Young people should consider other types of investments

It’s no secret that Australia’s young people have been severely disadvantaged by the country’s real estate boom. Rising house prices in many cities and regions means that only the wealthy—or those who’re assisted by wealthy parents or benefactors—can afford to climb the property ladder.

Negative gearing, which helps investors achieve great returns via lucrative tax breaks, isn’t helping the situation. Last week, Rob Stokes, the New South Wales planning minister, blamed negative gearing for the nation’s sky high property prices. He also warned that the current building boom would have very little impact on prices.

“Why should you get a tax deduction on the ownership of a multi-million dollar holiday home that does nothing to improve supply where it’s needed?” Stokes said in his speech.

While real estate may be difficult to attain for many young people, Cameron Kusher, head of research at CoreLogic, said it was time young people considered investing in asset classes other than real estate.  

“Young people, I suspect, don’t even think about trying to buy a home in Sydney as it’s too expensive,” Kusher said. “The challenge is what else to invest in.”

Listed here are some alternative investments young people should consider:

Physical assets

Getting a mortgage is just one way to invest in property, notes Craig Keary, AMP capital director for Australia and New Zealand.

“If you’re a young person without the capital to buy property, but you want to invest in something tangible, then you can always invest in a property fund that invests in commercial property, or shopping centres, and it gives you property exposure for as little as a $2000 entry,” Keary said.

“You can receive a distribution of roughly 7 to 9 per cent on your investment annually, depending on the fund, of course.”
 
Keary also recommends infrastructure funds. “Considering the global investment in toll roads and infrastructure, it may also make sense to look into funds investing in toll roads or airports, and, once again, you don’t need a lot of money to get started,” he said.
 
Corporate bonds and shares
 
Shares may be a risky investment, but when you’re in your 20s and 30s, you can afford to take such risks.
 
Gavin Fernando, director of Property Advisers, said shares suited investors with a decent amount saved in the bank—between $5,000 and $10,000. Corporate bonds are another great investment option. While the returns are generally less on corporate bonds, they can be less risky than equities (shares).
 
Fractional ownership of property
 
Companies that offer fractional ownership of property are also very popular. One such company—BRICKX—buys properties and divides them into “bricks” that people can buy for as little as $100. These bricks are essentially shares or stakes in the property.
 
“People like this concept because they are buying something tangible,” said independent financial commentator Heidi Armstrong. “There are now lots of creative ways for people to invest in property.”

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Sydney cannot meet future housing targets unless more land is up zoned

New research by the Property Council of Australia called out Sydney councils for being “asleep at the wheel” and for not providing the housing the city’s growing population needs.

Conducted by JBA, Australia’s urban development services consultancy firm, the research took a closer look at residential housing development proposals across 16 local government areas in the central and south west regions of Sydney over the past four years.

The research makes it clear that the planning system will struggle to meet Sydney’s future housing targets if councils continue to fail to up zone land to ensure the construction of new homes. (According to the Greater Sydney Commission, an estimated 725,000 new homes will be needed over the next 20 years.)

Across the central and south west districts of Sydney, 64% of residential Local Environment Plan amendments (which are used to assign land for development) were led by private industry, whereas only 29% were led by councils.

The gap is wider when it comes to larger developments that will deliver more than 100 dwellings for the community: 81% were developer-led whereas only 15% were council-led.

Jane Fitzgerald, Property Council NSW executive director, said the research highlights the fact that there is a worrying lack of forward thinking at a local level when it comes to supplying housing to a growing population and connecting it with infrastructure investment.     
“The Central District plan released…by the Greater Sydney Commission estimates that the district will grow by 16,260 people every year to 2036 and has a target of 157,500 more houses by 2036. Without strategic leadership from councils the housing demand from this increase in population will not be met and affordability will worsen.

“The South West district will grow by a massive 18,650 people per year to 2036 and has a housing target of 143,000 houses, yet only 5 new large residential developments were led by councils in this area over the past four years. We have a long way to go to meet the targets.”

Fitzgerald noted that the districts her team examined had received millions of dollars dedicated to major infrastructure, yet councils haven’t led zoning to provide for major residential development to ensure that houses and residents had easy access to this infrastructure.

“Many councils have started discussion papers, master plans, project plans – but our research shows that even if a document has been finished, there is no evidence it has been implemented.

“New home construction is crucial to the state’s economic fortunes as it underpins growth, jobs and affordability, [the report] shows us that councils are not taking up the challenge of meeting the demands of a growing population and without better strategic planning, the community will suffer.”

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REIWA lauds latest changes to the national foreign investment framework

The Federal Government’s decision to change the nation’s foreign investment framework to permit foreign buyers to purchase off-the-plan dwellings when other foreign buyers fail to reach settlement has been lauded by the Real Estate Institute of Western Australia (REIWA).

Neville Pozzi, chief executive officer of REIWA, said Australia’s national real estate body, the Real Estate Institute of Australia (REIA), has been instrumental in ensuring that these changes were passed into law. Pozzi believes these changes will greatly reduce the negative ramifications when off-the-plan sales to foreign buyers fail to push through.

“Off-the-plan developments are very prominent in Perth, so these changes will have a big impact on our local real estate industry by helping to eradicate the element of risk currently inherent with off-the-plan developments and foreign purchasers.  

“We commend REIA for their advocacy efforts on this issue and are thrilled with how quickly it has been addressed by the Federal Government,” he said.

The changes to the foreign investment framework went into effect on Monday, 28 November 2016.

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CoreLogic: Homes are selling much more quickly in Sydney and Melbourne

Although values have been increasing for almost four-and-a-half years, homes continue to sell quite rapidly with relatively low levels of discounting from vendors, states a new report from CoreLogic.

According to Cameron Kusher, head of research at CoreLogic RP Data, the average days on market across the combined capital cities was 39 days in September 2016. At the same time a year earlier, the average days on market was slightly lower at 36 days.

Average days on market, combined capital cities

Homes have been selling much more quickly in Sydney and Melbourne than they have across the other capital cities, states the latest CoreLogic data ending in September 2016.  

Homes in Hobart and Canberra have seen fairly large falls in days on market over the past year, which aligns with accelerating value growth. In contrast, homes in Perth and Darwin have seen a significant increase in the average days on market as selling conditions toughen and values decline.    

Average days on market, individual capital cities as of September

In September 2016, the typical home which sold at a discount from its original listing price was discounted by -5.7% across the combined capital cities. In comparison, at the same time a year earlier, the typical level of discounting was -6.0%.

“The lower level of discounting is reflective of more demand and fewer homes for sale but is also likely to reflect more realistic initial listing prices from vendors.”

Average vendor discount, combined capital cities

When analysing data about the discounting levels for each capital city in September over the past 8 years, it’s clear that Sydney and Melbourne, along with Canberra, have seen low levels of discounting by vendors over recent years.

In Sydney and Melbourne, this indicates strong housing demand, which has led to many homes selling in excess of their initial list price. “Despite only moderate growth in values over recent years Canberra has consistently recorded low levels of discounting. In Perth and Darwin as the housing market has [weakened] over recent years, discounting levels have increased significantly,” Kusher noted in his report.    

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Median selling prices continue to trend downwards in mining towns

The demand for housing in Australia’s mining areas has declined significantly due to sinking commodity prices and dwindling mining investments. CoreLogic recently examined the performance of the housing market in mining towns and regions in terms of volume and median price of sales. “The results indicate that not all mining towns have recorded an equivalent slowdown,” said Cameron Kusher, head of research at CoreLogic RP Data.

The following analysis looks at annual median prices and annual sales volumes in key mining towns:

Port Hedland, WA

Median prices in Port Hedland peaked at $925,000 in June 2013 and sales volumes peaked at 402 in July 2006. Current median prices have fallen to $390,000 (-58% lower than peak), and current sales are 128 (-68% below peak). “In what may be a positive sign for the market, annual sales are once again trending higher, although the median prices trend is yet to bottom out.”

Karratha, WA

Median prices in Karratha peaked at $815,000 in October 2010 and sales volumes peaked at 511 in March 2005. Current median prices have fallen drastically to $362,980 (-55% lower than peak), and current sales are 235 (-54% below peak). Transaction numbers have been trending higher, but the median sales price is still declining, albeit at a more moderate pace.

Kalgoorlie-Boulder, WA

Median prices in Kalgoorlie-Boulder peaked at $351,250 in June 2015 and sales volumes peaked at 1,656 in September 2006. Current median prices have fallen slightly to $312,000 (-11% lower than peak) and current sales are 345 (-79% below peak). While transaction numbers appear to be levelling, there is no sign of any upwards pressure on prices or turnover.

Mackay, QLD

Median prices in Mackay peaked at $435,000 in June 2013 and sales volumes peaked at 3,264 in April 2004. Current median prices have fallen to $345,000 (-21% lower than peak) and current sales are 1,045 (-68% below peak). While transaction numbers have recently levelled across the Mackay housing market, there has not been any significant improvement.

Many mining towns are experiencing a slight uptick in sales

Smaller mining townships which don’t act as major service centres have tended to see much steeper declines in median selling prices than the larger townships. “The decline in sales and prices from the market peaks has been substantial across all of these regions, however the regions that have seen the most significant downturn were those that also recorded a significant upswing in prices and turnover rates prior to the peak in commodity prices,” noted Kusher.

Most of these mining towns have experienced a recent stabilisation in sales, with some regions seeing an increase in sales volumes.  Although the modest uptick in sales may have broken the declining trend in a number of areas, median selling prices are generally continuing to trend lower across each of the regions highlighted in the CoreLogic report.

“The improvement in transactional activity could potentially be due to larger numbers of distressed sales moving through these markets, but may also be attributable to a cautious return of buyers seeking out a bargain.”

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The return of Chinese buyers has regulators worried

Australia’s spring real estate season has seen the defiant return of Chinese buyers, who’re undaunted by lending restrictions aimed at curbing their interest in the country’s robust housing market.

Financiers and real estate agents say Asian investors have found new avenues to re-enter the Aussie property market, including targeting cheaper homes and settling in cash. Other investors have turned to groups of wealthy individuals or foreign-owned banks for loans after Aussie banks turned off funding to overseas buyers earlier this year.

The renewed buying frenzy has reignited fears that property prices are in a bubble, which in turn has alarmed regulators.

An apartment with a view of Sydney Harbour Bridge now costs more than a similar apartment with a view of the Eiffel Tower, research from property group Knight Frank indicates.  

“We’re now seeing people even from mid-tier Chinese cities such as Chengdu or Shenzhen coming into Australia and buying,” said David Chatterjee, director of Melbourne-based Lucror Property. “Most of the house and land buyers that we see are cash buyers.”

The Reserve Bank of Australia has also expressed concerns that the booming apartment sector could be a key risk to financial stability, especially since interest rates are now at record lows.

The Big Four tightened funding to foreigners earlier this year, citing higher credit risks, causing demand from offshore buyers to almost dry up. Following that lull, inquires from Chinse buyers have rebounded. They were up 34% in the September quarter for properties up to $1 million compared with 12% in June, according to data from Juwai.com, the largest international property website in China.

RBA had hoped that tighter lending standards for foreigners, together with the increasing supply of homes, would help cool the property market. However, the recent rise in house prices has the central bank worried again.

While demand from China has driven up prices, the resurgence of Chinese interest in Aussie real estate could assuage recent concerns about the looming glut in newly-constructed apartments.

“There is no doubt the apartment sector is probably overbuilt and there will be an adjustment there,” said RBA board member Ian Harper.

Key affordability ratios—namely housing debt to home values, debt as a share of household assets—were falling, blunting the potential for a major crash across the market.

On the other hand, some analysts warn that Australia is still very much in bubble territory. Amy Reynolds, a strategist at Hong Kong-based hedge fund manager Apt Capital Management, believes an imminent correction could result in prices falling up to 15%.

“We don’t see how there could be a soft landing. When the bubble does burst there is going to be a shift in sentiment and things are going to move quickly,” she said.

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Can you negatively gear an empty house?

New property developments are rapidly taking shape in many parts of Australia, particularly in New South Wales and Victoria. As a result, the country now has more than 2 million landlords. However, despite the boom, thousands of dwellings remain uninhabited, even in high-growth markets like Sydney.

In taxation statistics from the Australian Taxation Office (ATO), the amount of net rental loss claims have decreased from the 2011-2012 to 2013-2014 financial years, while net rental incomes have increased.

Despite these gains, many foreign investors who’ve bought property in Australia reap more benefits by leaving them empty, states property tax specialist Shukri Barbara.

“If you don’t have a need for cash, and all you’re doing is sinking your funds into an asset, then in the current economic environment in Australia, particularly in Sydney and Melbourne, the markets are thriving and the values are thriving because of low interest rates,” Barbara said.
 
“Given the large number of developments, it’s not surprising that, especially overseas people, leave them empty. If you don’t need the cash…you can leave it empty.”

Are the owners of vacant property getting tax benefits?

That depends.

Negative gearing a property is possible if the owners’ rental expenses exceed their rental income. These expenses could come from items like loan interest, maintenance costs, strata fees, insurance, as well as rates and taxes.

People who negatively gear their properties expect the house value to appreciate. By taking a loss now, they expect the house to end up selling for more than what they bought it for. However, if a house is left empty by choice and there is no rental income coming in, then the owner is unable to get tax deductions from the government.

If owners try to claim rental losses when no revenue is coming in, Barbara warns that ATO will place them on their watch list. “[ATO] will start putting in the query to do an audit,” he said. “They’ll look at whether it’s a genuine investment purchase. [Hence] you have to demonstrate…that it is being put out for business.”

What happens if the owners cannot find tenants?

According to Barbara, if the property stood empty when the owner had it listed with a real estate agent in search of a tenant, then all the expenses would be allowed for a tax deduction.

He cited how some of his clients in northern Queensland were unable to find renters for their older properties because a massive new development next door was attracting the tenants. Though the property remained vacant, the owners were still able to negatively gear that property.

“The concept is that you are in the business to make a profit out of rental,” he said.

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Leasing activity continues to increase across the Perth metro area

Leasing activity continues to increase across the Perth metropolitan area, notes the latest data from the Real Estate Institute of Western Australia (REIWA).  Leasing activity in the three months to October 2016 lifted 4% on the three months to September 2016.

Hayden Groves, president of REIWA, said all the sub-regions in the Perth metro area experienced increases in leasing activity, with the south east and central sub-regions being the standout performers, lifting 7% and 5% respectively over the three months to October 2016.

“Perth’s rental market has certainly presented its challenges in recent times, however it’s pleasing to see that leasing activity is healthy across the metro area. Tenants clearly recognise that there is a good opportunity in the current market to secure themselves a new lease at a more affordable price,” Groves said.

Listings for rent declined in the three months to October, pulling back 2% on the three months to September, while the average number of days it took to lease a rental remained unchanged at 53 days. The vacancy rate for October was 6.9%.
 
“Although listings remain at elevated levels, we are seeing signs that stock volumes have begun to stabilise with the rate of increase slowing in recent months. There was also little change to Perth’s overall median rent price in the three months to October, with the price adjusting back slightly to $365 per week.
 
“While the Perth rental market clearly still presents some difficulties for investors, it’s important to remember that although rents have fallen, so too have interest rates with many investors able to ride out the downturn as a result. Perth investors are well advised to heed the advice of their property managers to help ensure their rental appeals to tenants in what is a competitive market.”

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54% of pet owners want landlords to allow pets on rental properties

More than half (54%) of all pet owners believe laws must be changed to force landlords to allow pets in rental properties, with most saying it took a long time to find suitable dwellings where they could live with their animals. 

According to the Australian Bureau of Statistics, 2.16 million renting families are pet owners. Despite these high numbers, landlords are reluctant to advertise their properties as allowing pets and many people assume they won’t be allowed to bring their pets with them.

The annual PETstock Pet Parent Survey, which interviewed more than 905 pet owners across the country, found that approximately 54% of pet owners thought landlords and property managers should be compelled to allow pets on the rental premises.

While a handful of owners (8%) admitted that their pets had damaged a rental home, 30% strongly agreed that landlords should be compelled to accept pets. Only 1.5% strongly disagreed with the need to change the law.

“In Victoria, there are no laws that directly cover pets in tenancies or residencies, but landlords often include a clause in the lease banning them,” said Shane Young, chief executive officer of PETstock. However, this may soon change as the Victorian Government is currently reviewing tenancy laws, including the law around pets.
 
RSPCA Victoria says it’s time to correct the perception that all pets damage rental properties. The organisation also wants the landlord ban on pet owners to be overturned, believing that the restriction unfairly hurts both pet owners and their pets. More than 700 animals were surrendered to RSPCA Victoria animal care centres in the last financial year because their owners couldn’t take them to their new homes.
 
“Given that an incredible 83 per cent of respondents agreed or strongly agreed that they treated their pets as their children, these figures are not surprising,” Young said. “When they are looking for a place to live, it can be really hard for pet parents to find a place where the owners will allow them to keep their pet.”  

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Rental unaffordability is threatening more Aussies with homelessness

While Sydney continues to be Australia’s least affordable city for rental accommodations, among all the cities, Melbourne has seen the greatest decline in affordability since 2013, notes the latest Rental Affordability Index (RAI), which was released today.

“The latest Rental Affordability Index shows housing stress is a common reality for people in the rental market, especially those on low incomes, who have little left to spend on essentials like food, electricity, fuel and education, after paying rent,” said Andrew Cairns, chief executive officer of Community Sector Banking. “People in the lowest income households are being pushed out of the rental market, and into poverty and homelessness – this situation is most dire in Sydney.”

Produced by National Shelter, Community Sector Banking, and SGS Economics & Planning, the RAI is an easy-to-understand indicator of rental affordability relative to household incomes across the country. Released bi-annually, the Rental Affordability Index is intended to complement the Housing Affordability Index (HAI), which is a price index for the purchase of homes.

“We are most concerned that there is no national strategy to tackle housing affordability, especially when we see that additional supply is not reaching low income households, and increases in homelessness are being reported,” observed Adrian Pisarski, executive officer of National Shelter.

With homeownership falling further out of reach for many households, rental unaffordability is a key issue that needs to be addressed. The RAI makes it clear that rental affordability is dividing the country, with service rich areas tending to be very unaffordable, while service poor areas tended to be more affordable.

No end in sight for Sydney’s rental affordability crisis 

Greater Sydney continues to be at crisis level in terms of rental affordability, with a RAI of 108 in the June quarter of 2016. The average renting household allocates nearly 28% of its total income to pay the median rent of $480 per week.

Most of Sydney’s inner-city areas remain extremely unaffordable, and regional New South Wales remains the least affordable regional area, despite experiencing a slight improvement in affordability over the past quarters.

Melbourne most unaffordable city for low income households

Despite seeing the most significant fall in affordability since 2013, Greater Melbourne is now the country’s second most affordable metropolitan area, with a RAI of 126 in the June quarter of 2016.

The average renting household spends around 24% of total income on rent. However, affordability varies greatly across different income groups and areas. The situation is most dire for non-family, mostly single person households. Such households allocate nearly 110% of total income on rent, even after discounting average rents for this group by 25% for access to social housing.

Brisbane and Adelaide reasonable but volatile

While Brisbane and Adelaide scored reasonably well overall in the latest index, some volatility was noted. Median rents fluctuated most significantly in Brisbane, from a high of $409 in March to a low of $397 in June 2016.

The average renting household in Greater Brisbane allocates around 25% of total income on rent, while those in Greater Adelaide allocate nearly 27% of total income on rent.

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