RATE RISES - OCTOBER 2009
This months rate rise should not have surprised or upset anyone. And nor should the fact that there will be more to come. They will come with increased property values. As they come through you need to clinically assess your situation and go back to the plan I know you have put in place i.e. one of 4 choices I suggested in my email on July 13th this year
Here is an extract from the email to refresh your memory
"I want to comment on the responses I have been getting regarding my email from last week. It seems as if the email left many of you asking the question of what to do? As I have said to those who have called me, the answer is simple. You have four choices.
1. Fix in your rate - this will not suit the majority of you
2. Pay your mortgage or offset account as if fixed at a higher rate. This takes more discipline but is far more flexible than option 1.
3. Expand your asset base whilst the cost of money is at a 50 year low (and pay your mortgage or offset account as if fixed at a higher rate)
4. Do nothing. Yes this is a choice. Albeit a bad one."
For those of you who chose number 4 this email is a reminder to make a decision. For those of you who chose 2 or 3 and passed on number 1 just remember that the self imposed fixed rate strategy is fantastic as long as you realise the additional cash you are accumulating is not yours to spend (not yet anyway) as it's purpose is to assist with mortgage payments if required in the future.
This is not a scary time. In fact it is just the opposite. There are so many opportunities coming across my desk everyday.
Continue to plan and adjust and enjoy the rise we are all experiencing in property values and are about to experience in rents.
Tim Murphy
Rate Movement (part 2) - Two Fascinating Must See Graphs - July 2009
These two graphs below are a must see.
Before I comment on these graphs, I want to comment on the responses I have been getting regarding my email from last week. It seems as if the email left many of you asking the question of what to do? As I have said to those who have called me, the answer is simple. You have four choices.
1. Fix in your rate - this will not suit the majority of you
2. Pay your mortgage or offset account as if fixed at a higher rate. This takes more discipline but is far more flexible than option 1.
3. Expand your asset base whilst the cost of money is at a 50 year low (and pay your mortgage or offset account as if fixed at a higher rate)
4. Do nothing. Yes this is a choice. Albeit a bad one.
GRAPH 1 - An illustration of the main central bank (The U.S. Federal Reserve) printing money
GRAPH 2 - Mortgage Resets
Graph 1 shows the unprecedented extend at which the U.S. central bank is printing money. This, along with zero interest rates, is an example of the methods being employed to combat the global financial issues.
A potential spin off from these actions is inflation. If anyone tells you they know exactly when this will take hold (if at all) walk away. However, this doesn't stop us trying to figure it out. Hence graph 2. Graph 2 shows a timeline of 'mortgage resets' around the world. A mortgage reset date is simply the date set in a loan contract when the bank will adjust the interest charged to the consumer. More often than not this adjustment is upward. These loans have been most popular in America and were a major contributor to the economic downturn.
The global financial crisis started in mid 2007. Graph 2 shows that mortgage resets peak in 2011 then fall away sharply. By looking at this timeline one could deduce that graph 1 will continue to head higher before it drops off.
If you want to play the inflation game and win, then you need to have a lot of the right type of debt and even more important you need to know how to control it.
Rate Movement - Now is the time to plan - June 2009
Please take a moment to read this brief message, particularly those of you who are on a variable home loan rate and are relatively new to having a mortgage. We need to talk about planning for when rates inevitably rise again. From speaking to many of you I get the general feeling that there are a lot of inexperienced property owners and investors who are being lulled into a false sense of security.
I know many of you have been waiting for our interest rates to go as low as they have overseas before planning and paying extra into your mortgage or offset accounts or expanding your asset base. Yes, interest rates may continue to come down. However, please keep in mind these points when planning;
1. If you are looking long-term, as you should be, then you need to understand what the central banks and governments around the world are trying to achieve, particularly the United States. The central banks cannot avoid altogether the pain of the process that the natural rebalancing of the 'markets' will bring. However, with the limited tools they have at their disposal, they believe that they can influence the type of pain we feel. That is, the pain of deflation or that of inflation. From the actions they have taken over the last 18 months, it looks to me as if they would much prefer inflation and inflation generally means higher interest rates and higher asset prices.
2. Having said this, our Reserve Bank is saying that inflation is not on the radar and the general consensus is that it will be a long time before they lift rates. However, you need to understand that the Reserve Bank is not the sole driver of interest rates. Our current cash rate, set by our central bank, is 3%. The cash rate in the U.S. is 0 - 0.25%. The interest rates to the U.S. consumer is only 0.4 - 8% lower than that to our consumers. In fact the American mortgage rates are actually currently climbing.
3. Australia, being a small nation, has historically had to offer more attractive interest rates (higher rates) to attract international investment.
4. The cost of funds for our local banks are about to climb as many of them have an expiry date looming that will increase their cost by up do 40 basis points (on the flip side, this of course could also prompt the reserve bank to cut the cash rate in the short term).
I am not making predictions, just strongly hinting that if you have not figured out that these rates aren't going to be around forever and started making the most of them then you better get moving.
Please call me if you would like to discuss your individual situation.
The Opposite of the Masses - August 08
I saw a quote from legendary investor Jim Rogers recently stating that he was buying up airlines even though oil prices are gong through the roof. The interviewer thought he was mad and reminded Jim that airlines were going bust in the U.S. His response was that ‘bankruptcies are signs of bottoms not tops’.
The art of buying when assets are unfashionable is difficult to master and very few people can detach themselves from the ‘group think’ that stops them from breaking free of the pack. For example if you went to a barbeque in 2003 in Sydney everybody would be all ears if you brought up the subject of property, however it is not a big talking point at barbeques in 2008. Would you rather buy an investment unit in Sydney in 2003 or 2008?. In early 2003 people were diving into property unperturbed because it had been booming for 5 years. Now that it has been flat for 5 years it is a no go.
From 1998 to 2003 this market doubled and people were breaking there neck to get in. Everyone was suddenly an expert on property, a sure sign to take a breather as an investor. It is easy to say now that Perth is where you should have starting buying in 2003. I don’t know too many people who can put their hand up and say they did it. It was too unfashionable.
From 2003 to 2008 the Sydney unit market has done nothing. Now that is exciting.
Home loan approvals hit an eight year low in May. You can’t get more unfashionable than that. During this period the economics of a property cycle has been quietly going about its business. The over supply of units that occurred from the Sydney boom has been slowly but surely absorbed due to lack of development and record net over seas migration and we have been in a position for some time where there is not the supply to satisfy rental demand. Another indicator is rental yield which can range anywhere from 3% p.a. (peak of a cycle) through to 8% p.a. (bottom of cycle) (taking out luxury properties). The Sydney cycle has been slowly working its way off this 3 per cent to the point that in some inner city suburbs it has hit 7%. This is also reflected in and is a result of vacancy rates. A balanced rental market is generally acknowledged as being represented by a 3% rental vacancy. It is currently sitting around 1% for the major capital cities along the East Coast.
Another very fundamental indicator is obviously interest rates. Economists are finally in unison on this and feel they have peaked. Reserve bank Governor Glenn Stevens has stated that ‘we could look back on these rates as being high’ and ‘the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing.". This is as about as specific as he will get. People’s ability to borrow is obviously critical to property growth as is sentiment and the general health of the overall economy. Affordability is another indicator that needs to be addressed. For the target group of young professionals, the cost of apartments with good access to the CBD does not make up an unreasonable portion of income. The portion that it does make up will only drop if rates come down as predicted.
Some cashed up investor are doing a Jim Rogers in Sydney’s west offering silly money to those in mortgage stress and close to repossession. In fact these investors are probably disappointed that more interest rate hikes aren’t in the offing because their focus is not on quick money or fashionable investing. Whether or not it is an ideal time to look at doing the opposite of the masses and investing in apartments in Sydney is open for further discussion. However, you can safely say that an opportunity to apply one of the best rules of investing is somewhere around the corner if not already here.
Tim Murphy
Where are we investing? - April 08
It has been a while since my last update (go to menziesfinancial.com.au to view Octobers Update) and it has been interesting to watch how the property & finance markets have been reacting to the economic conditions since. I'm sure you are tired of hearing about interest rates and the credit crunch as it feels like it is headline news every other day. Instead of going over this I thought the following may be of more interest. Before I go on I would like to say that all the talk of inflation and wage pressures etc.. aren't necessarily bad things for us property investors. In fact, sadly for some, inflation can be a property investor’s best friend if you manage your investment properly.
In my last update and in previous emails I have been keeping you abreast of my own personal property investments that I have sourced with the assistance of Anthony Simon. I will continue to do this as, with anyone in the industry, it is good to know that they are actually personally active in the market. Any of you who have sat with me will know that I am not a speculator at all and I am in fact a very conservative investor. My latest property settlement in February 2008 is a classic example of this. Objectives obviously vary from individual to individual and from time to time. My objectives for this purchase were conservative and were as follows;
1). To enter the market with little to no money down
2). To have zero impact on my current cash flow for as long as possible
3). To have a minimal impact on my cash flow once the property settled
4). To add to my net wealth before I had any holding costs (this would be just a bonus).
5). To have what every investor wants from then on, namely strong capital growth, strong rental growth with quality tenants over the next 10 years.
Lets take a look at how the numbers and my objectives stacked up upon settlement.
Purchase Price = $429,000 (contracts exchanged in mid January 2007)
Estimated rental return at the time of purchase = $420 per week
1). Entry costs = $3000 or $4 per week (Deposit Bond)
I2). Impact on cash flow for the 13 months prior to settlement = Nil
3). Impact on cash flow once purchased = $100/wk (this will vary from person to person)
4). Property Valuation at settlement = $460,000 (this is a conservative bank valuation. It is just a bonus. But a good one at that)
5). Advertised rent = $480 per week. 30 people lined up to rent the premises two days before settlement. The successful applicants signed up on the day of settlement. With over 10% p.a. rental growth projected over the next 3 to 5 years (due to record levels of population growth and low building approvals) it is a simple case of set and forget and reassess in 5 years.
The thing a liked most about the above investment is how conservative I was and how little impact it has had on me both whilst I did and didn't physically own it. Knowing the fundamentals of where we were in the property cycle my downside was so manageable. It is not spectacular, but believe it or not I am not after spectacular as this would more than likely mean I have taken risk above my personal risk tolerance.
I personally believe that 2008 will be a year of opportunities as there will be potentially less investors active in the market (remember the rule of doing the opposite of the masses). The beauty of investing in Australia is that we are such a large nation geographically and diverse in a sources of wealth. It could be argued that we have access to a property boom within Australia at any given time as each state is effected by economic conditions in various ways at various times. For example whilst we were moaning about flat conditions in NSW from 2004 through to 2007 Western Australia was there for the pickings going through one of the biggest property booms the country has seen. Similar scenarios have played out on the east coast states over the last 18 months. When it comes to property Australia is a land of opportunity.
Tim Murphy
Property Sourcing - October 07
Congratulations to those of you who have taken advantage of our property sourcing expert Anthony Simon. You will be reading the brief property market overview below in the knowledge that your wealth has increased quite significantly in 2007. For those of you who haven't yet been able to take advantage of this resource the good news is that there is still great opportunities. Some of which Anthony and myself will be taking up personally before Christmas.
As you would all be aware the property market moves in cycles. For a number of very fundamental reasons it generally moves in a pattern of upswing, side ways movement, upswing, side ways movement and so on. If a very distinct cycle were to run for 9 years and if a particular properties value were to double in that time the growth would be something like 35% in 5 years and the remaining 65% in the remaining 4 years. As you may be aware the West Coast of Australia has had a spectacular run and is now coming off its very aggressive growth phase. Whilst the west coast was going through this phase many areas of the east coast were serving their time of sideways movement.
The east coast is a classic example of cyclic buying. Take Melbourne as an example. According to leading property researcher and forecaster BIS Shrapnel Its property boom ended at the end of 2003. It then went sideways for 3 to 4 years and along with Queensland has now moved into a growth phase in 2007 (13.2% & 12.4% respectively) which BIS shrapnel predicts is set to continue due, among other things, to rental vacancies being at record lows, low supply and population growth being at record highs.
There is good buying for currently established homes. However, for those of you who feel that you are not quite ready to buy an existing dwelling you may want to consider the purchase Anthony and I are making in Melbourne as we are looking to achieve capital growth over three and a half years whilst not making any payments. To put this into perspective 13.2% on a $400,000 asset is an increase in wealth of $52,800 for the year without any holding costs. There is obviously no guarantees that this is going to happen, however if you like the investment medium to long-term it is just huge icing on the cake. To maximise the benefit of this type of buying the timing needs to be right and the right project needs to come along. We believe that time is now for both criteria.
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