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I've been investigating cashflow positive property to balance my existing grwoth portfolio and of course mining towns like Moranbah, Dysart and Blackwater etc. all appear on the radar screen. But as has been mentioned above by others, these places seem to be too close to their top and any mine closures could be devastating. Long term I believe in a continuation of the commodity boom (next 1-15 yrs) but also think that in the short / medium term the commodity prices will stay depressed and that may have some consequences.
What I am now wondering is whether I should be looking at towns where the mining supply chains converge, e.g. transport hubs which also have other industry?
Has any body looked into the areas where the QLD coal seam gas is / will be produced? There are major plans for several LNG projects based on coal seem gas.
As part of my research I have also (with a lot of effort) found some very surprising cashflow positive properties in much more robust areas with decent potential for capital growth. Less spectacular but a lot less risky…
Richard – please do disagree if I'm wrong!
But would appreciate to hear some more of your thoughts on this then.
The way my solicitor explained, when we setup an Australian company which buys as trustee of an Australian trust the FIRB will not need to give approval. It does mean that the business needs to have an Australian resident director.
EK,
Best to check with a solicitor but as far as I understand with your 457 visa you can
– buy your on house to live in
– buy new units or houses for investment that have not been pre-owned or lived in (the usual FIRB regulations)My solicitor has explained to me that if I set up an Australian company and the company buys as trustee of a trust then we are not limited to the FIRB restrictions. Living overseas makes setting up an Australian company a bit more difficult as you need at least one resident Australian director but that can be solved and in your case shouldn’t be an issue.
Regards,
Some more on the AUD (courtesy of CBA):
The AUD often trades as a "barometer of global financial market sentiment". When financial market sentiment turns to panic, the AUD gets oversold.
The reasons why the AUD gets sold are understandable*. What is less understandable is why the AUD gets oversold. The main reason why the AUD gets oversold is because the AUD is a very liquid currency. And due to the make-up of Australia's exports (more than 60% are commodities and exports make up some 22% of the economy), the AUD can often trade as a proxy for commodity prices and as a proxy for global growth estimates. The AUD can also trade as a proxy for Asia, a proxy for current account deficit countries, and as a proxy for Australia's economy. Overwhelming uncertainty in any of these areas can result in large falls in the AUD because participants can usually orchestrate the necessary volume of trade through the AUD currency market, whether they are leveraged or not.
When panic sets in, a circuit-breaker is needed. The larger than expected 100 basis point reduction in the RBA's cash rate, bringing the official rate to 6.0% is a prudent move and has, for now, provided a circuit-breaker. It demonstrates the RBA is able to take leadership when panic sets in and do what is required when growth risks are skewed heavily to the downside because of global financial market movements. But it is important to note that recent gains in the AUD from this morning's Sydney low have also reflected a weaker USD. The RBA's move has sparked the possibility that large and co-ordinated central bank interest cuts could be forthcoming and given non-USD currencies a temporary boost. The fact that the AUD is higher on the cross rates illustrates that participants have, for now, positively endorsed the RBA's leading and prudent move.
It is too early to be sure that global financial market panic has completely subsided. Until we can comfortably come to that conclusion, the risk to the AUD remains to the downside. When panic sets in, it tends to matter little that the AUD has fallen nearly 10% in one day. Or within a whisker of its record low vis-à-vis the EUR** and lower than the levels traded during the 2001 global recession the 1997-98 Asia crisis. Arguably the current credit crisis is much worse and so more downside should be anticipated, whether it comes in panic moves or not.
*Reasons why the AUD is falling
(1) The AUD is an extremely liquid currency. According to the Bank of International Settlements (BIS), the AUD/USD exchange rate is the 4th most liquid currency in the world. Australia's financial markets are deep and among the most sophisticated in the world. Hence participants can get pricing for large volume trades.
(2) Australia's exports make up approx 22% of the economy and commodities make up the bulk (approx 60%) of Australia's exports. Participants take the view that as global growth estimates get revised down, commodity prices will fall and Australia's exports and economy will slow. Putting large downward pressure on commodity prices, is the high possibility of a technical recession in the US, Eurozone and Japan. Indeed, a global recession is certainly a real possibility. Because the AUD is a very liquid currency, participants can ride the slowing global growth-commodity price cycle by selling the AUD.
(3) In times of risk aversion, the currencies of current account deficit countries tend to get sold and the currencies of current account surplus countries tend to get bought. Rising credit costs raise the costs of funding current account deficits, even if the ability to fund the deficit is not directly under the threat. Nevertheless, rising risk aversion leads participants to avoid the additional risk that current account deficit's bring to the equation, by selling the AUD.
(4) As global growth slows, the RBA reduces interest rates to insulate Australia's economy from the slowing global environment. Unless the current account deficit falls at the same time, the risk premium on Australia's interest rates is effectively reduced as interest rates fall. Hence, a lower AUD is required to compensate incoming investors willing to fund the current account deficit, for the lower interest rate (risk premium) environment.
(5) The USD is rising because demand for USD has increased exponentially as local US banks and foreign banks with US$ loan exposure scramble to appropriately match US$ denominated funding requirements (matching US$ assets and liabilities) and support US$ denominated capital adequacy ratios. Consequently, US institutions with an offshore presence are repatriating USD and foreign institutions with local exposure in the US are gathering USD to meet US$ funding requirements. The USD is also rising because the US authorities are seen to be addressing the credit crisis. There is a perception that the US economy, first into the downturn is likely to be first out. Certainly the US economy recorded stronger GDP growth than most of the industrialised world in Q2. While Q3 growth is less certain, large interest rate cuts are expected from the ECB and BoE putting downward pressure on those currencies, as their respective authorities grapple to deal with the credit crisis. A stronger USD is putting downward pressure on the AUD.
** Since the introduction of the euro in January 1999, the record low has been 0.5175. If we use a proxy for EUR (pre 1999), the record low is 0.4902, reached in September 1992.
SCAMP, you are so full of yourself that it makes me laugh
My views:
The 30% drop in AUD had NOTHING to do with interest rates, but everything with the carry trade unwinding, that is institutions borrowing in low interest JPY and investing in high interest AUD/NZD. These trades were unwinding because of risk in the financial markets as a result of the credit crunch. This became a self fullfiling spiral where initial sales forced more sales.
In uncertain times the USD has done well as it is still seen as the prime reserve currency. The AUD has suffered from the carry trade unwinding, the move of funds back into USD and the drop in commodities (AUD is strongly linked to commodities).
The AUD is now oversold and is very likely to bounce back although the current downward trend may well continue for a bit longer. The interest rate cut won't have a dramatic affect as it was priced in the market and all other reserve banks will follow suit (but likely with smaller cuts, Bernanke has already indicated the US is looking at a rate cut).
Nat,
You said it yourself, the financials on this property don't seem to make it a great investment property, but before you rush off to sell consider the following:
– how do you see the long term outlook of the area the property is in? does the area have a solid historical population growth and capital growth? If you held on to the property for 10 years what would you investment return look like (i.e. how much cash did you have to put in vs a realistic capital gain)?
– is you rent at market, remember rents are going very fast, have you increased your rent as far as you can? Can you do something to increase rent e.g. improvements, furnishing.
– can you move back into this property as your PPOR and rent our the property you are now living in?
Whatever you do, don't panic because then you're likely to make a bad decision. I agree that the outlook going forward is far from rosy, but we all know the market move in cycles and the key question is if you can hold on to the property through the next cycle would it be worth it, i.e. will the property perform well enough in the next upswing to make good the current cashflow issues? If so look at creative ways of solving the cashflow problem, if not then indeed look at selling. Think of a rent-to-own solution.
KW I struggled with this one for quite while myself. We bought our first few IP’s in our own name but have since started using multiple trusts (which in QLD can help you to avoid paying land tax). You need to consider what you want to achieve with your structure: asset protection, tax minimisation or estate planning or some combination of those and if it’s a combination then which one is most important.
Then you need to understand what you investment strategy is, i.e. buy and hold or buy, renovate and sell, positive or negatively geared or whatever.
Then think about what your approach / attitude to risk is.
Once you have that on paper, think through the structure options and then go and speak to some accountants and solicitors. I spoke to a handful and got different answers from each of them! That didn’t help at first and I needed to do a lot of thinking to be clear about our priorities before I could decide on which way to go. Sorry, no clean cut answer…
If you get to the point that you suffer from analysis paralysis and find a good deal just buy the first one in your own name and then sort out your structure later.
StumpCam, I can understand your scepticism as these rates do seem high over the long term (I personally am a lot more conservative and aim for 7% over the longer term and that with selecting strong groth areas)
But if you take into acccount population growth both in AU and the UK and the fact that the average property of today offers a lot more than the average property of 50 or 100 years ago or even longer then why can't property outperform inflation by no more than 1%?
I don't have inflation data going back very far, but I don't think that inflation levels of 5% are representative for the much earlier periods in history…. hmmmm maybe that is why the growth was much higer and with inflation now more stabilized due to central bank intervention proeprty growth will also be more 'controlled'…?
Very likely that in the long term property will continue to double every 10 yrs or so.
The question is how long the current bearish period will be…
Michael Keating states in his blog entry of 24th January 2008:
– Australian property prices have averaged 10.4% growth over the last 120 yrs
– UK property prices have been recorded since the year 1088 and over those 920 yrs property prices have gained on average 10.2% per annumI know a lot people say go for small developments, because that means scarcity, but scarcity means does not automatically translate into demand…
One of our best investments is a 2 bedroom 2 bathroom unit in a development called The Emporium in Fortitude Valley (Brisbane) – with indeed a parking space. It has all the usual items of a large development like pool, bbq areas, gym, private cinema etc. and so indeed the body corporate fees are high. But this development as a twist in that the whole ground floor is actually shops, cafes, restaurants, deli's etc. This has made the development an attraction on its own and now people are cueing up to buy or rent and that in trun makes us very happy owners (solid growth and good rent).
It's all supply and demand and you need to look at both sides of that equation…
Here is something we all know: savings rates are down and the average citizen in the US, Uk and Australia has more debt than ever and less wealth then before. Right?
Well, maybe not quite, an analysis by the Reserve Bank of Australia burried in the RBA's Statement on Monetary Policy from May 2006 shows that if you take the traditional definition of savings indeed savings rates have been falling in Australia, but in this definition any growth in investments is not included in savings. But that's deceiving as nowadays many people save by putting their money in investments like property or shares rather than just putting the cash in an interest bearing account. If you do include equity growth teh savings rates are actually pretty solid, hovering between 10% to 20%.
As for net wealth this was $32,000 in 1991 per person of working age to $90,000 in 2005. Even taking a 3.5% inflation into account that is a 60% increase in net wealth.
Bit hey doom & gloom sells better …
Barbara, there is no issue buying property as a non resident. We're non resident investors and since 2004 we have built up a portfolio of 10 properties (whilst living overseas but migrating in the next couple of years).
Some things to keep in mind:
– your purchases will be regulated by the Foreign Investment Review Board (http://www.FIRB.gov.au) and it basically says that as a non resident you can only buy new not previously owned, not previously tenanted properties (houses and units) or you can buy land but then have to build on it (and add a minimum value) or you can buy a existing house but then again you have to add value or increase the number of dwellings.
– however if you are a 457 visa holder I think Paul was right in that the FIRB will allow you to buy your own home, but then the interest is not tax deductible
– as Richard says your maximum LVR will be 80% as a non resident, once you are a permanent resident you have access to higher LVRs (if you want that)
– if you intend to settle in AU longer term and want to buid a significant property portfolio, think about your holding structure. We initially bought in our own names (didn't know any better) but are now using different structures. Structures is something you need to discuss with a solicitor and accountant as each individual situation needs to be assessed carefully. You can setup a structure with a company acting as the trustee of a trust and in that case you can avoid FIRB limitations, but I would say that is not something you'd want to do just yet.My recommendation?
First read some books, like Steve McKnight (0-130 properties in 3.5 yrs) and Michael Yardney (How to grow a multimillion property portfolio in you spare time). Together I think these would give good insights in property investing and the key approaches, i.e. cashflow positive, negatively geared growth property, adding value etc.
Do some research on key growth areas, lots available on the web. Sometimes it is worth paying money for good research!
Don't wait 2 yrs – if you have the money buy your first investment property. If you wait 2 yrs you have lost the opportunity of 2 yrs of growth and even with a conservative growth of 7% over say $400,000 you're talking about close to $60k… that is money you could then use to fund a next investment…
Good Luck!
Erik
Regarding investing in property in the Philippines:
– yields tend to be good indeed, i.e. 10% or above, but for holiday lets consider that during the rainy season most (beach) resorts struggle to get many guests
– legal system is ok, you can actually buy more than just the usual condominiums like land, houses etc. but then you need to get a business structure in place which as long as you have a reliable lawyer on your side should be ok (you can only own 40% but there are ways around That)
– Only buy titled land (be careful with tax registered)
– Look carefully into who will manage your property, I have lived in the Philippines for the last 6 years and maintenance of properties is in general pretty poor to say the least.Capital growth is far from assured, I would probably look at residential estates on the outer side of Manila e.g. Alabang area or consider Subic which is likely to grow strongly in the future with major investments in semiconductors, shipyards and finally some infrastructure improvements (new highway and rumours of a rail line). Alternative could be beach resorts e.g. a new development is being marketed in Cavite and being not too far from Manila this could have good growth prospects.
In summary when you're doing your reserach and making a decision remember that the Philippines is 3rd world country with all the associated risks and that real estate is controlled by a small group of very powerful families. If you do invest, make sure you expect big returns for the risks you take.
Sandy,
If you're into property with a longer term buy and hold perspective no need to consider demographics and what that will do to the types of properties in demand. In my view, going forward well positioned units close to employment centers and with facilities (nearby) will do very well in the future. Much better than the average house+land in the average suburb which is miles away from the CBD or employment centers. It is supply-demand that drives prices and the question unit or house is too simplistic and so is the much heard comment that buildings only depreciate and only land appreciates…ummester wrote:ErikH, RP data is a company that profits exclusively from the property market, which slant do you think they prefer to give? There is no way the information they provide is unbiased – they need a strong market to remain operational.
Consider this
http://www.jenman.com.au/news_article.php?id=226
I never realized, before skulking around here, how much of an industry putting spin on the property market has become. Oddly, it seems to be driven by the banks. This kind of scares me, don't we have enough debt with the banks as it is? I mean, how much debt can they safely create?
Unmester, thanks I am aware of that, but the statistics come from the ABS and are pretty robust (I checked the ABS website and got the same dataset). I actually made some charts of population growth by state and that shows some interesting trends… I do agree with you that median prices as offered by the various companies are unreliable at best – I don't like the concept of a median price anyway unless it is ona limited popultaion of properties. And indeed companies by RPData, Residex etc. make their money in the property business, so as you say, you have to watch out for the spin – whether it be from the bulls or the bears!
I don't think you can argue about the population growth etc. and what that does to the market fundamentals, but as I highligted their article conveniently forgot to mention affordability as a a major issue …
And scamp:
– of course you include births, baby's don't buy houses, but they do make the population grow and that drives long term trends.
– and deaths don't make houses "dissapear", the left behind family/partner etc. also need to live somewhere
– and I don't know where you do your research, but your comments on immigration are way off the mark. NETT migration has increased from around 60,000 on average during the 70s to over 200,000 on average between 2003-2007 and there has been a very steady trend in that increase. To paraphrase yourself… "it's simple, just do the math, more people in, less people out and the population grows"Here are some interesting statistics, issued by RP Data and based on ABS statistics:
First, Australian population change is bigger than ever before (incl. going all the way back to 1789) due to both peaks in net immigration and births:
Add to that that the size of the average household is projected to decline from 2.6 in 2006 to 2.3-2.2 in 2006 and the pressure increases.Second, the number of new houses/units coming on to the market has been reducing (the graph doesn't make it very clear, but I believe this is completions per quarter not year!):
http://www.vision6.com.au/download/files/09640/561899/Dwelling+completions+-+ORIG.gif
So according to RP Data the supply-demand balance (based on a study by the Commonwealth Treasury) is as follows:
http://www.vision6.com.au/download/files/14347/562072/Underlying+demand+graph+-+ORIG.gif
And so they conclude that all the fundmentals are in place for future growth which they predict is likely to start again by end 2009… what is not covered in their article is the issue of affordability nor are the 900,000 empty dwellings mentioned.
I think the changing demographics can apart from driving prices up, maybe also push for a faster change in the type/size of properties that people buy to help reduce prices e.g. more high density. As for the empty dwellings my gut feeling says there is something fundmentally wrong with those numbers and that we will not see most of those properties (re)appear on the market all of a sudden, but I haven't looked into the data so this is more of a hunch…
ok, come on, scamp, tell me this is all rubbish and house prices will crash and Australia is set up for utter demise…
imugli – nice one!
I agree with you that you're better off buying when you can then when you can think is the right time, otherwise you'll never buy anything, just make sure that what you buy and how you finance it take account of the current situation… and since you did I'm sure it will work out nicely.
mackar, it was an article on the basics of property investing and in a section on "timing the market" versus "time in the market" the author highlighted how since the mid 40's there had always been good reasons not to invest in real estate, e.g. high interest rates, recession threats etc etc
Don't remember who wrote it and I didn't keep the article
Mackar,
I don't think we'll see a boom anytime soon but I do believe Australia will ride this global downturn out much better than most.
I believe:
– that the US, UK and continental Europe will suffer pretty strong downturns / recessions
– that BRICs and other emerging markets are decoupled enough from the US to continue to grow but at a slower pace
– that commodities will stay high for many years to come due to the growth in emerging markets
– that even though prices will recede from their recent peaks they will stay high (e.g. oil is down from its recent $140+ peak but I believe it will stay in the $70 to $100 range which is much more than most would have believed only a short while ago)
– that robust commodity demand and commodity prices will keep Australia afloat, i.e. not suffer as badly as the US and UK
– that migration will stay high, as recession sets in in the UK there are plenty of people with equity who may well decide that this is now the time to go down under
– that inflation will stay above target so interest rates will only decrease slowly in Australia
– that the census data stating 900,000 houses are empty is misleading and that a very limited amount of this will actually get onto the residential market
– that commodity states like WA and QLD will not suffer a great rise in unemployment but this may well be different in say areas around say Sydney
– that local variations in unemployment, will further increase interstate migration towards QLD
– that some areas may well suffer severe declines in property price, i.e. those areas with higher unemployment where people bought too high and leveraged themselves too far. Some areas like SE QLD and other selected areas may well actually continue to increase slowly.Oh, and as always, when the inevitable correction in the cycle comes all the media and the public declare property prices lost forever, that prices will drop by 30%, 40%, 50% or more, typically the corections are much smaller and after 7-10 yrs or maybe even 12 yrs we'll have had another cycle… I read an interesting article a few years ago that actually summed up all the popular reasons why people shouldn't invest in property in the 40s, 50s, 60s, 70s, 80s, 90s and so on. If you had followed these common reasons why "now isn't the time to buy" you'd never buy anything …
