The price of the average residential block of land has risen to a record high in the December quarter, a new survey says. The Housing Industry Association (HIA)-RP Data land residential report for the December quarter found the weighted median price of a vacant housing block increased by 2.2 per cent in the December quarter to $185,222.Over the year to December 2009, the weighted median land price rose by 14 per cent, the fastest annual rate since mid-2004, the report said. HIA chief economist Harley Dale said land values rose substantially quicker than building costs and the rate of inflation during the previous upturn in the housing cycle. Dr Dale said new house prices (excluding land) rose by an annual rate of 2.8 per cent in December 2009, building materials increased by one per cent, yet median land prices increased by 14 per cent."Only six months into a new home building recovery this situation is happening all over again," Dr Dale said."If this situation continues then the recovery will stall, the housing shortage will worsen, and there will be upward pressure on rents and on existing home values that could have been avoided."Sydney had the dearest median price of residential land in Australia, $275,000. This report has obviously not taken into consideration the ACT where land prices are well over $350,000.The cheapest market in Australia was the northern region of South Australia ($59,165), followed by Mallee in Victoria ($75,000).RPData.com national research director Tim Lawless said policy makers had to act to arrest the recent drop in the number of land sales."With Australia's population growing at a rapid rate and housing undersupply worsening we should be seeing land releases and consequent sales volumes rising not falling," Mr Lawless said."... without further construction of homes we are likely to see affordability worsen and more prospective buyers looking towards an already very tight rental market for their accommodation requirements."We believe that policy markers must act to provide additional residential land which affordable as well as being close to necessary amenities."
Monday, April 19, 2010
Goldman Sachs accused of fraud
The US government has accused Wall Street's most powerful firm Goldman Sachs & Co of fraud. They sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on them to fail, which they did to the tune of $US1 billion ($A1.07 billion).A hedge fund, capitalised on the housing bust. The civil charges filed by the Securities and Exchange Commission are the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.The news sent Goldman Sachs shares and the stock market reeling as the SEC said other financial deals related to the meltdown continue to be investigated. It was a blow to the reputation of a financial giant that had emerged relatively unscathed from the economic crisis but who continued to play the same games that brought down the US economy in the first place
The SEC alleges that Goldman misled investors by failing to disclose that Paulson & Co. also played a role in selecting the mortgage pools and stood to profit from their decline in value. Two European banks that bought the securities lost nearly $1 billion, the SEC said. The global game continues."Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," SEC Enforcement Director Robert Khuzami said in a statement.
Thursday, April 15, 2010
economy and property
Banks & mortgage lenders have been biggest beneficiaries as mortgage debt has risen from under 20% of GDP in 1990 to over 85% at end of 2009.
So how does Australia keep house prices high? By encouraging households to get into yet more debt.The rise against GDP is far more dramatic than against household disposable income because other government policies—the stimulus package itself and the RBA’s 4% cut in interest rates—boosted disposable income dramatically in 2009 (but even so, mortgage debt is now a higher proportion of household disposable income than before the GFC). The Boost-inspired house price bubble was financed by households adding another 6% of GDP to their already unprecedented debt burden, when prior to The Boost they were on track to reduce mortgage debt by about 3% of GDP in 2009.We’ve avoided hitting the ground of deleveraging by climbing to a higher cliff but stepping off the cliff will eventuate unless there is a totally new solution to the dilema. Saying all this we have Grace on our side because we are still an expanding relatively new country with a growing population that does need a place to live.
Australia’s still unburst bubble drove the real price of housing to 140 percent above the level of June 1986–that is, real house prices are now 2.4 times what they were in mid-1986
Australia's Debt Bubble has kept going while other countrie's have already popped is the same old reason-debt. This is the biggest debt bubble in our history. The previous two record highs were in 1882 at 104% of GDP, and 1931 at 77% of GDP. Record debt is 158% as of March 2008.
large reason why Australia has had such a mild GFC so far is because Australian households were enticed back into debt by the First Home Vendors Boost, and by the impact of the Government stimulus package upon household disposable incomes.Households were reducing their mortgage exposure prior to the introduction of The Boost: mortgage debt had peaked at 81.3% of GDP in June 2008, and was trending down prior to the Boost. It then hit a bottom of 80.3% in December 2008 before rising to an all-time high of 86.8 in January 2010.The change has been less extreme when mortgage debt is measured against Household Disposable Income (HDI), since the Australian government’s stimulus package and the interest rate cuts by the RBA boosted household incomes by almost ten percent last year. As a result, mortgage debt fell only slightly as a percentage of HDI, from 133.6% to 130.3%, and it took longer to fall. But ultimately, even though incomes had been boosted so substantially, the increase in mortgage debt last year finally exceeded the increase in incomes: by January 2010, the mortgage debt to HDI ratio had hit a new peak of 134.2% The overwhelmingly important reason why this happened is the policy that the Government called the First Home Owners Boost.
Wednesday, April 14, 2010
Gearing and Super
If your fund were buying a property under an instalment warrant arrangement, it must be held in the trust until the debt is paid in full, at which point it is transferred into the SMSF. The grey area was always whether that transfer triggered capital gains tax.But last month, Financial Services, Superannuation and Corporate Law Minister Chris Bowen announced an amendment to the tax law so that a superannuation trustee entering into a limited recourse borrowing arrangement to purchase an asset would be treated as the owner of the asset for income tax purposes."The changes will ensure that trustees to superannuation funds who have entered into permitted limited recourse borrowing arrangements will not face CGT obligations at the time the last instalments are paid," Bowen says.Another grey area was whether the super fund trustee or the instalment warrant trustee should be the one to declare any income earned on an asset.The latest announcement confirms it is the super fund trustee who should declare the income. And equally, the fund can claim a tax deduction from earning that income."If structured properly, it will look as though the investment trust does not exist," says Philip la Greca, technical services director at Multiport. "Income flows through to the fund; dividends and depreciation flow through to the fund. It looks as though the fund owns the asset directly."La Greca goes on to say the issue of CGT has been a big concern given that an asset held for five or 10 years could have a reasonable capital gain.Another issue is stamp duty, which, rather than being a federal tax like GST and CGT, is administered by the states and territories. Generally speaking, however, the transfer of a property from a bare trust to an SMSF should be exempt.The recent announcement also brought gearing property into SMSFs into the framework of financial products.As a result, providers have to be licensed. In the past, real estate agents and property developers had been promoting the strategy and this has caused some concern. The move to licensing underlines the importance of having sound financial advice to ensure the strategy is right for your SMSF's circumstances.A downside of having property in your SMSF is that not only is it an illiquid asset but it can also be a large chunk of your fund's investments.What would happen, for instance, if one of the members of your SMSF were to die early and the fund had to make a payout?Deb Wixted, head of technical services at Colonial First State, says in such circumstances it could take time to unwind the arrangement and could be expensive.She also comments that although the latest government announcements have cleared up a number of issues, there is still a lot of scope for interpretation."The Australian Tax Office is still sifting through the issues, so what you do now could still be called into question in the future," Wixted says.But there are other positives in gearing, not least that if the fund still holds the property when it enters the pension phase there will be no capital gains tax payable on the sale of the property. But the wisdom seems to be that the gearing should be well and truly completed by then, otherwise you may have problems with cashflow at the time you may be needing to draw an income out of your super on which to live.Another plus is that once you are in the pension phase, the rental income will no longer be tax assessable, although that also means the interest costs won't be deductible.Of course, gearing into super is not all about property. Indeed, most reports are that while there are plenty of inquiries about borrowing to buy property within super, very few actually end up going down that road.Far more popular is the use of instalment warrants for direct share purchases or to invest in managed funds, although with the latter it may be simpler to invest in a geared managed fund rather than have your SMSF undertake the gearing.Graeme Colley, national technical manager at ING Australia, says borrowing to buy shares in your SMSF means the fund can enjoy the benefits of franking credits. With fully franked dividends taxed at 30 per cent already and your SMSF only paying 15 per cent tax on its earnings, the fund can use the 15 per cent difference to offset other income in the fund.And if you are gearing into these shares, then, assuming the market remains positive, you benefit from the extra exposure. Of course, if shares tumble then you will take a bigger hit.On the shares front, Macquarie, for example, has Equity Lever, which allows you to get leverage in an SMSF.Peter van der Westhuyzen, head of sales and marketing at Macquarie Margin Lending, says Equity Lever has been on the market for some 18 months and has enjoyed strong support."Equity Lever gives you increased investment size in a tax effective environment along with diversification," van der Westhuyzen says. Just as the banks want a low loan-to-value ratio when customers are borrowing for property, the LVR for Equity Lever is below 50 per cent.The initial investment can be as low as $20,000 but the interest rate on the product is 9.55 per cent. borrowing to invest, whether inside or outside super, can be fraught.But if the fund makes the right investment and can service the loan, you could be bolstering your super benefits.And given that superannuation payments are tax-free to those aged over 60 and there is no capital gain on assets sold when in the pension phase, it makes for a reasonably solid argument.If the limited recourse loans start to offer competitive rates of interest and the grey areas of gearing are cleared up, it may well prove an effective strategy for your SMSF.
Gillian Bullock From: The Australian April 14, 2010
Wednesday, March 31, 2010
GFC
While GDP certainly decreased during the GFC, Australia avoided sliding into an official recession. And while the unemployment rate rose (reaching a high of 5.8% in June 2009), those that retained employment actually experienced an overall increase in disposable income.Many Australians are actually in a better position now than before the downturn – what with significantly lower interest rates (currently at 4%, compared to 7.25% at the start of September 2007) and greater national disposable income (estimated by IBISWorld to reach $194,500 in the March 2010 quarter compared to about $181,000 million in late 2007).Add to this lower fuel-prices (now at US$80 per barrel compared to US$145 per barrel in mid-2008) and it's not surprising that household spending has been relatively strong over 2009-10.
Where to from here?
Average Australian households remain better off now than before the GFC and the first home owner boost encouraged many Aussies to enter the mortgage market – meaning we are just as indebted now as pre-GFC. Interest rates, fuel and electricity prices have all risen and many Australian families will again feel the pinch this year and onwards.Nonetheless, conditions are forecast to continue to improve, with IBISWorld projecting that slow economic growth in the March 2010 quarter will be replaced by solid growth for the remainder of the year, as households continue to spend and businesses join the fray.IBISWorld also expects the unemployment rate to continue to trend downwards and, barring any reversal of the improving trend internationally, the Australian economy will remain strong for the foreseeable future.
Friday, March 26, 2010
John Edwards of Residex speaks
This second phase or part of the growth cycle is usually longer and stronger than the initial growth period. The cycle has moved to being more normal, with upper cost areas of the market now leading the way forward. This is as one should expect as confidence among the ranks of our executive and upper management groups become stronger. It will flow on to other areas as corporate profits improve and there is lower unemployment and some wages growth.
Slowing is evident from the number of slightly negative growth numbers in the month of February for houses. The relatively strong performance in the unit market is evidence that investors have become much more active.
Here are the house and unit market statistics for February 2010.
| Houses | |||
| | | Growth | Growth |
| Area | Median value | Feb 09 to Feb 10 | 10 year average |
| ACT | $501,500 | 9.45% | 10.74% |
| Melbourne | $547,500 | 16.32% | 10.16% |
| Brisbane | $469,000 | 6.52% | 11.81% |
| Sydney | $634,000 | 13.28% | 6.62% |
| Perth | $481,000 | 2.00% | 11.67% |
| Hobart | $362,500 | 5.20% | 11.98% |
| Darwin | $501,500 | 11.20% | 11.28% |
| Adelaide | $400,000 | 7.95% | 10.48% |
| Units | |||
| | | Growth | Growth |
| Area | Median Value | Feb 09 to Feb 10 | 10 year average |
| ACT | $394,000 | 7.84% | 10.98% |
| Melbourne | $422,000 | 16.39% | 9.85% |
| Brisbane | $357,500 | 3.10% | 10.36% |
| Sydney | $444,500 | 10.41% | 6.00% |
| Perth | $391,000 | 7.27% | 11.08% |
| Hobart | $277,000 | 9.01% | 12.50% |
| Darwin | $410,500 | 17.02% | 11.09% |
| Adelaide | $306,000 | 8.01% | 11.57% |
Darwin houses are at last taking a breather and the growth for the month was for the first time negative in more than a year. Its rental yield remains the highest of all capital cities and will cause further investor interest which will continue to drive prices but at a lower level given the cost of property which is now relatively high by comparison to the other opportunities. The cost of an unit investment here is now only very marginally lower than in both Sydney (8%) and Melbourne (3%).
Graph 1: Major Capital City Trends
Graph 1 Major Capital City Trends clearly shows that the market is now softer than it was in September/October 2009.
The auction clearance rate in Sydney last week was approximately 65% while the clearance rate in Melbourne was in the 80% range. The impact of the RBA to increase interest rates has been more noticeable in Sydney but is a reasonable outcome given the higher cost of housing and the larger mortgage position for most when you consider that Sydney has been more expensive over a longer period. The momentum and confidence of Melbourne property buyers in a city which is growing strongly is likely to carry its growth phase for longer than in Sydney. However, both cities are exhibiting a slowdown as we move into winter. In both capitals investors are active in the unit market and prices are moving forward.
Our other cities are also exhibiting a softening but it is not as noticeable as in the two majors (see Graph 1). Again, this result is probably an expression of the lower impact of unaffordability and the RBA´s move on interest rates. (see Graph 2 Minor Capital Cities Trends).
Graph 2: Minor Capital City Trends
I have recently been reading suggestions and arguments about a price bubble in Melbourne forming.
I can see no evidence of this. Yes, houses are too expensive across Australia but that position is unlikely to change for at least a decade as it will take that length of time for governments to correct the stock shortage issues.
Further our population needs to expand to satisfy the fundamental needs of a growing resource sector. Add to this – the recent breaking of the drought and it is clear that Australia is in very good shape with the population more likely than not to see growth in wages, and reductions in unemployment than anything else. Add to this – a banking network that is strong and has the capacity to continue to lend to this sector and needs to, to maintain profits and we have a recipe for moderate to good total returns from our housing assets. Please note that I speak of total returns as the affordability issue will lead to renting becoming more normal than in the past and creating moderate capital growth, but at the same time causing rentals to rise.
But I digress a little. The RBA interest rate increases are having a slowing affect and the data is clearly showing that the rate of growth is moving back a little. This in itself points to a "bubble" being avoided as the growth rate would need to be increasing for there to be the potential of any major problem. One last point on this; our more than 170 years of data tells us that capital growth rates in the last 60 years are less each cycle and hence as property becomes more expensive, bubbles become harder to create. Having said that, we have to bear in mind, any long period of moderate growth with excessive bank lending with higher leverage being allowed or encouraged can lead to problems if the economic circumstance of the country turns down.
Our banks are well controlled and governed so a rapid adjustment to our housing values to make them affordable looks very unlikely.
With the market moving to a normally quieter period during winter, it is a good time to identify opportunities. For me winter is the best time to purchase as there is less competition in the market and sellers at this time are usually more anxious. You probably have a better opportunity to negotiate that bargain, particularly in Melbourne.
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