$30,000
Weekly shortfall without using strategy of capitalising expenses $222
Weekly shortfall using strategy of capitalising expenses $222
Explaining The Property Cycle
CASHFLOW & PROPERTY CYCLES (continued)
EXAMPLE 2 | City Park @ Cairns | December 2008
Assumptions…
Purchase Price: $310,000 (Unfurnished)
Taxable Incomes: $60,000 and $40,000
Ownership Split: 50 / 50
Rent: $360 / week
Interest Rate: 6.0% (Approx rate with full professional package
2. Objectivity VS Subjectivity
IMPORTANT: Objective Research From A Variety Of Reputable
Sources Rather Than Subjective & Emotive Views & Opinions!
Michael Matusik - Matusik Property Insights
BIS Shrapnel
RP Data
NAB Economics
ANZ Property Outlook
Australian Bureau of Statistics
Real Estate Institute of Australia
mrd your property investmentmentor.com.au
Please note, the information provided in this web seminar is not to be taken as financial
advice. Before acting on anything outlined it is recommended that you seek to
independently verify the information and or opinions expressed
3. Who is Nick Lockhart?
Born & raised in Sydney
Married to Katrina for almost 22 years
4 Children; Rebecca 20, James 17,
Natasha 15 & Brittany 12
7 Investment properties
Background in property research
Have sourced land & put together development
projects on behalf of other developers
Licensed Real Estate agent
Diploma of Financial Services
Extensive business experience
Believe passionately in the essential need to take responsibility for one’s own financial
future
Desire to see others reach their full potential
4. Who is mrd?
Property educators & strategists
Wealth creation mentors
Walking the talk
Customer Care Programme
Our Customer Care Programme works for you… because investing is personal
Unique “set ‘n’ forget; for busy peoplequot; TM system
Teaching people how to BUY so they will never be SOLD
Personal Support before, during and after the purchase
Strategies for sourcing, structuring & managing cashflow
QS Report, Rental assistance, Property bookkeeping spreadsheet, etc
A real (supported) strategy for planning your retirement
Recognition that each person is an individual with individual goals… because investing is personal
Striving to keep education FREE!
5. FOUR KEY FACTORS TO
CONSIDER
1. Record Population Growth
2. Investors Have Fled The Market
3. Home Ownership Unattractive
4. New Construction Has Stalled Badly
6. Record Population Growth
1. Record POPULATION GROWTH
Fastest population growth in Australia in 200 years
Predicted to grow by 350,000 per year; first time in over 200 years
Almost as many people as are living in Geelong, Cairns & Bunbury
combined, or the whole of Canberra (EACH year)
Previous Population Explosions:
- 1850s Gold Rush years
- Post World War 1 (1919 onwards)
- Post World War 2 (1946 onwards)
Today we see a similar pattern
- Rapid and prolonged growth
- Too few workers
- Pro-immigration government policies
9. Record Population Growth
1. Record POPULATION GROWTH (continued)
The Australian Bureau of Statistics (ABS) is not forecasting a slowdown in the
population boom
Australia‟s net annual population growth will hit nearly 400,000 in less than five
years:
- 2009: 350,000 increase - 2012: 384,000 increase
- 2010: 365,000 increase - 2013: 390,000 increase
- 2011: 379,000 increase
The projected housing shortfall by the end of
2009 is expected to reach between 170,000 and
200,000!!!
10. Investors Have Fled The Market
2. INVESTORS HAVE FLED THE MARKET
Property investors have left the market in droves
Record population growth = demand = willing investors?
- Ordinarily, YES… But NO!
- Investor interest in property has never been lower! (See Chart 3)
Investor lending growth
- 2004 = over 30%
- 2008 = below 10% (8.4% in July)
11. Investors Have Fled The Market
2. INVESTORS HAVE FLED THE MARKET (continued)
First time below 10% since records were kept! WHY?
- Interest rates; thus
- Rental yields
- Booming (bull) share market
(averaged over 20% per year 2004 to 2007)
- US sub-prime crisis - global share markets into a bear market
(i.e. prices fell more than 20%)
- US sub-prime crisis = shareholder’s were burnt = switch to
cash rather than property this time
- Horror stories | property prices crashing 30-40% in UK & US
Only the 'brave' have continued to invest in property
13. Home Ownership Unattractive
3. HOME OWNERSHIP UNATTRACTIVE
Affordability barrier
Interest rates
US sub-prime crisis
Lack of consumer confidence
Negative media reports
Scared!!! Renters have simply continued to rent
14. New Construction Has Stalled Badly
4. NEW CONSTRUCTION HAS STALLED BADLY
Many developers nervous & are not building
Many developers have gone broke
Many developers can‟t get funding
See Table 1: Failed property development companies
Investors make up approximately:
- 50% of the new housing market
-70% of the new apartment market
Drop off in investor interest
Developers reduce number of new projects
Chart 4: Annual change in advertised rents, July 2008
17. New Construction Has Stalled Badly
4. NEW CONSTRUCTION HAS STALLED BADLY (continued)
Since 2005 the absolute number of completed residential properties has fallen
Forecast to continue falling in 2009
(see Chart 1)
US sub-prime crisis cemented downward trend in new properties
Borrowing costs skyrocketing for developers
Liquidity crisis
High profile bankruptcy of many developers owing investors millions
(see Table 1)
Massive financial pressures on hundreds of smaller developers
Developers now understandably very nervous
Shelved many new developments until there is clear evidence investors are back
in the market
19. Explaining The Rental Cycle
EXPLAINING THE RENTAL CYCLE
Market Equilibrium exists where the average advertised rents and average
actual rents are about the same
Ford Geelong recently announced massive job losses. This can affect rental
markets
People need to reduce expenditure | look for a cheaper property to rent
Supply of rentals goes up while demand for rentals (at the same price) falls
- This results in a drop in rental values
However, while average advertised rental prices fall almost immediately
Average actual rental prices don‟t! Why?
- Because most tenants are locked into existing leases
Then… leases begin to progressively expire
Over 12 to 18 months people move from area OR demand reduced rents to stay
20. Explaining The Rental Cycle
EXPLAINING THE RENTAL CYCLE (continued)
A Balanced Rental Market - 3% to 4% Vacancy
Rents steadily rise
Rental prices eventually peak
People respond by moving “out” to less expensive areas
Demand reduces
Average advertised rents fall from their peak
Average actual rents stay higher than the new advertised prices (as many people
remain locked a lease)
Rental leases expire over a 12 to 18 month period
Average actual rents fall
Market equilibrium is reached
21. Explaining The Rental Cycle
EXPLAINING THE RENTAL CYCLE (continued)
A Stressed Rental Market – 1% to 3% Vacancy
Population boom
According to property research firm Residex www.residex.com.au; average
advertised rentals have jumped by about 8% to 17% in capital cities over the last
year (see Chart 4)
- NB: Average advertised rentals usually rise between just 4% & 8% per year
Outrageous rental increases are forcing a much higher than normal exodus from
areas close to infrastructure and services to the suburbs
23. Explaining The Rental Cycle
EXPLAINING THE RENTAL CYCLE (continued)
A Stressed Rental Market – 1% to 3% Vacancy (continued)
Normally such an exodus would affect the market equilibrium, resulting in rents
softening for a time
Now, however, these vacated properties are being snapped up by new
immigrants, who have arrived in town and simply accept the higher rentals (e.g. Sydney
& Melbourne)
New immigrants: willing & able to work | usually have little savings | will remain
renting for a season
Even with a deposit, banks loathed to extend credit until they‟ve been permanently
employed for between 6 & 12 months; especially in current climate of tighter credit
They create demand that fills vacuum left by those moving out
Those who move to cheaper suburbs find rents spiralling there too (overall supply and
demand)
24. Explaining The Rental Cycle
EXPLAINING THE RENTAL CYCLE (continued)
SOARING RENTS
$10-20 a week rent rises were common
In 2008 they were significantly higher, however
I know someone very well whose rent rose:
- from $450 a week in Sept ’04 to $480 a week in Sept ’07
- That’s 6.6% increase over 3 years
- In Sept ’08 it jumped $80 to $560 a week
- That’s 16.6% increase over previous year… and in one hit
Vendor not worried about losing a tenant as he would get $580 without a problem
NB: Between 2004 and 2007, the housing shortage across Australia was
absorbed by a 2.0% fall in the vacancy rate to 1.5%
25. Explaining The Rental Cycle
EXPLAINING THE RENTAL CYCLE
SOARING RENTS (continued)
As long as vacancy rates are over 1.0% +, rents experience moderate rises
1.0% vacancy is effectively 0% as the remaining 1.0% represents the few days
between tenants when properties are cleaned and inspected
Vacancy rates now set to fall past 1.0% & approach the unprecedented 0.5% mark
A 1.0% vacancy rate | A population boom & | The Great Housing Shortage
- Can mean only one thing for 2009… rents are going to soar!
One of the following two outcomes will occur next year:
a.Supply must increase; i.e. more housing constructed – This cannot happen
b.Vacancy rates fall... and rents rise – This must happen
26. Greatest Ever Housing Shortage
GREATEST EVER HOUSING SHORTAGE
Let there be no confusion…
The result of this is that Australia now faces its greatest ever housing shortage!!!
27. Explaining The Property Cycle
EXPLAINING THE PROPERTY CYCLE
Despite recent pessimism; when the largest population boom in 200 years hits the
greatest housing shortage in 200 years there is only one way property values can
head… and that‟s NORTH!
I expect that official interest rates will come down to at least 4% by April 2009
- NB: Today, 19th November; Bank West announced a 2 year fixed rate of 5.99%
That would be a $218.75 per week interest saving on a $350,000 mortgage
(assumes a 3.25% drop in interest in just the 7 months from Sept '08 to April '09)
Rising rents | Falling interest | Uncertainty surrounding global shares | Increase to
1st home owners scheme =
- Increased demand | Pressure cooker lid comes off | Will trigger another strong
round of residential property price growth
- Investors & owners drawn back into market further compounding price growth
29. Explaining The Property Cycle
Michael Matusik says:
The current situation is “Demand with NO Supply”
Sometimes these laws can be artificially stalled but they will always win through
in the end
Every market returns to its long term average; that is a mathematical certainty
The market has bottomed out and he expects it to get back to a more normal
pattern in about 6 months
30. Explaining The Property Cycle
ABERRATIONS, FLUCTUATIONS & SHORT-TERM BLIMPS
While there will be exceptions to any rule in the short term; water always finds it‟s
own level
Regardless of short term market reactions expressed in rentals and/or values;
supply & demand will set the long term direction of prices
“Set „n‟ Forget; for busy peoplequot; TM OR Property trader & speculator
- “Don’t make long term decisions based on short term focus or information”
(Unknown)
- “Great opportunities arise when excellent investment prospects are surrounded by
unusual circumstances that cause the situation to be mis-appraised”
(Anonymous)
- “Be fearful when others are greedy and greedy when others are fearful”
(Warren Buffett)
31. Explaining The Property Cycle
CASHFLOW & PROPERTY CYCLES
Let‟s look at 2 examples of how significant the current economic climate is on the
cost of holding property.
EXAMPLE 1 | The Wharf @ Robina | August 2008
Assumptions…
Purchase Price: $459,000
Taxable Incomes: $60,000 and $40,000
Ownership Split: 50 / 50
Rent: $420 / week
Interest Rate: 8.87% (Westpac variable rate, with full professional package
discount, at peak)
Weekly shortfall without using strategy of capitalising expenses $344
Weekly shortfall using strategy of capitalising expenses $212
32. Explaining The Property Cycle
CASHFLOW & PROPERTY CYCLES (continued)
Let‟s look at 2 examples of how significant the current economic climate is on the
cost of holding property.
EXAMPLE 1 | The Wharf @ Robina | December 2008
Assumptions…
Purchase Price: $459,000
Taxable Incomes: $60,000 and $40,000
Ownership Split: 50 / 50
Rent: $460 / week
Interest Rate: 6.0% (Approx rate with full professional package discount)
Weekly shortfall without using strategy of capitalising expenses $116
Weekly GAIN using strategy of capitalising expenses +$20
33. Explaining The Property Cycle
CASHFLOW & PROPERTY CYCLES (continued)
Summary:
Interest Rate Cuts producing approximately $253 per week holding cost reduction
Rental Increases producing approximately $40 per week holding cost reduction
TOTAL HOLDING COST SAVING OF $258 a week (incl. tax adjustment)
Investors are starting to trickle back to the market now
HOWEVER, within about 6 months; I think they will flood back!
34. Explaining The Property Cycle
CASHFLOW & PROPERTY CYCLES (continued)
EXAMPLE 2 | City Park @ Cairns | August 2008
Assumptions…
Purchase Price: $310,000 (Unfurnished)
Taxable Incomes: $60,000 and $40,000
Ownership Split: 50 / 50
Rent: $320 / week
Interest Rate: 8.87% (Westpac variable rate, with full professional package
discount, at peak)
Value of Furniture Pack: Not Applicable
Cost of Furniture Pack: Not Applicable
Weekly shortfall without using strategy of capitalising expenses $198
Weekly shortfall using strategy of capitalising expenses $94
35. Explaining The Property Cycle
CASHFLOW & PROPERTY CYCLES (continued)
EXAMPLE 2 | City Park @ Cairns | December 2008
Assumptions…
Purchase Price: $310,000 (Furnished)
Taxable Incomes: $60,000 and $40,000
Ownership Split: 50 / 50
Rent: $380 / week
Interest Rate: 6.0% (Approx rate with full professional package discount)
Value of Furniture Pack: $16,700 (Approx)
Cost of Furniture Pack: Nil (Developer’s Incentive)
Weekly shortfall without using strategy of capitalising expenses $18
Weekly GAIN using strategy of capitalising expenses + $93
36. Explaining The Property Cycle
CASHFLOW & PROPERTY CYCLES (continued)
Summary:
Interest Rate Cuts producing approximately $153 per week holding cost reduction
Rental Increases producing approximately $60 per week holding cost reduction
TOTAL HOLDING COST SAVING OF $187 a week (incl. tax adjustment)
Investors are starting to trickle back to the market now
HOWEVER, within about 6 months; I think they will flood back!
37. This Is NOT The USA
This Is NOT The USA
Ric Battellino, the Deputy Governor of the Reserve Bank said
on 30th October 2008: quot;The overhang of unsold houses in the
US has created downward pressure on house prices as
builders and developers have been forced to sell. This is
absent in Australia. Rather, a shortage of housing here
means that there are buyers waiting for better circumstances
- e.g. lower interest rates or rising incomes - to facilitate the
market. This latent underlying demand for housing is a factor
that will support the market.quot;
38. This Is NOT The USA
This Is NOT The USA
US credit crunch
„Free money' mentality of US banks
'NINJA' loans = No Income, No Job or Assets
Banks were happy | a booming market | could foreclose on
defaulters | then sell property for more
Built to satisfy GREED, rather than NEED
Result was a huge housing glut
Nine months oversupply
House prices fell last year in Florida & Detroit by 30% - 40%
Negative equity
Send back the keys and walk away | Jingle Mail
39. This Is NOT The USA
This Is NOT The USA (continued)
Non-recourse loans
- I.E. Bank could not sue a borrower or touch his/her other assets
Defaults between 2006 & 2008 more than doubled from 6% to 15% of all sub-prime
mortgages (see Chart 6)
Banks forced to foreclose in greater numbers than anyone expected
- Personally, how they could have been so stupid I will never understand
Flood of houses foreclosed added to the huge oversupply of properties built by
developers
- Chart 5: US monthly oversupply of housing vs residential lending
- Chart 6: US and Australian sub-prime loans in 90 days arrears
43. This Is NOT The USA
This Is NOT The USA (continued)
Australia is very different | Australian property market well placed
No US style loans | Faces none of the risks the US market is currently facing
We have a 200,000 (and growing) shortage of property... not a property glut
Rents are rising... not falling
Australian economy underpinned by the 'once-in-a-lifetime' commodities boom
(led by China)
Australian banks wrote virtually no sub-prime mortgages
(no-doc or non conforming loans)
Australian no-doc borrowers are not defaulting | Defaults are falling (see Chart 6)
Only option is for vacancy rates to fall and rents to rise
BUT... no room for vacancy rates to fall
44. This Is NOT The USA
This Is NOT The USA (continued)
Since 2004, rental vacancy rates have fallen nationally from 3.5% to below 1.5% in
2008 (see Chart 7)
Councils and State Governments are loathe to approve new housing subdivisions
(which require expensive infrastructure such as roads, water and sewage)
The long run of increasing interest rate rises scared many renters away from buying
Rising rents have the opposite effect; especially with interest rates falling
simultaneously
Rent rises in 2009 will push many renters to buy their own property | Promoting a
broad rise in property prices
Chart 7: Residential vacancy rates
46. This Is NOT The USA
This Is NOT The USA (continued)
Reserve Bank of Australia dropped interest rates:
- Cash rate of 7.25% was reduced by 0.25% in September
- Cash rate of 7.0% was reduced by 1.0% in October
- Cash rate of 6.0% was reduced by 0.75% in November
- Cash rate of 5.25% was reduced by 1.0% in December
- Cash rate is now 4.25%
More rate cuts forecast into early 2009 (see Chart 8)
I have suggested at least down to 4.0% cash rate by April ‟09
- This now looks conservative! NB: Bendigo Bank announces a 2 year fixed rate of 5.99% (LAST Month)
Interest rate cuts makes ownership 'relatively' more affordable
3.25% (conservative) interest rate drop (between Sept 08 & April 09) on a $350,000
mortgage would equate to $218.75 a week in interest saving
47. This Is NOT The USA
This Is NOT The USA (continued)
Affordability & security associated with home ownership boosts confidence
Increased income from property (i.e. rental increases)
Government‟s increased first home owners incentive
Renters & investors alike are enticed back into the market
Renters, those living with parents and/or share accommodating will buy their own
properties in 2009
HOWEVER, all this new rental vacancy will be totally dwarfed by the influx of
immigrants
Therefore, the demand for rental housing will not materially ease
The most money is made by those leading, not following the herd
Investors are fickle | Herd mentality prevails | From cold to hot very quickly
48. This Is NOT The USA
This Is NOT The USA (continued)
Nationally speaking, property investors have been relatively cold since mid 2004
Annual growth in investor lending plummeted from 30% in 2004 to 10% by the end
of 2005
In early 1997 and 2002, investor lending jumped 10% within a year and then
continued rising another 13-15% the following year
When investors return to the market; they return en masse
- Soaring rents = Better income
- Falling interest rates = Cheaper holding costs
- Rising property prices = Capital gains
RESULT?
- Investors WILL BE tempted back into the market… and probably mid-to-late 2009?
49. This Is NOT The USA
This Is NOT The USA (continued)
Continuing uncertainty around the stock market will also encourage
investors to look for the safer investment with better returns offered by
residential property
Renters should consider buying; probably sooner rather than later
Anyone can “see” where a market is now! It‟s those who “see” where a
market is headed that make the best gains
Stay alert in the midst of doom and gloom; so as not to miss an
impending BOOM
50. What Next?
Don’t Miss This IMPORTANT Step!
Go To: www.investmentmentor.com.au
Click: Borrowing Capacity
Complete our online secure BCA form
Submit (NB: Encrypted & Secure)
Alternative download NOW, complete & fax
We will:
- Have your Borrowing Capacity Assessed
- Prepare for you a complimentary sample Cashflow Analysis
- Prepare for you a complimentary sample Retirement Projection
- Print & Post these to you, along with a complimentary copy of my DVD
(should you not have received this previously)
- Complete a complimentary finance structure & cashflow “health check” (if requested)
51. Questions?
Type your questions into the chat room part of this event now!
We trust this evening has been worthwhile & beneficial
Thanks for listening.
Nick Lockhart
52. What Next?
Don’t Miss This IMPORTANT Step!
Go To: www.investmentmentor.com.au
Click: Borrowing Capacity
Complete our online secure BCA form
Submit (NB: Encrypted & Secure)
Alternative download NOW, complete & fax
We will:
- Have your Borrowing Capacity Assessed
- Prepare for you a complimentary sample Cashflow Analysis
- Prepare for you a complimentary sample Retirement Projection
- Print & Post these to you, along with a complimentary copy of my DVD
(should you not have received this previously)
- Complete a complimentary finance structure & cashflow “health check” (if requested)