Happy New Year and welcome to the first NextHotSpot weekly update for 2011. We will be reporting each Tuesday on topical issues and current events that may influence your property investments and always searching for ways to enhance our clients’ returns.
In recent years, Australian property watchers have become familiar with many Queensland towns profiting from the resources boom and it is distressing to see those places suffering from the current horrendous floods. I don’t know about you, but having spent so much time analysing the area, I feel like I’ve developed an affinity with the places and people, which makes it all so much sadder. To any readers who may be affected, our thoughts and prayers are with you.
One of the few certainties around the Queensland floods is that at this point we are unable to quantify the extent of the damage. On Wednesday 12th, the PM suggested a repair bill in the order of $13 billion, or around 1% of national GDP. Approximately 75% of the state’s coal production has currently ceased and on Wednesday 12th the Local Government Association of Queensland was suggesting two years would be the minimum timeframe for restoring the state’s infrastructure.
To focus purely on the consequences for property, it will obviously take longer for a clear picture to emerge. Time lines for development will likely be pushed back and therefore potentially job commencements and demand for commodities such as housing will also be delayed. Of more significance is the extent to which infrastructure projects are stalled. It is unclear how resource developers have factored in the potential damage caused by acts of god (perhaps they should employ Billy Connolly) and to what extent the current flooding may adversely affect their future commitment. Additionally, any government spending, particularly at state and local government level that exceeds provisions made for disaster recovery has the potential to stall spending on infrastructure. Again, too early to call at this point, but we’ll make sure to keep you in the loop with any eventualities. Photo by Selma Dredge
The uncertainty that characterised 2010 appears, at the start of the year, likely to be perpetuated well into 2011. The Sydney Morning Herald reported on January 10th:
“Most economists expect between two and four more interest rate hikes by the RBA this year, adding another 100 basis points to the current cash rate of 4.75 per cent in an effort to curb inflation pressures from China’s growth and the local mining investment boom.”
Additionally, Credit Suisse has reported a large rise in the numbers of people fixing their home loans, now 15.22% of the overall mortgage market, up from the 11.24% reported for last November. Here we have an opinion and a set of facts, both from credible sources that indicate a rise in rates but I suspect there is a strong case to the contrary.
Central banks use the cash rate to regulate inflation, with a benchmark of 3% desirable. Interest rate rises are a device to slow spending in an economy by making the cost of funds more expensive but there is a strong chance that the current flooding may take care of any potential overspending problem.
In addition to the prevailing climate of weak consumer confidence, the consequences of the massive Queensland floods have not yet been understood. Given that much infrastructure development is likely to be stalled or possibly even scrapped, overall levels of activity will be suppressed, which in the big picture means that more rate hikes are becoming less likely. Borrowers should note that in the current environment, banks have acted independently of the RBA on several occasions in timing and scale of rate rises, making it worthwhile for you to understand your lender's stance.
The home loan industry provides the oxygen that fires the property industry. An increasingly prominent theme in the wake of the GFC has been the quality of home loan offerings available in the Australian market, particularly those provided by the major banks. We may be seeing a repeat of a recent cycle, starting in the early 1990s, during which many independent lenders, including Aussie, RAMS and Wizard emerged in the mainstream market. Offering superior service, several independents carved out a worthwhile market share and were duly absorbed by the majors. The four major banks’ apparent recent neglect of their mortgage customers has created opportunity and once again we are witnessing the emergence of an independent tier of lenders.
The NextHotSpot is proud to announce a new Alliance Partner - intouch Home Loans, headed by Paul Ryan, formerly a founding principal at Wizard. As the name suggests, their mission is to be in touch with their customers and offer the personalised service lacking in the marketplace.
If, as we expect, 2011 sees a softer property market and a general lack of consumer enthusiasm, one of the options that may appeal to investors is engaging with the National Rental Affordability Scheme.
The scheme’s intention is to address the chronic undersupply of housing in Australia by stimulating the supply of up to 50,000 additional new affordable rental dwellings by June 2012. Through the NRAS, the federal government provides annual incentives for 10 years to increase the supply of affordable rental housing, reduce rental costs for low income earners and encourage significant investment and development of affordable dwellings.
Two tiers of tax offsets and payments are available based on strict criteria, including a 20% rental discount to the qualified low income households. As with every property investment, the details for each property are specific and need to stand up on their own merits. Particularly for entry level investors, the benefits of NRAS are worth considering.
Western Australia has been the shining light of the Australian economy for the last decade and the prospects are bright for another, potentially even bigger boom. The major threat to the overall prosperity of the state is a softening of Asian demand for iron ore and other resources. Perth looks set to recover capital eroded over 2010 and regional centres such as Bunbury and Geraldton are particularly appealing given the blend of diverse local economic activity and accessible pricing levels. The Pilbara towns of Karratha and Pt Hedland offer double digit rental yields and potential for even more capital growth, but both are very expensive (median housing around $750,000) and largely “one trick ponies” which should ring prompt caution for investors.
Australia is generally considered to be experiencing a “two speed economy” led by the mining booms of Western Australia and Queensland. The current flood damage in Queensland is exaggerating Western Australia’s prominence as the Queensland economy will clearly take some time to recover. In general terms, Western Australian property looks to be a case of full steam ahead with an eye on Asia. Photo by Gary Tamin
Weak consumer confidence in an uncertain environment is likely to see a softer and less active property market in 2011. As the likelihood of interest rate rises diminishes, so does the likelihood of a volume of distressed sales.
The relevance of this to the investor is that the fundamentals become even more important. Do your numbers and make sure that you can manage a debt before committing to it, and then check you can afford it if interest rates rise by 2%! Do your homework on your investment and know YOUR property – median statistics are useful to know, but they are an average and your investment is specific.
There will inevitably be good buying opportunities during the year for the vigilant long term investor. Given that activity levels are down and the cost of loans is unlikely to go up in a hurry, forced sale bargains are more likely to be offered by developers than mums and dads
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