"HOTSPOT" – JUST MORE SALES JARGON?
IT SEEMS THAT HOTSPOT IS THE NEW GO TO WORD FOR PROPERTY DEVELOPERS.
Tag lines like “40 hottest suburbs under $400,000”, “Melbourne’s hottest suburbs”, “Perth’s Cinderella Suburbs” are no longer confined to investment property forums, they are now on Facebook, in the paper, even on our Linkedin feeds.
“Hotspot” has been bandied around since the mining boom. Far flung areas like Port Hedland, Karratha, and the Bowen Basin saw phenomenal growth in a short period of time of the back of large infrastructure projects and lack of housing supply. Generally, by the time you have heard about the next “hotspots” it has already seen a significant increase values. Unfortunately, the people who get convinced to buy at this point are often the ones who will suffer the worst losses. The word hotspot is generally used to create hype, and create a perception of demand, encouraging the buyers to “get in quick, or miss the opportunity of a lifetime”.
So how can we cut through the hype and identify areas with growth potential and a sustainable opportunity?
Supply and demand. Sounds so simple, however it is a key driver of price growth. If the suburb can’t build quickly enough to meet demand, prices will increase. You can identify these areas by looking at:
Large infrastructure projects. Think Fiona Stanley when it was announced years ago. These types of projects create a spike in housing demand as workers move in for jobs. Preferably look for projects which are underway, as we all know government promises can sometimes change with budgets. Education and healthcare projects are often strong growth drivers.
Gentrification is becoming a popular way to predict price growth. These areas have had a poor reputation in days gone by, but are now seeing a change (Highgate, Perth is a great example). If you look at the property prices in the area you should have seen an increase in prices over the last 2-3 years, they should have grown steadily. If this is the case look at the demographics, young residents (under 40) with strong incomes is a good indication that gentrification is taking place. Usually you will see new houses and development in the area (subdivisions of older blocks, new apartment buildings etc.) happening in the area. It is also good to look for new cafes, retail stores, restaurants and bars opening in the location.
“We Guide, You Decide”
NEGATIVE GEARING: MAGIC OR MADNESS?
THE AMOUNT OF TIMES I HAVE HEARD COMPANIES IN THE PROPERTY INVESTMENT SPACE THROWING THE WORDS “NEGATIVE GEARING” AROUND LIKE IT IS A CURE ALL TO PEOPLE’S FINANCIAL WOES IS ASTOUNDING.
Don’t get me wrong, gearing is a tried and tested method of building wealth through property investment, however it needs to be entered into carefully, and armed with the knowledge that it suits your circumstances.
Australians have long been borrowing money to invest in bricks and mortar. Some think the values always increase, many like that they can touch and see it, whilst others are targeting the potential tax benefits (negative gearing). In a property market which is rising, negative gearing is a good strategy for wealth creation, but beware for when values fall.
When the loan costs (interest on the loan), and the property upkeep costs (maintenance, body corporation fees, rates, insurances etc.) outstrip the income (rent) the Australian Tax Office allow the investors to offset the different (loss) against their taxable income. This is what is known as negative gearing. It is important to understand that this is more of a tax strategy than an investment one.
For example, the below calculation gives a rough example of how negative gearing would work. I have left out depreciation for the purpose of the example as it has additional negative tax implications when you sell the property anyway.
Property Value: $400,000
Stamp Duty: $15,000
Total Loan: $415,000
Rent: $20,800 per annum ($400 per week)
Total Income: $20,800
Rental expenses: $5,000 per annum (rates, insurances, maintenance etc)
Interest on loan: $415,000 x 6.00% = $24,900
Total Expenses: $29,900
Total Income less Total Expenses equals minus $8,600 per year.
So, if you had an annual taxable income of $100,000 you would currently pay $26,947 in taxes (includes medicare levy). In the above scenario your taxable income would be $100,000 less the $8,600 loss, so $91,400 per annum. The tax on that is $23,593 (including medicare). That means you would have saved a total of $3,354 in tax. Take this from the $8,600 loss and you are still left with $5,246 per annum out of your own pockets! If we were too fast forward the property 10 years and it has not increased in value, then you have lost $52,460! ($5,246 x 10). If the same property is now worth $600,000 then you have made a gain ($600,000 less $415,000 less $52,460 equals $132,540).
Ultimately, the strategies success or failure will come down to the property you purchase, and the rent it brings in. If the rent is greater than the expenses (positively geared) then you have to worry about the capital growth slightly less. If the property is making a loss (expenses are greater than rent) then it must be growing to provide a return. Unfortunately, we see many investors making this exact mistake. I am a firm believer that only investors who have the financial ability to absorb potential decline in property values, or the loss of rent for a period of time, should consider negative gearing as a strategy.
“We Guide, You Decide”
The Rise of the "Single-Person-Dwelling" and the "One-Bedroom-Apartment"
Home ownership has very much been a part of the Australian psyche over the years, and while this is still desired today, one of the significant changes impacting its attainment, has been affordability.
Over the past 15 years, buying your own little piece of Australia has unfortunately become a lot more expensive.
Affordability is often measured by comparing household debt with annual income. You will see from the ABS published graph below, just how the household debt to income ratio has changed over a 25 year period, where at the end of 2013, the value of households debt was almost 1.8 times the amount of gross disposable income.
It comes as no surprise then, that the ABS have noted a clear drift from detached housing to medium and high density living.
In addition to affordability, the ABS stated that Australia is undergoing a major demographic change. There is a clear decline of the average household size, an increase in defacto relationships and a long term increase of divorce rates.
Another notable trend is that our Gen Y population, currently aged 15–34, are opting for a lifestyle close to cafes, transport and shops, and hence resulting in growing demand for affordable one bedroom dwellings within trendy, and often affluent city fringe suburbs.
Australia is not alone with these demographic changes. According to US sociologist Eric Klinenberg, the past 15 years has seen a global trend of solo dwellers, which has resulted in a surge of almost 50%.
It has been described as the biggest social revolution since the baby boomer generation. Currently, almost 2 million Australians live alone. This is the fastest growing demographic in the country, with the ABS predicting a 1.7 million increase in the number of single person households over the next 20 years. Which has been projected to surpass the number of the traditional nuclear families in Australia within this same time period.
Of course, successful investment is the result of holding an asset where there will be limited supply and is likely to remain in high demand.
Understanding demographic changes is one important factor that can impact on where future demand will exist for varying product types.
To round out your investment decision, we suggest taking a top down approach that starts at a state level. This should take into account the population growth, unemployment trends, homes on the market and sales rates.
You can then progress to the area, looking at local demographics, existing infrastructure, government spending, vacancy rates, time on the market, auction clearance rates, vendor discounting, proximity to amenity and hence a high walk score. Also review current and future zoning, and the potential for future supply.
Now you can move to the actual dwelling, which should include an efficient floor plan, a product type that is in current demand and aligns with future demographic changes, quality of the building, builder/developer track record if new development, and last but not least, sales evidence that supports the purchase price!
“We Guide, You Decide”