Monday, February 9, 2009

Why Invest in Australian Property by Erik Hupje

Property and especially Australian property is an excellent investment. Not only is it much harder to lose money in property than in the stock market, but with property you also benefit both from steady capital growth and from rental income. And as rental income increases over time it protects you from inflation. At the same time you can borrow money to buy property and despite Australia's high taxation environment, property investment can be very tax efficient.

Let's have a look at these advantages and some more beneficial aspects of residential property investment in a bit more detail. Please note that this article does not include the charts and tables of the original article, which can be found at

1. An investment market not dominated by investors
First of all, you need to realize that some seventy percent of all residential property is "owner occupied" and only thirty percent is owned by investors. That means that residential property is the only investment market not in fact dominated by investors, which means that there is a natural buffer in the market that is not available in the share market. To put it simply, if property values crash by 10%, 20% or even 40% we all still need a home to live in and so most owner occupiers will simply ride out any major crash rather then sell up and rent (compare this to the stock market where a major drop in prices can easily trigger a serious meltdown). Sure, property values can and do go down but they simply do not show the same level of volatility as the share market and property offers a much higher level of security.

And if you don't believe me when I tell you that residential property is a safe investment, then just ask the banks. Banks have always seen residential real estate as an excellent security and that's why they' lend up 90% of the value of your property; they know that property values have never fallen over the long term.

2. Sustained growth
Property prices in Australia tend to move in cycles and historically they have done well, doubling in cycles of around 7 - 12 years (which equates to about 6% to 10% annual growth). We all know that history is no guarantee for the future but combined with common sense it's all we have. There is no reason to think that the trends in property of the last 100 years would not continue for the next few decades, but to be successful in property investment you must be prepared and capable to ride out any intermediate storms in the market, but that applies to any investment vehicle you choose.

Australia's median house price between 1986 and 2006 as published by the Real Estate Institute of Australia (REIA) shows that back in June 1986 you would have bought an average home for $80,800. That same home would have been worth $160,500 in 1986, which is pretty much double of what you paid 10 years earlier. Another 10 years later in 2006 that average home was worth some $396,400. So between 1986 and 2006 that average home went up by nearly 400% or about 8.3% per annum.

Not bad. And quite in line with the longer term history.

In fact, as Michael Keating points out in his blog on 24th January 2008 (Why Melbourne's properties will keep rising), it is actually on the low side compared to the historical average. Australia's property prices have been tracked for something like the last 120 years and on average they have risen 10.4% per year. Just in case you might believe that had to do with Australia being a newly found colony, and don't believe this would be sustainable in the long term, consider this. In the UK records of property sales go back till 1088 and analysis of the data shows that in those 920 years UK property on average has gone up by 10.2% per year.

3. Buy It With Other Peoples Money (OPM)
Now just in case the above has not been enough to convince of the value of residential property investment, let me tell you one of the great secrets of creating wealth, which also applies to investing in property. The secret is OPM. Other Peoples Money.

Secret? No that's just marketing hype you see on the web, but the power of Other People's Money or more common referred to as leverage or gearing is absolutely critical to building wealth. And, in the case of property the leverage you can apply is substantial. As I mentioned above, banks love residential property as security and therefore will easily lend you 80% or 90% of the value.

It was Archimedes who said, 'Give me a lever and I'll move the earth'. Well, as an investor you don't want to move the Earth, you just want to buy as much of it as we can!

When you use leverage you substantially increase your ability to make profit on your property investments and, importantly, it allows you to purchase a significantly larger investment than you would normally be able to.

Let's have a look at how this works. Imagine there are five investors each with $50,000 to invest. Say they all buy an investment that achieves 10% growth per annum and has a rental yield (or return) of 5% per annum. Investor A borrows 90% of the value of his investment property (Loan to Value Ratio or LVR of 90%) and investors B, C and D borrow 80%, 50% and 20% respectively. Investor E doesn't borrow at all and goes for an all cash transaction.

Let's start with cashflow, which is here simplified to rental income minus interest paid. Investor A, who geared 90%, has a negative cashflow of $15,500 for the year whilst Investor E who borrowed no money at all has a positive cashflow of $2,500. But that's not the whole picture because each of the properties increased in capital value and once we include that the picture changes significantly, Investor A has a net worth increase of $34,500 whilst Investor E who didn't gear increased his net worth by only $7,500. In terms of return on investment Investor A achieved a 69% return on his initial $50,000 whilst investor E achieved a return of 15%.

That's pretty impressive for one year. And if the investors let their properties grow one or two full cycles we're talking about serious wealth creation. And once the investors have enough equity in their investment property they can use that to fund a second purchase which after a few years growth will allow the purchase of a third and we're on our way to wealth! That is, those investors who geared as Investor E is not going anywhere fast.

However, it is not all that easy. As you saw Investor A incurred a negative cashflow in his first year and would continue to do so for a few years until the rental income had grown sufficiently to pay his interest. He has to fund this annual shortfall from his salary. And this is called negative gearing - you borrow money to generate capital growth in your property but incur an annual shortfall in the near term. For most investors this means there will come a limit on how many properties they can buy with negative gearing, as they don't have too much spare income. If you look in our strategy sections you can read more about negative gearing and techniques to avoid paying the shortfall out of your own pocket. We also address cashflow positive properties.

But let's get back on topic and have a look at some more compelling reasons to invest in Australian residential property.

4. Income That Grows
We've discussed that Australian residential property vestment is safe, with long term growth prospects and combined with the right level of leverage can create significant wealth. We also briefly touched on the fact that it generates a rental income. The good thing is, that over the years the rental income received from property investments has increased and this increase has outpaced inflation. In fact the last few years have shown tremendous increases rents - I know because the rent on my investment properties has been booming. Still is actually.

Ok, but are rents likely to keep growing? Well, statistics show that the level of home ownership is slowly decreasing in Australia. There are a number of reasons for this like demographic trends but, in particular, as property prices keep rising, fewer people are able to afford their dream homes. The latest Australian Bureau of Statistics figures confirm that more and more Australians are renting and many industry commentators are suggesting that the percentage of Australian who will be tenants in the near future will go up to 40%. So demand is growing. We also know that supply of good quality rental properties is limited (very low vacancy rates across all of Australia) and the government is having difficulty providing public housing. So all in all, it is very likely that rents will continue to grow at a pace faster than inflation - good news if you intend to become a property investor!

5. Tax Efficient
When it comes to investing in property, your best friend is the bank as they provide the leverage you need to accelerate your wealth creation. Your second best friend is your tenant, as without a tenant your investment property would stand empty and your third best friend is the taxman.

The taxman? Absolutely.

How can that be when Australia is not know for attractive tax rates, in fact the opposite?

Well, first of all the interest you pay on the loan to buy an investment property is fully tax deductible and if you own the property longer than a year you only pay capital gains tax over 50% of the gain. Add to that various depreciating allowances and you have the makings of a very tax efficient investment. If you do your homework, the bank will happily give 80% or 90% of the money you need to buy your investment property and once you own it, your tenant and the taxman will pay your interest and your rental expenses. Guess who gets to keep the capital gains, you!

Talk about OPM.

6. Millions of Millionaires
And if the above doesn't get you going, consider this: most of the world's richest people got rich by investing in property. Those that didn't get rich from property typically invested their newfound wealth in property.

So, if the majority of wealthy people have used investment property to increase their wealth than why not use that knowledge to you advantage and do the same! There's nothing wrong with seeing what successful people do and applying those principles to your own life.

Even McDonalds make more money through its real estate than through selling burgers and fries as it owns most of the land and buildings in which it's franchises are located!

7. You Can Do It Too
Before you say, it's ok for the rich, but how the heck am I going to get into property investing, let me tell you this. You do not need to be very wealthy to get into property investment; it really doesn't take large sums of money to get involved. And that's because many of the banks will lend 80%, 90%, 95% and sometimes even 100% or more of the value of a residential property. As long as you have a steady job and a little starting capital (spare equity in your home) you can afford to buy investment properties.

It has been shown over and over again that careful and intelligent use of real estate can enable ordinary people, like you and me, to become property millionaires in about 10 years. If you truly intend to become one of the wealthy people in the future, you should probably take a serious look at using property to your advantage.

8. Too Much Hard Work?
There are many ways to make money and some say that property investment isn't that easy and takes a lot of time and effort. It takes time to get an understanding of the property market and how to go about investing in property. It can take weeks if not months to research areas and find the right investment property for you. And then it only gets worse, you have to organize finance, get a solicitor to deal with all the legal work. Just the finance and legal work can take 30 to 60 days. And once you own the property the work isn't over, as you need to look after it and do your tax!

Nobody said it would be easy. Nobody said you didn't have to get your hands dirty.

Iit will take time and you will have to work at it and educate yourself. But hey, if you are serious about creating wealth and retiring early then property is a great way to achieve that. And once you've started and get some experience under your belt, you'll see that I gets easier, and actually the process of building a investment property portfolio can be very rewarding and a lot of fun too.

So, to come back to the original question, my choice for property investment is based on the low level of risk and robust long-term performance property compared to the alternatives. Investing in property, if done well, is Simple, Safe and Reliable.

For more information on investing in Australian property visit

About the Author

Erik Hupje is an experienced international investor in Australian Real Estate and shares his experiences and knowledge through

Australian Property Market Predictions For 2009 by Hugh McInnes

Australia may be one of the last, great unspoiled destinations on Earth, but like a lot of other locales, the country is having its own problems with the property market as 2009 kicks into gear. Experts are divided on the property market forecast - neither committed to success or failure - saying simply that the market is unlikely to drop more than 10-20 percent, nor increase more than five percent.

Certainly one of the driving factors affecting the 2009 Australian property market will be employment or the lack there of, given that new houses can only be afforded by those with the money to make the down payment. Having said that, the Reserve Bank of Australia has slashed interest rates a whopping three percent since September 2008 bringing the rate to 4.25 percent - setting precedence that Australia's major banks have been pressured to emulate.

If employment is the key to the success of the Australian property market, then job prospects will determine property prices. Many experts feel the current 4.5% unemployment rate is predicted to rise as high as 8% in 2009, which means if those unemployment levels are realised, house prices could start to drop.

Although still early in the New Year, economic experts feel there are four key elements that will affect the Australia property market in 2009 - and odd though it may seem - none of these elements involve supply and demand. The forces pulling Australia into the New Year are: - Debt
- Jobs
- The world economy
- Affordability.

Regarding debt; the most problematic issue is the fact that household debt levels are at record highs. For house prices to rise people would need to be able to take on extra debt - but they can't. Official statistics already show that the majority of households are experiencing mortgage stress.

Jobs (and job security); both categories will be critical to the Australian property market in 2009. Current data shows full-time employment fell by 44,000 in December 2008, part-time employment rose 42,800 and unemployment rose by 1,200. The unemployment rate has crept up to 4.5 percent from 4.3 in just a few months. What this means is that the underlying labor shortages have been soaking up most of the unemployment pressure, with employers making roles part-time to protect themselves in uncertain times. This trend is likely to continue for the next few months but should ensure householders can continue to repay debts.

The world economy; this can be considered the key driver in regards to employment. The United States, Japan and many European countries are in recession and China is experiencing a slowdown. All of these governments have embarked on massive stimulatory programs the likes of which have not been witnessed in recent history. The future of the Australian property market will swing very much on the success of these programs, but the affects are unlikely to flow through until the second half of 2009.

Some economists are predicting across the board price falls of as much as 30% in the Australian property market, but most expect much more modest price corrections. The severe downturn in Australian housing construction and a 34% fall in residential building approvals in 2008 should ensure any falls aren't that steep.

Interest rates have made a mortgage more affordable, and the first-home buyers grant is helping, but the flipside is that unemployment has only just begun to rise and the rise will be substantial. Normally, when unemployment rises, it puts a big dampener on the housing market. For example, the period of high unemployment during the 1990s put significant downward pressure on housing prices. 2009 may bring even bigger decreases because the household debt, relative to income levels, is now four times higher than in the 1990s.

Although generally weak, the market should hold for the first half of 2009. The second half of 2009 is less clear - it may experience a minor recovery as the massive economic stimulation packages kick in, although any rally is likely to be restrained by debt levels, credit availability and affordability.

About the Author

Some useful tools are the Australian mortgage calculator and stamp duty calculator.


First Home Buyers back in the market in Australia. by avisolutionz

All the signals are right if you are a first home buyer living in Australia. At no previous time has a first home buyer had access to a number of cash subsidies and savings that have resulted firstly from individual state government initiatives and secondly from initiative by the Federal Government to encourage first home buyers back into the market. By providing generous subsidies and grants it is hoped that more first home buyers will be out and about looking for a new home and this will provide the stimulus for increased construction activity in the home sector.

In NSW the state government introduced a New Home Buyers supplement Effective from 11 November 2008. Under this arrangement a NSW First Home Buyer who is purchasing a newly constructed home will receive a Supplement of $3,000.

This will be will be added to the existing $7,000 grant for eligible First Home Owner Grant applicants building a new home or buying a newly constructed home. For the time being, the $3,000 Supplement will only be available for 12 months (11 November 2008 to 10 November 2009 inclusive), at which time it will be reviewed in the context of the property market. One can probably assume that if the global crisis continues beyond November 09 then the first home buyer supplement will be extended for a further period.

This first home buyer supplement is on top of the $14,000 provided under the Commonwealth's First Home Owner Boost scheme. This will give eligible First Home Owner Grant applicants i.e. first home buyers building a new home or buying a newly constructed home a total of $24,000 towards the cost of their new acquisition.

Effective from 1 July 2009 (still subject to Federal Government approval) the First Home Owner Grant and NSW New Home Buyers Supplement will be capped and only be available for properties valued up to $750,000. This is likely to include the majority of first home buyer purchases and is a terrific incentive for first home buyers to enter the market. Other Australian states also provide incentives at State level to first home buyers - the Commonwealth 'boost" scheme obviously applies to all states and territories.

To date the most funding under the first home buyer schemes in NSW has gone to Liverpool ($98 million +), followed by Campbelltown ($70m +) Wentorthville (69m+) and Blacktown ($63m+). In NSW as at 8th January a total of $5 billion has been paid in subsidies and grants to first home buyers. These subsidies for first home buyers include: • $7000 additional grant for new homes where contracts were signed between 9 March 2001 and 31December 2001 • $3000 additional grant for new homes where contracts were signed between 1 January 2002 and 30June 2002 • $7000 Boost Payment for established homes where contracts were signed from 14 October 2008 • $14 000 Boost Payment for new homes where contracts were signed from 14 October 2008 • $3000 NSW New Home Buyers Supplement for new homes where contracts were signed from 11November 2008.

In addition to the above mentioned subsidies and grants first home buyers in NSW also have access to concessions relating to stamp duty costs.

About the Author

My choice finance is a mortgage broker company, it offers competitive rates for

first home buyer
and home finance.