, which could affect the timeframe or quality of the development, it’s important to remember that old cliché – that time is money. Yes, you’ve probably heard this before but that doesn’t mean it’s not relevant. Many first-time developers seem to forget that for every month (or day for that matter) that you are delayed; you’re paying interest on your loans used to fund the development. For example, if you had $1 million in outstanding loans, each month your project is delayed could cost you more than $5,000 every month! Every wrong decision could seriously dent your profit margin.

With this in mind, as soon as you have a signed contract you should get your finance application in with your broker as early as possible. If you have a short settlement or your offer is subject to finance, you will not be able to wait until you’ve completed your due diligence so you must act quickly. Assuming everything has been done correctly, you will probably get finance approval for the land purchase and perhaps some level of indicative approval on the construction.

With finance out of the way, you need to consider whether to use a project manager. A project manager’s role is to take responsibility and control of the development from start to finish. You have to decide whether you have the time available and skills required to manage the project yourself. In most cases, I would recommend you hire a professional. I have seen many clients attempt to do it themselves only to find it’s not as simple as they think and it ends up costing them more at the end of the day because of their inexperience.

Assuming you are managing it yourself, start by approaching the consultants you’ll need. If it is a land subdivision you will need surveyors. If it’s construction, you’ll still need surveyors but possibly at a later stage. And if constructing units or townhouses, you’ll need to decide whether to engage a builder directly or an architect or building designer for the project.

In Inner city “trendy” locations buyers will typically appreciate the style and flair a quality building designer or architect can bring, and they will be willing to pay a price premium. If you are going direct to a builder, comparing quotes can be difficult so ensure you develop your own understanding of costs. And don’t focus exclusively on cost. Time to complete the construction and work quality is very important criteria to consider when selecting a builder (remember time is money).

Depending upon the size of the project, it can take anywhere from 6 months to 3 years. It requires a great deal of determination, can be stressful, and to really be successful you often need to undertake many developments of which not everyone you’ll win. So if your development doesn’t go to plan, learn from your mistakes so that history doesn’t repeat itself.

The Reality of the Average Australian Investor
Who is the average landlord in Australia and how wealthy are they? Thanks to statistics from the Australian Taxation Office (ATO), we now have a much clearer picture.

Landlords are sometimes portrayed in the media as wealthy individuals who would do anything to squeeze an extra dollar out of their tenants. But while this may be true for a few, the reality is that the average landlord in Australia doesn’t match this description at all.

So, who is the average landlord in Australia and what do we know about him or her? Well, thanks to statistics for the 2009-10 financial year released by the Australian Taxation Office (ATO), we now have a much clearer picture.

The first thing to note is just how many landlords there actually are in Australia – more than 1.7 million of them. That means 1 in 7 Australians is a property investor, which goes some way into explaining why politicians might be wary of upsetting this rather large voter pool.

The ATO statistics show that 63% of investors are negatively geared, which means that their holding costs (e.g. interest payments, rates, and other costs) are greater than their rental income. Clearly, most Australia landlords are making a loss week to week.

As a group, these negatively geared investors made a total loss of $4.810 billion. But what is most revealing is that nearly 75% of these people earned less than $80,000 per annum. I would hazard a guess that half of the tenants renting from these landlords earned more than that!

It might be surprising that the majority of property investors in Australia are in the low-to-middle income brackets, but their age is perhaps less of a surprise. According to the 2009-10 Household Wealth and Wealth Distribution statistics from the ABS, nearly three-quarters of investment properties were held by individuals aged 45 and over. Baby Boomers held just over 55 per cent of these properties.

Retirement planning seems to be a driving factor for the majority of property investors. However, many of them are leaving it too late to start investing. The earlier you can get started the more time you have to build your equity base and the fewer risks you have to take.

Research conducted by property analyst Michael Matusik a few years back showed that three out of five investors borrow money to invest and more than 80% of investors buy for long-term capital gain. Mr Matusik also observed that most investors expect that property values will double every ten years.

Whilst historical data might suggest that this expectation isn’t unrealistic, the reality is that different properties will always perform at different rates. If the right properties aren’t purchased, investors could easily see their portfolio stagnate or even decline over a ten year period. This is why expert assistance is needed when it comes to selecting an investment property.

According to Mr Matusik’s findings, about 25% of the investors decided to sell within 12 months of purchasing the property and 50% sold within five years. The reasons for selling were varied.  About one third of investors sold because they needed the money, a quarter due to disappointing capital growth, 20% because of low rental returns, and one in six because they believed owning an investment property was simply too much hassle.

Given that most investors understand that property is a long term investment, and buy with the intention of realising long term capital gains, 75% will sell within the first five years. Ironically, it is generally after 5 years that property investments begin to truly realise their capital growth potential.

What’s clear to me is that to create serious wealth, you can’t afford to be an average property investor. You need the right information, advice and opportunities to give you an edge and ensure your properties outperform the rest. Only then will you reach your goals in a reasonable timeframe.

Comments are closed.