March 2012 Newsletter

Welcome to our March newsletter

As we head into autumn, the outlook for the Australian economy appears to be reasonably favourable.

But let’s not kid ourselves: while the domestic economy seems to be weathering global volatility quite well, we’re not out of the woods yet.

The ‘GFC 2’ may no longer be imminent, but a majority of economic commentators expect the road out of the global financial crisis to be a long one.

At its monthly monetary policy meeting on 6 March 2012, the Reserve Bank of Australia (RBA) left the cash rate unchanged for the second consecutive month, at 4.25 per cent.

The Bank’s governor, Glenn Stevens, provided some cause for optimism, suggesting the likelihood of a global meltdown had declined.

“Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring,” he said.

Mr Stevens noted that, domestically, economic growth remained “close to trend overall”, with the current cash rate appropriate for the time being. Only if demand conditions weaken materially would there be scope for further easing of monetary policy, he said.

The RBA’s decision came as little surprise to industry forecasters, including RP Data’s research director Tim Lawless, who said capital city home values have come down just 0.2 per cent over the three months leading up to the latest rate announcement.

“A return to stability in the housing market is precisely the outcome the RBA have been aiming for with respect to housing market conditions,” Mr Lawless said.

“Based on the recent data flows, it is becoming increasingly clear that the housing market is likely to be less of a concern to the RBA.

“Mortgage arrears appear to be in check, home values are stabilising and transaction volumes are starting to tick up.”

Although improved economic conditions should bode well for the housing market, lenders continue to cite higher funding costs as a key impediment to providing lower home loan rates.

In fact, in February, all four major banks increased their standard variable mortgage rates, despite the RBA’s decision to keep the cash rate on hold.

ANZ also became the first major to announce a new rate review process which will consider other funding pressures, not just the official cash rate, in determining home loan pricing.

“Our new monthly interest rate review process recognises that the Reserve Bank’s cash rate alone is not an accurate reflection of bank funding costs, particularly since the global financial crisis which has left all banks with the task of raising funds in volatile global markets and through stronger competition for deposits,” ANZ CEO Australia Philip Chronican said.

With the banks breaking ranks with the RBA in setting home loan pricing, selecting a mortgage is more difficult than ever.

If you need help exploring your financing options, or if you want to discuss any aspect of your home loan arrangements, please don’t hesitate to get in touch.

Sincerely,

Nick Foale


6 investment essentials

There may be no money-back guarantees in property investment, but by keeping the following essentials in mind, you can get pretty close to ensuring good returns.

Capital growth potential
The biggest financial gains will always flow from a property’s capital growth potential. Unfortunately there is never a steadfast guarantee that a property will increase in value, but knowing where and what to buy certainly helps.

There are some features that will almost always facilitate capital growth, such as proximity to amenities, positioning in a unique building, a car spot, a practical layout, desirable outlook, good condition and a good price compared with others in the area.

Rental return 
You want to look for properties from which the rental revenue will cover the cost of holding. Units or apartments in sought after areas are often good options, as they will generally net a greater yield in proportion to the purchase price than houses.

However, the likely rental return on a property will do nothing to mitigate the risks involved with investing if its vacancy rates are high. Narrow your search to properties in locations with traditionally low vacancy rates which should deliver consistent returns.

Keep within your means
Seasoned investor or fresh to the market, buying beyond your means is a Big No No. You’ll only serve to over commit yourself, which is a fast route to investment failure.

You also need to consider the budget of future buyers, since this will affect its market appeal.

For example, top-end properties will have a more limited market, compared to properties in the middle of the market, as will those at the cheapest end of the market.

Location
Make sure the location has the required features – such as migration intake, population size, and multiple industries – to deliver both a safe investment environment and the greatest chance of capital growth.

Population records – specifically growth – can be used to guide where you choose to invest. For example, it is probably worth avoiding suburbs that are experiencing nil or negative population growth, such as those dependent on one industry.

You also want to consider where the property is located in relation to key amenities, such as schools and public transport – the more convenient your property, the easier it will be to keep it tenanted.

Demographics
Just because a type of property is of high interest in one area does not mean it will perform on a par in a different one. If your investment is ever to realise its full potential, it needs to cater to the local demographic, whether the residents are working professionals, families or students.

This means the inclusion of a bath in a family-oriented suburb, for example, and minimal garden and yard for students.

Infrastructure
Good, quality infrastructure is crucial to a property market’s health.

Look for infrastructure and new projects that will enhance an area into the future, not just temporarily during the construction phase.


Smart spending

Smartening up your spending activity needn’t be a hassle if you follow a few simple savings strategies.

With interest rates now at their lowest level since April 2010, it may be tempting to spend your extra cash. However, failing to look to the future can cost you over the longer term.

Both in Australia and overseas, economic uncertainty remains at very high levels.

Very few financial commentators are willing to predict which way interest rates will move next – let alone predict how the banks will react to any changes.

In this sort of environment, the word ‘budget’ should be front of mind for every Australian household.

Here are a few simple strategies to ensure you keep your spending in check.

Counting the costs
The only way to rein in your finances is to know exactly where you are spending your hard-earned cash.

Take some time to map out what percentage of your income is spent on leisurely and ‘impulse’ spending and compare this with your essential costs.

This simple exercise will allow you to calculate how much of your income is going to waste, making it easier to adjust accordingly.

Weekly allowance
With a greater understanding of where your money is going, you are now in a better position to set yourself a weekly allowance.

This allowance should be spent purely on life’s pleasures and be considered as your ‘disposable income’.

Be sure to keep track of where your money is going and resist the temptation to go above and beyond your allowance.

Start a piggy bank
It may sound obvious, but saving is the best way to improve your financial position.

One way to do this is to set up a high interest savings account and create direct debit payments that operate on a monthly basis.

How much you choose to save is totally up to you, but 10 per cent of your salary is considered a good place to start. You will hardly notice any change in your financial situation, but you will find yourself getting into the savings groove.

Cut the credit
Ditching the credit card is the most effective way to drive down your debt.

Credit cards typically involve a higher interest rate and can cost you thousands annually.

If it is a pricy item that you are looking to buy, be patient and save.

While it may take a little longer to acquire the necessary funds, the money you will save in interest repayments will certainly be worth the wait.

Increase your mortgage repayments
Upping your monthly mortgage repayments can save you thousands of dollars over the life of the loan.

Moreover, the more cash you put towards your home, the faster you’ll be able to unlock equity to use for other projects or investments.


Pets – should you allow them?

A pet-friendly property can open up a raft of opportunities for a savvy investor, but that doesn’t mean there aren’t risks involved

As a landlord, two of your most important goals are attracting tenants and keeping your property in good condition.

If you decide to allow tenants to have pets, this might help you achieve one of those goals, but would it hinder your ability to achieve the other?

Is allowing pets a smart decision or not? Here are a few points every landlord should take into account before deciding to rent out a pet-friendly investment property.

What’s in it for me?
The greatest benefit of adopting a pet-friendly policy is an immediate increase in your prospective tenant pool.

If you own an inner city apartment or suburban home in an area which has traditionally had a no pet policy, you will gain an immediate advantage over your competitors without having to lower your asking price.

Most pet owners see their furry companions as part of the family and this can be great news for savvy landlords.

A pet-owning tenant is likely to feel extremely comfortable in a pet-friendly property. This means they will be less likely to leave, ensuring you continue to enjoy a steady rental income.

You will also find it easier to increase your rent when needed as you are offering something that very few landlords offer – and something that pet-owning tenants will be willing to pay that little bit extra for.

What are the dangers?
The first question that springs to a landlord’s mind, of course, concerns how much damage the property is likely to suffer from claws, teeth etc

If you are unsure about allowing a pet onto your property, why not take the time to meet your new tenant and their furry friend.

Arrange a time that suits both you and your tenant and inspect how the new addition to the property interacts with its surroundings.

If you have questions or doubts, negotiating a ‘trial’ period can be a great way to see how the pet might affect your property, while minimising any potential damage.

During the trial period, be sure to inspect both the inside and outside of the home, including checking for any odours.

There are without doubt problems that can arise from allowing pets into your property; however, depending on the specific situation, the benefits can also very easily outweigh the disadvantages.