Article by :
Stephanie Brennan | www.stephaniebrennan.com.au/ | 19.10.2016
Throughout history property (bought in the right areas) has always increased over time and in excess of inflation. The market does level off as it follows normal economic life cycles, however Australia has a two-speed economy whereby our property market often works on a separate life cycle to our GDP as we are currently seeing.
Whilst the property market is booming our GDP isn’t looking so good, namely because of how much we have borrowed over the last few years. The majority of the public have only recently become aware of this as our mining investments were temporarily inflating our GDP, however these have since matured last year, which has significantly reduced out GDP. In order to help correct this, the government has been borrowing more money to invest in infrastructure that will increase in value and enable us to pay back the debt we owe.
In terms of the property market, it doesn’t rapidly decline, only during the great depression was there a restriction on raising rents and were properties along with all investments significantly devalued.
When buying property, lenders don’t hand out loans to everyone that come through their doors, there is a formal assessment process and the banks assess applicants at a higher interest rate to allow for market fluctuations. Most lenders also assess any rental income at 80% to allow for vacant periods.
Recently the Australian Prudential Regulatory Authority (APRA) have enforced banks to look at their lending policies to which each bank has placed further restrictions and limitations around borrowing.
With any investment there are ways to de-risk your investment and with property the best way to do this is through positive cash flow properties this gives a further buffer for investors in case interest rates rise.
The comments you see in articles stating that rents are low in comparison to the purchase price are relative, there are a lot of factors that contribute to this that have very little to do with the market itself. The only correlation is that when property prices increase rents are always going to appear lower as they don’t increase exponentially like property purchase prices do.
When property managers lease a property or when they suggest a rent review they base their market estimate off comparable properties, usually through a site that gives them information on properties leased in the past 6 months. These figures aren’t always a true and current reflection of rental values, the reason being that there are many owners that don’t increase rents, as they prefer keeping their tenants, and legally under the residential tenancies act you aren’t able to issue a rental increase that is deemed excessive even if the market has increased significantly.
The comments you read in articles stating that Sydney and Melbourne are not suitable investments and are too pricey without a strong rent return is inaccurate. Personally, I am looking at a property in Melbourne (one bedroom, CBD apartment, fully furnished) with a purchase price $360,000 and a rent return of $500 per week. Previously I have looked in Newport, Sydney for a 1 bedroom with a purchase price of $395,000 and a rent return of $450 per week and Dee Why, Sydney for $450,000 with a $490 per week rent return. It’s all about what you buy and when you buy and taking the time to find the right property.
The other issue is the media; you hear all this doom and gloom over property because the idea is to create a sense of fear so that people keep reading the newspaper for regular updates on their impending doom or they keep reading for a sense of false hope when a controversial article bucking the trend comes out.
What people don’t know and what the media declines to tell you is that according to the Australian Bankers’ Association, whilst households do continue to borrow and whilst we are currently seeing the highest number of investor loans throughout history, households also continue to invest and to save.
In Australia, property is the single largest component of household wealth at $5.1 trillion, with superannuation at $1.9 trillion. The value of individual household assets is much greater than the value of household debt, with every $1 of household debt matched by almost $6 of assets.
Despite mortgage holders taking on record debt levels, on average, mortgage holders are some 28 months, yes, over 2 years ahead on their mortgage payments because of the record low interest rates. Meaning they aren’t just getting ahead of their mortgage but are also paying down and paying off their debt at a faster pace.
Now if you have a higher number of people with more assets and less debt and more passive income and therefore less need to work, how do you think this affects the government? I’ll tell you! If you look at the below chart, you’ll see that the majority of revenue the government raises so it can continue spending is through individuals income tax which raises $194.3 billion per year.
Simplistically, if you have someone earning $70,000 with 1 property they live in, the government can still take their tax and you have nothing to offset or reduce your taxable income with. Now if you buy an investment property that earns you $20,000 a year then your taxable income is now $90,000. However, your property had $15,000 worth of expenses you could claim so you only earned $5000 from your property so your taxable income is not $90,000 its $75,000, and you happened to buy a new property so you can depreciate the fixtures and fittings which comes to a total of $30,000, so your taxable income isn’t $75,000, it’s closer to $45,000. Meaning you’ve just dropped a tax bracket so you’re now paying less tax and yet you’ve earned $5,000 more this year. So you building wealth is not in the governments best interests.
I firmly believe that the larger issue at hand is the lack of accurate knowledge and information available around property investing and I blame the education system that allows this nation to let it’s students finish year 12 without everyday life skills such as how to buy your first property and how to invest your money for your future, how to network and up skill yourself to make more money and I wonder why that is? That’s right, the government governs school and what does the government not want, for you to make money, because wealthy people are much harder to control that people collect their pension and centrelink benefits.
That is the greater issue here and we are masking it by trivial commentary on a housing bubble that the educated realise is simple inflation at its best.
Remember, it’s not a housing bubble; it’s called a good investment.
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