Tuesday, 23 October 2012

Are the Media your investment adviser? Are you sure?

A lot of people get their investment advice from the Media by default and that worries me and should worry you.
Sometimes it is because we believe what we read and sometimes because the short term nature of news causes us to have doubt about the long term viability of property and hence we don't do anything for fear of making a mistake.
Believe me they don't write articles to help anyone make wise investment decisions. They write articles and produce the nightly News, to sell advertising.

The investment arena is full of misinformation so to do my part to help clarify it, here are some things I think investors should never forget when it comes to the Media.

The media have a huge disadvantage...
Unlike me, where I can write an article when there is something worth writing about, the Media have to produce something worth reading/talking about every single day.

Can you imagine how effective a headline like “Nothing to report today… situation normal” would be at selling advertising. It probably wouldn’t sell many papers... or get you to watch the nightly news. (Actually it probably would if someone did it, just once, but beyond that, probably not).

So the problem for the Media is they have to produce something sensational to get your attention, even if there is nothing sensational happening that day. As a consequence a slight rise in an investment market becomes the beginnings of a boom or a slight fall becomes “the bubble is about to burst”.

For the Media there is only “boom or bust”, there is no in between. And yet, the reality is 90% of the time is neither boom nor bust.

Out of the last 112 years of residential property investment (that we have records of), only 11 years have had a negative return. As an investment, I am sure you would agree, that's pretty good!

The 24-hour news cycle is built for people who can’t see more than 24 hours ahead. That’s why a long, slow, but very important rise is rarely mentioned.

Then there are the Economists who want to see their name in lights or maybe want to take the focus off the fact that they failed to predict the GFC, so they declare, "The Real Estate Bubble is about to Burst” and it becomes a MUST READ - BREAKING NEWS. That was 4 years ago and it was going to be a drop of 40% in the next 12 months. We saw a rise of over 20% in the 12 months following that comment.
Or recently "The Mining Boom is Over"...
Not a month earlier they were reporting that the Mining Boom was here for the next 30 years.
So sorry, but they have no credibility with me.
  • Non-existent ie ingnore it all, don't listen and don't read it. (there are now many people that feel this way) Put it in the Fiction Section with Lance Armstrong's book.
  • OR
  • Something that incrementally help you understand how the world works but rarely compels you into action.
After all, how many of the items that we see every day will be important to investors in 5 years time?
Sure, short term, the articles may be useful for employees, customers, suppliers and other interested parties for whom the short term does have relevance, for jobs, sales orders and deliveries etc. But for investors, they are at best irrelevant and at worst a distraction that leads to poor investment decisions.
A well known journalist Derek Thompson recently wrote:
I'ver written hundreds of articles about the economy in the last 2 years, But I think I could reduce those thousands of words to one sentence, : "Things got better slowly".
That's all you need to know. The rest was just noise.
For investment decisions on residential property you need to trust that property goes up in value while there is more demand than there is supply. When property stops going up our economy is in a really bad place and whatever you have invested in, will still be in a worse situation than property.
So look for properties that are in long term quality locations and buy as many as you can afford.

Monday, 22 October 2012

Bank Valuations – What’s with them right now?

We have had some amazing valuations lately…

With variations of over 20% on the same property, with the same valuer, but with different Banks, so what is going on?

On one property alone recently we have seen valuations of; 2 lenders at $300,000, 1 of $330,000, 2 of $340,000, 1 of $350,000 and 2 at the Contract Price which was $365,000, with a valuation of $300,000, $340,000 and $365,000 from the same individual valuer. It was actually different properties but they were all identical and all within a block of each other and on the same size land.

Explain that to me?

Bank Valuation 101.

The valuers job is to assess risk for the bank.

It is important to note there is a distinction between the way lenders value a property and the true market value.

True market value can only be assessed by a “willing buyer and a willing vendor” however in the past the lender valuation has always been close, because it has previously been based on previous sales of a similar property in a similar area, without caveat.

More than ever our lenders are placing caveats on valuations by way of “instructions” all possibly driven by profit at any expense.

Lenders have outsourced the overhead of valuations to commercial valuers but still control the valuation process with “instructions” to the valuer.

If a loan goes bad and the banks are not able to recover their principal and costs, then valuers are at risk of getting sued. Yet they are paid peanuts to do the valuation so the commerciality comes into it too, for the valuation firm.

So when undertaking a valuation, the valuer must take into consideration a number of factors not the least of which is, how much they are getting paid for the time spent on it. Hence they might give the task to a new or less experienced valuer and therefore they must consider the terms of their Professional Indemnity Insurance.

Nowadays Bank valuations are not generally based on true market value of a property, but are rather based on the level of risk to the valuer and to the bank.

Valuers take their “instructions” from the bank.

Right now banks are cooling the market, with tight lending criteria and they do that by limiting valuations. When you go to borrow money, the instructions will more often than not (these days) come through from a lender that may force the Valuer to use certain “indicators”.  For example the value of a brand new property may be valued significantly lower than expected as it may be based on using only second hand properties as sales data. Or perhaps previous sales of old homes in an area that is going through re-gentrification where the old homes are really land value only.

Over exposure in certain areas:

Banks have exposure limits in areas and even complexes. In other words, if a particular lender has lent too much in a postcode, they will restrict further involvement or at least offer less favourable terms.

Lenders Mortgage Insurers (LMI’s) have exposure limits in areas and even complexes. In other words, if they have lent too much in a postcode, they will restrict further involvement.

So funders don’t chase business away, they use guidelines and instruction to control the outcome.

No Bank wants to chase away business so they will rarely say “No” but what they will do is make the loan more attractive to their business guidelines by lowering the LVR.

LVR an acronym for “Loan to Value Ratio”

LVR is basically the amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan. Lenders place a large emphasis on the LVR when assessing your loan application. The lower the LVR, the lower the risk is to the bank and hence the lower their cost on that loan and on their Book in general.

Question: Would it be plausible that a lender would advertise that they will do 95% LVR loans yet rarely lends that amounts over 80% LVR?

Absolutely, and they can achieve that by giving “instructions” that result in a lower valuation.

LMI (Lenders Mortgage Insurance)

When a loan has a LVR of less than 80% then the borrower doesn’t pay mortgage insurance. Lenders still insure all loans so in the case of a LVR less than 80% the Lender pays the premium.

If the loan is greater than 80% then the borrower pays the LVR.

* Would it also be plausible that a particular lending might instruct the valuers in such a way that it elicits lower valuations so that the lender does not have to pay as many insurance premiums? Absolutely! That way you pay for their risk.

NOTE: Nowadays you just can’t tell whether a valuation is realistic or not until you see the valuation and try to understand what the Lender is trying to achieve.

Thursday, 18 October 2012

Housing Stimulus Package announced by SA Govt.

This week saw the announcement by Revenue SA of the Housing Stimulus Package to boose the SA Housing Construction Industry.
This time the handounts are available to investors as well as first home buyers...
Below is the actual detail from Revenue SA and as you can see there is no mention of it not being available to people who already own an investment property or two. Still I have sought clarification.

If you are interested in finding out more about the stimulus package and how best to apply it or if you are considering an investment in residential property please give us a call or <click here>

From: DTF:RevSA Taxpayer Education & Communication
Sent: Monday, 15 October 2012 2:50 PM
Subject: Increased Government Assistance for New Home Buyers

Today, 15 October 2012, the Government announced that they have retargeted their home buyer assistance by:

§         increasing the First Home Owner Grant (FHOG) for new homes from $7000 to $15 000 (ongoing) for contracts entered into on or after 15 October 2012;

§         reducing the FHOG for established homes from $7000 to $5000 for eligible contracts entered into between the date the necessary amending legislation comes into force and 30 June 2014. The FHOG will be abolished for established homes from 1 July 2014; and

§         replacing the $8000 First Home Bonus Grant with a Housing Construction Grant (HCG) of $8500 for all new home construction where contracts are entered into between 15 October 2012 and 30 June 2013 inclusive. The HCG will be available for properties valued up to $400 000, phasing out for properties valued up to $450 000.

First Home Owner Grant

From 15 October 2012, new home purchasers are entitled to a $15 000 FHOG. This measure is ongoing.

Purchasers of established homes will continue to be entitled to a $7000 FHOG until the necessary amending legislation comes into force.

From the date the amending legislation comes into force and 30 June 2014 purchasers of established homes will be entitled to a $5000 FHOG.

From 1 July 2014 no FHOG will be available to purchasers of established homes.

The FHOG property value cap of $575 000 will continue to apply for all FHOG applicants.

Other than the changes above, no other criteria will change.

First Home Bonus Grant

The $8000 First Home Bonus Grant is abolished for all contracts entered into on or after 15 October 2012.

The First Home Bonus Grant will still be available for contracts entered into between 1 July 2012 and 14 October 2012.

Housing Construction Grant

The $8500 HCG is available for new home buyers and owner builders, and, including investors, who are purchasing or building a new home valued up to $400 000, phasing out for properties valued up to $450 000.

The HCG applies to contracts that are entered into between 15 October 2012 and 30 June 2013 and to owner builders where construction of the new home commences on or after 15 October 2012.

The HCG will be available to natural persons, companies and trusts and there is no limit on the number of grants available, regardless of whether a person purchases or builds a new home alone or together with others.

Previous recipients of FHOG grants are also entitled to the HCG on purchasing a new home. First home buyers of a new home will receive both the $15 000 FHOG and the $8500 HCG provided all eligibility criteria are met.

New Home

New Home means a home that has not been previously occupied or sold as a place of residence and includes a substantially renovated home. There is no change to this definition.


Initially all applications for the HCG (including by first home buyers) will need to be made via RevenueSA. An application form will be available as soon as possible.

Applications for FHOG can still be made via Financial Institutions and it is planned that systems changes to reflect the new arrangements in FHOG online will be in place in the near future.

Internet pages, publications and forms will be updated as soon as possible to reflect the revised arrangements.


Kristy Ferguson
Taxpayer Education & Communication

phone: (08) 8226 0193  fax: (08) 8226 3788
GPO Box 1353, ADELAIDE  SA  5001
Level 2, State Administration Centre, 200 Victoria Square, Adelaide 

Sunday, 14 October 2012

Is Property a Safe Investment?

I did a bit of research on a particular investment and was surprised at what I found...
The figures that I'm quoting date back from 1900 to 2011, so it
not a recent trend, it's been around for a while and that's a good thing. It is not a get rich quick scheme.

After reading this I want you to think...
Would you invest in this asset class based on the following historical results? 
So here we go...

In the last 111 years, this investment has only had 11 negative years. That's just 1 in every 10 years producing a negative return... Ten years is a long time to have just one losing year!

The worst of those years was 1930 with -18%, but remember what happened back then; The Great Depression was not the best time for any investment!
Since that period the average losses in the bad years for this investment has been only around -5%, remembering that the other nine years were all positive.

How positive?

Well of the 111 year history, 100 of those years produced at least 1% return or better.

But 24 of those years produced 10% or more…

And 13 of those years produced more than 15%, often in the return was in the mid 20%’s…

The best of the lot was 1950, that year produced a whopping 133% return.

I'd love to tell you why that year was so good, but I don't know. Maybe it had something to do with the end of the war or maybe a late recovery from the Great Depression which ended in the mid-40s. But no one will ever know exactly why.

In the entire 111 year history the average return has been 6.9% annually... Not bad!

That is doubling every 10 years and is probably given you a hint as to what the asset class might be.

So, if we go back a step and we consider that in 1 in 10 years, you have an average loss of less than 5% and the rest of the ten years, you get an average growth of 6.9%, you're way ahead. Actually the average of 6.9% takes into account the losses as well. So it is pretty solid!

But there is more… Here are a few other interesting observations:

o   There was hardly ever a period of 2 years in a row with negative returns and immediately after a negative return you get higher than average positive returns. A “recovery to the norm” so to speak.

o   This investment can go for 10, 15, even 20 years with positive, back to back gains before you see a loss.

o   If you invested $226,000 invested in this asset class in 2001 it would be worth $485,000 in 2011 ...that's a 125% gain in a period that included the 2008-2009 Global Financial Crisis.

So back to my question when we started out, would you invest in this asset class?

With 111 years of strong history on your side, it’s a yes or no proposition.

OK, enough suspense... the big reveal...  What asset class is this?

Have you figured it out?  It’s REAL ESTATE!

Now, I didn't make these figures up, I got them from the REIA (Real Estate Institute of Australia).  

So what do you do now with all this information?

You can be influenced by all the noise, opinions, doom sayers, and the Media out there and do nothing. And by the way that is a very natural human response to risk. It’s the fight or flight response that is programmed into our brains. Every day you'll hear reports of property bubbles about to crash, inflated prices, unsustainable growth, etc, etc, etc. so it is quite natural to be concerned.

Or you can use 111 years of historical fact and figures to realise that long term the risk is less than it is being made out to be, and that the negativity comes from looking at too short a period of time. And the Media are good at that!

If you can see the long term view then you can move forward and be part of a great investment opportunity. If you can’t then blame the Media.

Now, I'm not saying that you can't lose money in real estate; there are plenty of opportunists out there ready, willing and able to take your money, if you are not wary, but if you're smart, do your research, find someone you can trust and invest for the long-term it's pretty hard not to make substantial gains.

The quicker you get on board the better for you in the long run.
NOTE: Compare that to other asset classes during the GFC which saw the Stock market fall by 46% in the first 12 months and falls of 5% or more are possible on a daily basis.
If you want to know more please call or join us at one of our Property Seminars...

The next seminar is tomorrow night 16th Oct 2012

Click here to register

Friday, 12 October 2012

Investment Property Finders is different to most property marketing businesses in that we have a Financial Planning background.
That means that we are ideally suited to assist you plan your future... others just sell property.

With nearly 20 years of Financial Planning background and 8 years specialising in residential property we have a wealth of experience to assist you build a property portfolio with a minimum impact on your existing lifestyle.
We have strategies to use that portfolio as your asset base to provide additional income before retirement or the lifestyle you have been looking to achieve in retirement.
We are continually researching the market and our existing client base to come up with strategies that will help you make money, pay less Tax or find the right property or combination of properties.
As we discover and after testing we will post our findings here.