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Wednesday, December 5, 2007

Interest Rates Remain Unchanged

Yesterday morning the Reserve Bank of Australia (RBA) announced that the official cash rate will remain at 6.75%.

The renewed volatility of international financial markets, concerns about the US economy and uncertainty about the likely path of fiscal policy and labour costs here in Australia are acceptable reasons for delaying any further rate hike.

The RBA Board warned, however, that rates may rise early in the new year, due to its concern about the outlook for inflation

Recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity. Inflation on a year ended basis, as measured by the CPI and underlying measures, is likely to be above 3 per cent in the first half of 2008, and to decline somewhat thereafter. Simon Turner

Property Vs Shares: And The Winner Is...?

I was talking to a friend in the last week who has just purchased a great 1 bedroom apartment in Surry Hills. I visited him there just after he moved in and while showing me around asked the BIG question - which is a better investment for me, shares or property? The question took me back a little as he had just purchased his first home and yet still felt uncertain enough to ask the question. We then sat down and discussed what it had cost him to purchase his first home.

He had $50,000 to invest and he could have chosen property or shares. The property cycle and share trading cycles over the last 100 years or so have shown study after study that similar returns are achieved in the long run by investing in either area. Property prices typically double every 7-10 years depending on where you are in the country and share prices tend the same way over a similar period. The issue for the person with $50,000 to invest is gearing.

Gearing is what I believe makes the big difference for the average long term investor. Given that no stamp duty is payable up to $500,000 for a first home buyer, combined with the first home owner's grant there is an immediate incentive of up to $30,000 approximately. The big deal is financial institutions of all types will lend you up to 100% of the purchase price of property and most will lend at or above 90% LVR (Loan to Value Ratio). What this means is that you can take advantage of the capital growth of a property worth $500,000 with no stamp duty payable and legal and mortgage fees all paid with the first home owner's grant. At an LVR of 90% you would owe $450,000 to the lender and the property should be worth around $1 million in 7 to 10 years following on from past trends.

This sort of capital gain would simply not be possible for those investing in shares without significant security such as existing property or other assets. Few if any financial institutions would lend at such a high LVR to anyone purchasing shares and therefore I have to say that property comes out on top well and truly for the average Australian. Of course we have seen some huge success stories with people making millions from shares and it would be unwise to ignore shares as part of your total investment portfolio when you have the means to do so. Shares are cheap and easy to trade and if traded well can return enormous sums of money. The winner for the average Australian starting out their financial life in 2007 is property! Michael Marquette

Education Revolution: School Visit Update

Last week each of us at Marquette Turner committed ourselves to visiting one Public and one Private School within the week. We are awaiting confirmation of the times from the schools and will let you know more as soon as we can. Michael Marquette

Buy Low to Make Big: How To Find a Bargain

Finding a bargain property, one that is being sold well-below its worth or potential worth, is not as easy as riding a bike or watching T.V. Not that it is that difficult either, but the task of getting a good deal on an investment property can at times be cumbersome.

In the brief list below, four methods for finding and grabbing that good deal are explained, and although the descriptive nature of the list is brief, it will give you just enough to ignite your thought.

1.) Distressed sellers – These are people who are eager to sell due to personal reasons, such as changing jobs, upsizing or downsizing, family issues.

2.) Vacant Properties – Here’s a simply one: drive around an area and look for homes that have tall grass and a crummy exterior. You can then go to the Land Titles office to search for the owner, get in contact with them and see if they are open to an offer being made. Often it is a case of the owner not having the time, means or inclination to renovate the property, which is a prime opportunity for someone with all three! Win-Win is the best!

3.) University Towns - Here there are often an abundance of rentals and a plentiful stock of professors and students to rent the properties. In these areas, there are always landlords wanting out of the game for various reasons. Not only can you get a property that is already a rental, but often you can buy them with a tenant under lease, lessening the risk of an upfront vacancy. Usually these properties are priced around their actual value, but the bargain is the fact that they usually demand a higher-than-average rent because of the continuous demand for housing.

4.) Repossessions – Homes that have been repossessed by banks due to mortgage defaults will almost certainly be auctioned by a real estate agent, and clearly advertised. Simply search the internet, or ask agent’s to keep you informed of any upcoming repossessions.

Whilst these options may seem somewhat unconventional, remember that you generally make money when you buy a property rather than when you sell. Good luck. Simon Turner

Bleak House

It is widely known that houses prices in Australia, particularly Sydney are becoming increasingly unaffordable to an increasing number of the population. Higher interest rates have begun to limit the extent to which demand for housing can be financed. Rates have risen six times in just a short space of time.

Given that household debt now exceeds approximately 150% of disposable income (a historical high), and that the mortgage interest burden stands at 20% of gross income (up from 11% in 2003), even if demand were strong enough to continue to push up house prices, the recent credit crunch has reduced the funds available to potential house buyers as lenders have reined in borrowing.

Increased mortgage repayments are set to deal current homeowners a further blow.
Given the current credit squeeze and sup-prime mortgage crisis in the US, Australian banks will feel the pinch.

From a consumer’s point of view, this will mean that there will be few attractive offers from banks to refinance for a better deal. Indeed, many lenders have tightened their lending criteria as a result of the problems in the US subprime mortgage sector.

These trends will inevitably lead to an increase in the number of defaults in Australia —although it is unlikely that there will be a surge in defaults to the extent witnessed in the US, where many subprime mortgage holders are being hit by higher "reset" repayment rates.

Faced with higher mortgage repayments, Australian homeowners will be in less of a position to release their equity to purchase additional homes. Simon Turner

Australia's Mortgage Blackspots

NSW home owners are the most stressed, and WA by far the least, according to a new study by Fitch Ratings, with home owners in south-west Sydney are by far the most likely in the country to miss more than one mortgage payment.

The Sydney suburb of Guildford topped the list, with 5.65% of mortgagees there missing more than one mortgage repayment. The NSW areas of Granville, Wetherill Park, Cessnock, Belmore, Greenacre and Punchbowl take up the next six spots on the list, all with payment default rates of between 4.63% and 4.91%.

Fitch managing director Ben McCarthy states that “This report, for the first time, confirms the anecdotal evidence that south-west Sydney is the most stressed part of the country in terms of residential mortgages. In south-west Sydney, mortgages that have missed more than one payment at 30 September were almost twice that of the national average.” Simon Turner