Mar 2019

Presenting A Property For Sale

Presenting A Property For Sale

Written by Hudson Adviser Kris Wrenn

Property values in Australia have definitely slowed in some areas, and with the uncertainty around the upcoming federal election and the outcome from the financial services royal commission and the potential fallout to the mortgage market, the property sector has definitely hit uncertain  times.  We are in the midst of a housing downturn, with only four capital cities seeing price increases in 2018 with the rest recording declines. The capital cities continuing to record growth are Hobart, Canberra, Adelaide and Brisbane. Interestingly, Hobart has also seen the highest decline in first home owner affordability.

With the subdued sentiment towards housing the best strategy is possibly to hold your property to ride through the wave, and if in the financial position, purchase another property. We have seen a more significant housing downturn within the last 30 years, and any property within the inner circle ring should hold its value and continue to grow in the long term. A lot of buyers are sitting on their hands and waiting for conditions to settle.

Sometimes it is not possible to hold and properties have to be sold for one reason or another.  A strategy that has been on the increase in recent times is that of furnishing and styling  homes for sale. David McClean, general manager of Furnish and finish, said a professionally styled property can shave about four weeks off a marketing campaign and add about 12.5% on average to the sale price. He recalls two identical studio apartments in North Sydney in the same unit block that were on the market recently; the styled one fetched $100,000 more *1.

To sell a property in this current market for the best possible price you have to consider the way you choose to present your property to the market. Buyers will often pay significantly more for a property packed with visual appeal. It can be difficult to disconnect and view your beloved family home through the eyes of on outsider. This is where it might be worth employing the services of a professional. A lot of real estate agents are offering  a new ‘service’ now where  they will offer tips to maximise the potential market price of your property. This can give you an objective look at your house, consider buyers in the area and ways to make the home more appealing to as many of them as possible. The aim is to make your home a blank slate so that buyers can imagine themselves there. Professionally styled properties can help buyers overlook flaws in the property by creating a stronger emotional connection. Selling a property is a big decision, and selling in this current market requires a little bit of extra attention and effort. I get asked sometimes if it makes sense to spend money on my property before selling. Because every property is different it is hard to answer this question and of course the deciding factor should be the return on your investment, ROI. It is always going to be hard to gauge which is where you need the help of a local real estate agent who is knowledgeable of the local area and its buyers to offer some guidance. But whether it’s a tidy up or an overhaul, there is one thing that I agree with and that is to present your property as professionally and as stylish as you can. First impressions count and the longer your property sits on the market the more cost to you, and the more damage is done in securing a future potential buyer.


*1 Sydney morning herald

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Mar 2019

A Case Of Wait And See For Property

A Case Of Wait And See For Property

Written by Hudson Adviser Kris Wrenn

Property prices are certainly fluctuating across the country. According to realestate.com.au the year on year change (to January 19) in median house prices has seen negative growth of between 10% and 13% for most regions of Sydney. Conversely areas such as Ballarat have experienced positive growth of over 7%. What we are NOT seeing a lot of is SALES. Both buyers and sellers seem to be just waiting to see what is going to happen.

This is arguably understandable given the impending general election, especially on account of multiple (potential) proposed changes discussed by the (favourites to win the election) the Labor party – removal of negative gearing for established property, reduction to the capital gains tax discount from 50% to 25%, etc.

Another reason activity may be low is that we are not seeing a lot of “forced sales”. Normally when prices are falling, as they are in Sydney and Melbourne, it’s because there are a lot of people being forced to sell. Falling prices are usually linked to poor economic conditions and rising unemployment levels etc, and this was certainly the case during the GFC. In the current climate however, if anything, we are experiencing the opposite, and Australia currently enjoys a National unemployment level of just 5%.

It could also be argued that forced sales are not occurring due to the historically low interest rate levels, however I would have to refute this one, on the basis that loan sizes are rising and as such the actual cost of paying for a home is rising, and what’s known as “mortgage stress” is very high in some areas. It’s tricky because there’s no technical definition of mortgage stress per se. Historically it’s been considered that if one is paying more than 30% of their income on their mortgage (or rent), then they may enter into mortgage stress territory. We are certainly seeing above this in Sydney, but not so much in areas such as Adelaide. A similar measure used is to consider your house price as a ratio to your income. In the past a general rule of thumb was your house price should be 3 times your annual income. A recent study by Demographia revealed figures in Australia are closer to Times 6 for Brisbane, Times 10 for Melbourne and an unbelievable Times nearly 13 for Sydney. This puts Sydney as the 2nd most expensive city in the world (taking into account income), with Hong Kong in top spot.

So could there be a storm brewing when it comes to property?  As stated, it’s likely going to be a waiting game until at least the election, in order to give buyers and sellers more clarity on political implications. But beyond this? Mortgage stress is very high compared to historic levels. Furthermore, Australian household debt levels compared to disposable income at are historic highs (see appendix  A). Finally, and this may well be a concern you share, many investors are being faced with interest only loans coming to term and having to think about the implications of those loans going to Principle & interest if the banks won’t extend.

If you have any concerns about your Property portfolio and/or your lending arrangements, give Hudson a call and review things with your adviser.

Appendix A

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May 2018

Demographics, Demand and A Little Design Census...

Demographics, Demand and A Little Design Census...

Written by Terry Taylor of Specific Property

Demographics, Demand and A Little Design Census Makes Sense, but Floorplan Design Is Critical

For more than 20 years now I’ve been talking about the change in demographics and household formations in Australia.  These are the very changes which are going to determine the types of properties more people will live in as the effect of those changes occur in our society.  Numbers and statistics have always fascinated me because even though they are just numbers and are sometimes considered boring, it is these numbers which actually speak to you and give you an understanding of why and what is actually happening in the residential property market.  The latest Australian Bureau of Statistics (ABS) data cannot be fudged, changed and regardless of what market sentiment is, or at least newspaper comment is, the figures on the changes to household formations in Australia tell the story very clearly. 

We’ve recently reviewed the historic data regarding demographics in Australia and included the latest data from the most recent Census completed by the ABS in 2016. What we’ve found is already impacting the residential property market and will continue to do so in the future.  The magnitude of the shift in demographics over the last 50 years and even just over the last 30 years is nothing short of game changing.

The census figures show that Australians are, in greater numbers than ever before, living either on their own or in two person households.  The percentage of family households, whether as a couple or a single parent family with children, is reducing as an overall proportion of the population.

In order to highlight and clarify the changes that have been occurring, we have put together a few graphs that show these changes visually.  Each graph represents the data in a slightly different manner in order to clarify the magnitude of the shift that has been occurring.  

Note:  These numbers refer to household formations, not physical property types e.g. house and land, units etc.  The time period covered is 50 years and we have shown the information from three ABS Census’s, specifically 1966, 1986 and 2016.  The 2036 data is the ABS’s projections for household formations in that year.  Each household formation type is shown as a proportion of the whole, 100 percent, of the population.

What is clearly evident in chart 1, is that couple families with children (the blue area on the graph) has been reducing since 1966 and is projected by the ABS to continue to fall as a percentage of all households.  At the same time, single and two person households (the green and yellow area on the graph) have been growing substantially. 

Between 1966 and 2016, a period of 50 years, homes occupied by couple families with children have fallen from 53 percent to 33 percent, a fall of almost 40 percent. In that same time, homes occupied by a single person and couple households have risen from 36 percent to 53 percent, a rise of over 50 percent. That means that the two groupings of singles person households and couples without children, now account for over half of all occupied properties in Australia. It is impossible that these demographic shifts are not impacting the residential property market in Australia.

Chart 2 demonstrates how dramatic the changes have been for each household formation.  Quite clearly couples with children households are trending lower and significantly lower.  Whilst in stark contrast to this, single person households and couple only households have seen solid growth.  The numbers and change in demographics in only 50 years has been quite staggering. 

Consequently, our bias towards a home on its own block of land, other than for a couple family with children, is no longer as valid as it once was. It is because of the demographic changes taking place that a proliferation of medium and higher density properties are being developed. The market always gets the general trends right. The problem is the appropriateness of many of the properties being built. More medium and higher density properties will need to be designed to meet the lifestyle aspirations of the changing demographics, but more on that later in this article.

In addition to these demographic trends, our main population centres are getting much larger and more populated. As a result, properties close to the centres of those cities are becoming more expensive and out of reach for many, especially for houses on their own blocks of land. The changes in household formations in Australia mean more people will be happy to live in something other than a single lot house.   It is obvious from current trends that more people want to live closer to the amenities provided in our more expensive inner city locations.  New medium and higher density properties are going to address some of the housing affordability issues currently being experienced by those who want to live in those locations.

With a rapidly growing population we have no choice other than to build more residential property to house that population.  The question is who are we building the properties for and where do they want to live?

Chart 3 will help you to see who we have to accommodate in the properties.  We have grouped all types of household formations into two distinct categories, those with children at home and those without children.

Now it is quite clear that the trend is showing that an increasing number of households today do not have children living in them.  This means that single lot houses are no longer the only option or even the most appropriate option for a majority of households.  It is also becoming apparent that some family groupings with children are choosing amenity over space and are happy to live in something other than a single lot house.  Most people who move into our larger cities want to live as close to the central infrastructure as they can.  Now we can see why an increasing number of properties that have been, and are to be built, will be properties in medium and higher density developments, that is apartments (units) and townhouses. 

Governments of all persuasions have been scratching their heads to how they can accommodate more people closer to the centre of their main population areas. This is so they can use the existing infrastructure because that is where people want to live. The bonus is that if they get this right it is a far less costly exercise than building new infrastructure to open up land on the fringes of our cities and pushing people further out of town where the amenities people want do not exist.

In Melbourne, the city which soon will be Australia’s largest, the State Government has developed design regulations which require more natural light and better room sizes in medium and higher density accommodation.  This is a very sensible start and will help to accommodate the demographic changes that are occurring in that city. 

We have talked many times about the need for good design in residential properties.  Unfortunately, we are still regularly faced with developments where the floorplans of those properties simply do not work well and will not accommodate the comfortable long term living requirements of just about any category of household formation.

More work obviously has to be done in this space and people will need come to terms with the fact that if they want to live closer to the centre of our larger cities, where the jobs are, they will have to pay the price that those properties cost.  A solution to living in more medium and higher density accommodation may be to multifunction some of the areas within those properties to create additional living space.  As a prerequisite of this it is essential that the property floorplans need to be designed to accommodate those multi-functioned uses. 

Australia has some of the largest average property sizes in the world and despite the fact that we have more land available than most countries.  Our people have spoken very clearly about where they want to live and that is close to the centres of our major cities.  When this is married with the changes in household formations as clearly evidenced by the latest ABS census, it means that if we get the designs of the properties right, the desirability and uptake of more medium and higher density property will increase.  Price growth for those types of properties that are well designed and in good locations will follow. 

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Feb 2018

Wouldn’t It Be Nice If The Commentators Told The Whole Story!

Wouldn’t It Be Nice If The Commentators Told The Whole Story!

Written by Terry Taylor of Specific Property

Is there no end to the distortion that people like Roger Montgomery perpetrate in the press on the residential property market? 

In The Weekend Australian of January 27-28 2018, an article written by Roger Montgomery was titled “Brisbane units crunch to be felt nationwide”.  Now this is not the first time that we have commented on an article by Roger Montgomery, but there seems to be no end to the distortion and deception that people like him perpetrate in the press when talking about the residential property market.  A copy of his article is attached so you can see for yourself, exactly what he is saying and why what he is saying bares absolutely no relevance to the truth. 

https://www.theaustralian.com.au/business/wealth/falling-prices-in-brisbane-to-have-national-effect/news-story/c3419c6a77bd6c4b151eff565ca6a3e5  (you may need to have a subscription to read the article).

Mr Montgomery has a habit of publishing articles like this one, but this time, he uses figures in a way that is intended to deceive or distort how the market is actually performing.  It would be a joke if the consequences weren’t so serious.  Many people believe everything they read in the press and base decisions that they make on what these supposed experts are saying.  In the article, “Brisbane units crunch to be felt nationwide”, Mr Montgomery made the statement that Brisbane apartment prices plunged on average by $81,000 and that there was still more to come according to him. 

He references a report by property consultants Urbis, who actually did publish the figures which show June 2017 averages at $725,563 and September 2017 averages of $644,667, which is indeed a variance of the $81,000 that he is talking about.  What he conveniently left out is that the figures in the December 2016 quarter and March 2017 quarter were $673,281 and $670,861 respectively.  Notwithstanding this, the figures actually mean nothing because if you were to read the Urbis report to which Mr Montgomery is referring you will find that the supposed price fall is based on the fact that in the September quarter of 2017 there was a return to a more normalized mix of 1,2 and 3 bedroom sales, compared to a higher proportion of more premium price point stock selling in the June 2017 quarter.  The Urbis report specifically mentions this as the main reason for the decline, yet Mr Montgomery completely glosses over this.

Also, Mr Montgomery at no point mentions that these figures are averages only for brand-new property sold, and not for all (new and existing) properties sold in Brisbane.   To that end, it sounds like the entire Brisbane apartment market has fallen over, this is far from the truth.   

To further put some perspective into the prices of apartments in Brisbane, we can look at the median prices for sales of attached dwellings as published by the Australian Bureau of Statistics.   Attached dwellings include flats, units and apartments plus semi-detached, row and terrace houses.  We have referenced the same quarters as in the Urbis report.

December 2016             -  $397,800      

March 2017                   -  $400,500                              

June 2017                     -  $395,000

September 2017            -  $403,500

Clearly his article is meant to distort the view of the market for what are obviously his own purposes and whilst the figures he uses relate only to new properties, those median prices of new properties are based on what is actually built in that quarter.  For example, if in any given quarter only cheaper one bedroom apartments were sold, the average new price for properties sold would fall dramatically based on a previous quarter when perhaps the only properties sold were high end three bedroom apartments.  Once again and clearly the figures that he is reporting, mean absolutely nothing in the way he is reporting them. 

A good example of that can be seen in the same Weekend Australian, in which his article appeared, where another article written by, Robyn Ironside, titled “Size really does matter” showed that some larger apartments in Brisbane, 10 kms outside of the Brisbane CBD, had soared in value by 121% to $1.12 million in the past year and based on 26 sales.  It obviously does make a difference what type of property and where that property is, and in what quarter it is sold. 

All of this of course does matter to prospective purchasers who need to look at what they are buying, where they are buying it and who the property was built for.  This is regardless of whether the property is new or not.  As we have said many times before a residential property is someone’s home and if we fail to get that right we have missed the point and those properties that have been designed well and positioned well will experience good growth in price over an extended period of time and they will always be in demand by tenants if those properties are owned by investors.

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Feb 2018

What You Don’t Know Can Hurt You - Budget Changes That Could Cost You

What You Don’t Know Can Hurt You - Budget Changes That Could Cost You

Written by Terry Taylor of Specific Property

Seven-thirty PM on the 9th of May, 2017 was an important time and date in most property investors lives.  What occurred at that time was an announcement in the Federal budget by the Australian Government of changes to legislation relating to depreciation benefits that residential property investors can claim. 

Previous to this time there were two types of depreciation, known as non-cash deductions, that every residential property investor could take advantage of when preparing their tax returns.  The intent of these deductions has always been to assist an investor build a portfolio of assets to provide for their income in later life and retirement.  To allow them to do this, the Government provided incentives to reduce the holding cost of those assets, whilst the investor was able to benefit from the capital growth of the property, increasing rental returns over time and of course to pay the property down.  The Government’s intention with this measure is to reduce the need to provide support for those people later on in retirement. 

There are two types of depreciation allowable to a property investor.  Firstly, the division 43 Capital works deduction, which allows an investor to claim 2.5% of the original building cost of the property they are buying each year for 40 years.  An example of this would be where the bricks and mortar construction cost of the property was say $400,000, an investor would be able to claim 2.5% or 1/40th of this amount in other words, $10,000, per year, each year for forty years.  They call this a non-cash deduction because you haven’t actually paid that money and the way this works is that $10,000 per year would be deducted from your pre-tax income meaning that you would pay your income tax on a lower amount.  The result is that you pay less income tax, thus saving you money. 

It should be pointed out and we find that most people are not aware that the Government does not give you this deduction for nothing, they are just delaying the time that you will have to pay for it.  To do this each time you or your accountant claims this non-cash deduction, the capital base of the property is reduced by the same amount and effectively increasing the amount of capital gains tax you will have to pay when the property is sold.  Of course, the way things stand, investors who own properties for more than 12 months are given a 50% capital gains tax concession on the profit they make.  In simple terms this would mean if you made $200,000 profit, you would only pay tax on $100,000 of that profit, a huge benefit to the investor.  So the government doesn’t take away the full benefit of claiming the depreciation benefit.

You also have the additional benefit of being able to time the sale of your property to coincide with when your income is lower/lowest and therefore paying a lower percentage of overall tax.  Because any capital gains tax that you pay is calculated at the marginal level of tax you are currently paying. 

The 2017 budget changes do not affect investors receiving this division 43 capital works deductions, so you will be able to go on claiming those deductions as previously the case.

The big change to the depreciation rules is around the second type of depreciation allowance available to property investors, the Division 40 plant and equipment depreciation.  Plant and equipment assets are those deemed to be easily removable or mechanical items found within an investment property.  They can include items such as air-conditioners, dishwashers, ovens, garage doors, carpet and blinds.  Prior to the legislative changes all property investors could reduce their taxable income by a percentage of the plant and equipment’s purchase price over the effective life of the asset.  The deductions available to investors under Division 40 were larger in the earlier stages of the assets life and diminished over the assets effective life until either no longer owned or fully depreciated.

Division 40 allowances can be calculated using either a diminishing value or prime cost method where the assets are deducted over a 15 year period with the highest proportion of deductions in the first 1-5 years, especially in the diminishing value method.  As an example the following table has been produced by BMT Tax Depreciation and shows the different methods and values of calculation for an original Division 40 cost of $26,787.

So looking at our earlier example, a property investor would be able to claim the $10,000 per year for the division 43 allowance plus the applicable division 40 allowance which might be an additional $5,302 for the financial year 2018.  This would be a total of $15,302 to be deducted when calculating income tax from their taxable income.  Both the division 40 and 43 depreciation allowances were available to all property investors prior to 7:30pm 9th of May 2017.

However since the changes to legislation were passed on the 15th of November, those property investors who exchanged contracts after 7:30pm on the 9th of May 2017 and who purchased a second-hand property are no longer entitled to claim any division 40 allowances.  Please note it is the date of signing the contract and not the settlement date of the property that is relevant with these new property depreciation changes. 

Effectively what that means is that any property investor who purchases a second-hand property from now on will not be entitled to the division 40 deductions on the property purchase.  If the property investor however purchases new or replacement plant and equipment, they are then entitled to claim the division 40 depreciation solely on those assets they actually add to the property, in other words their own new expenditure. 

The key thing to note is that those who purchase a new property will still be able to depreciate plant and equipment assets as they had previously.  There is NO change for property investors who purchase a brand new property.


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