In this issue:

Young and Ambitious

Parents often ask me about the most effective strategy their children can follow to purchase a first home. It’s a good question.

There are many facets a potential first home buyer needs to get right in order to optimise their savings and ultimately, their purchase. Budgeting and the right choice of savings accounts, sourcing and applying for a loan, and property selection are some of the important areas a first home buyer needs to navigate correctly.
 
Property selection
 
I am a firm believer that a first purchase should not only be a great place to live – it should also be a great investment. Buying a home that will produce the optimum capital growth will result in hundreds of thousands of extra dollars for the buyer in the medium term.
 
This will give the first home buyer the opportunity to upgrade to a substantially better home when the time is right for them. Alternatively they will be well placed to retain their home as an investment and use the equity to borrow for another place to live. A further bonus for owner occupiers is that there is no capital gains tax on the sale of a principal place of residence.
 
In the current Melbourne market a first home buyer requires minimum funds of approximately $350,000 to purchase a property that will produce a reasonable level of capital growth.
 
An astute purchase for a first home buyer with funds under $500,000 would be a one or two bedroom apartment. Unfortunately this would not be enough to purchase a house with the attributes necessary to produce a reasonable level of capital growth.
 
In order to achieve the optimum capital growth, an apartment must be located in a quality location and streetscape, be situated in a low density block, be positioned well within the block and have title to off-street car parking.
 
Budgeting and saving
 
A first home buyer will need savings of at least $50,000 to give them the opportunity of buying a $350,000 apartment. The table below outlines the buying costs a first home buyer will encounter.
 
A young person budgeting to save $50,000 requires discipline and sacrifice – not an easy task for a primary school-aged child or teenager. However, using technology can assist with budgeting. There are countless budget applications for phones and tablets that can help keep tabs on spending. Also, automatic deposits into a high-interest savings account can be set up to take advantage of compounding interest.
 
There are many temptations to spend. Rather than purchasing a new phone every year, going out every Saturday night or eating out every day, limiting these activities will have immediate positive effects on savings.
 
There are three different types of interest-bearing account that will support the accumulation of that $50,000.
 
Firstly there is the ‘first home savers account’. This was introduced by the federal government to encourage first home buyers to save for a deposit. The ‘first home savers account’ offers extra incentives for saving, however these accounts are highly regulated.

At the moment these accounts require contributions of at least $1000 for each of four financial years before funds can be withdrawn. These four years do not need to be consecutive. 
  
With these accounts, the government will make a contribution equal to 17% on the first $6000 deposited each year. This means if you deposit $6000 in one financial year, you will receive $1020 from the government. In addition, earnings on these accounts are taxed at only 15%.
 
You can contribute as little or as much as you like every year, up to a maximum account balance over the life of the account. The current maximum account balance is $90,000 but this cap will be indexed in future years. After your savings reach this level only interest can be added to the balance.
 
A sound strategy for first home buyers would be to accumulate $6000 in the account each year as soon as possible, therefore taking advantage of the 17% interest rate. The interest rate drops to around 3% for all deposits in excess of $6000.
 
Savings the first home buyer may have in excess of the $6000 could then be placed in the second type of account: a high-interest bearing deposit account with one of the major banks or smaller financial institutions.
 
A third option for the more adventurous type of saver would be to invest in managed funds. Many of the financial institutions offer these accounts. Returns can be in excess of 15% per annum, however with this higher return comes greater risk: these funds expose the saver to share markets with the potential for market downturns.
 
The right loan
 
Choosing the right loan structure can save many thousands of dollars for the borrower. These days loans can have many features and restrictions, e.g. ongoing fees, early payout penalties, offset facilities and redraw facilities. Choosing a loan with fewer ‘bells and whistles’ can result in a lower interest rate.
 
Based on a purchase of $350,000 as per the spread sheet example below, our first home buyer would need to be earning a gross income of approximately $50,500 per annum to gain loan approval for an amount of $320,607. This example assumes the borrower has no other significant liabilities.
 
At the time of writing the major banks were offering mortgage interest rates at 5%. This equates to a loan repayment of approximately $396 per week for the first home buyer. Of course, this does not take into account the additional expenses associated with owning your own home. For an apartment, the most significant expenses are council and water rates, the owners’ corporation fee, contents insurance and general maintenance.
 
Starting a savings plan early and making informed choices along the way, combined with a sprinkling of discipline, can result in a first property purchase only a few years after beginning full time employment. Provided the correct property selection is made, this first purchase can provide the foundation stone to financial freedom for a young person.
 

Purchase of a high-performing one-bedroom apartment.	$350,000.00
Less amount borrowed (90%) = $315,000 + mortgage insurance =	$320,607.00
Total Required	$29,393.00
Plus buying costs
Stamp Duty on transfer of land (includes first home buyer discount of 40%)	$8,322.00
Registration of Transfer of Land	$993.00
Registration of mortgage	$107.60
Buyer advocacy fee	$5,500.00
Conveyancing	$700.00
Bank fees (application fee, valuation fee etc )	$500.00
Total required by buyer	$45,515.60
Notes;
Mortgage insurance = 1.78% of loan
Buyer advocacy fee can vary according to level of service

Acknowledgments; I would like to thank the following two people for their contribution to this article.
 

1. Chris Carstens from Aussie Home Loans. M ; 0411 444 211 E; Chris.Carstens@aussie.com.au
    
2. Alex Paraskevas from AMP Financial Services. M; 0401 846 528 E; alex_paraskevas@hillross.com.au

 

The Only True Measure of Performance

As consumers we have always been conditioned to purchasing goods and services for the lowest price possible. Everybody loves buying a bargain whether it is real or perceived. One of the few exceptions to this way of thinking should be residential property investment.
 
Contrary to most other commodities, residential property is an appreciating asset. Selecting a property that will produce the optimum capital growth is crucial to becoming a successful property investor.
 
There can be a phenomenal difference in the appreciation of two different properties. For example, one apartment might triple in value over nine years while another reduces in value substantially over the same period. Believe it or not this sort of discrepancy can occur in the same suburb.
 
Most people aren’t privy to data that shows how different properties perform over the long term. Therefore most don’t realise the substantial variation that can occur in capital growth between two different properties.
 
More often than not there will be fierce competition to purchase a high performing quality investment property. This, of course, pushes the price up. However, going that extra yard in price to attain such a property will put the buyer many hundreds of thousands of dollars in front in the medium to long term.
 
Capital growth in the residential segment is driven by home-buyer demand as against investor demand. Quality of location and streetscape will always be top order priorities when choosing the optimum performing investment.
 
The only real key performance indicator of a property investment advisor is how their selections have performed in regards to capital growth. Simply, how much have those properties risen in price and over what period of time?
 
Our firm has always prided itself on being extremely discerning when selecting investment properties for our clients. A property has to meet strict criteria before we would recommend a purchase.
 
There have been three re-sales of properties I had previously selected on behalf of investor clients. As the table below demonstrates, the capital growth of each was substantial in a relatively short period of time. These results were even more amazing given the fact that during this period our economy supposedly experienced the worst recession since the great depression.
 
The following are the results:
 

	Property 1	Property 2	Property 3
Purchase Date	26-4-2008	9-3-2007	10-7-2007
Buying Price	$452,000	$435,000	$320,000
Date Sold	14-11-2009	14-11-2009	15-1-2010
Selling Price	$535,000	$593,000	$410,000
Time Held	1 year 7 months	2 years 8 months	2 years 6 months
Gross Profit	$83,000	$158,000	$90,000

Waste of Time and Money

The state government’s new planning initiative, which will change residential zones effective July of this year, is a waste of time and money and will not result in any improvement to the current planning framework. 

The three main new residential zones are: the Neighbourhood Residential Zone, the General Residential Zone and the Residential Growth Zone.

These zones will replace three existing residential zones: Residential 1, Residential 2 and Residential 3.

The Neighbourhood Residential Zone is intended to provide a high level of protection for local neighbourhood character, including restrictions on lot subdivision and a mandatory eight-metre height limit. Its aim is to encourage predominately single-dwelling development and to limit opportunities for increased residential development.

The General Residential Zone is designed to encourage ‘moderate’ growth and housing diversity in areas with good access to services and transport. It is similar to the existing Residential 1 zone.There is a discretionary height limit of nine metres.

The Residential Growth Zone will be applied in areas which are appropriate for increased growth and density, and will support medium-density development in buildings up to and including four storeys, and will include some minor commercial uses to provide local services to residents. There is a discretionary maximum height of 13.5 metres for residential buildings.

Changes will also be made to some other existing zones – including the Mixed Use Zone, the Township Zone and the Low Density Residential Zone – to make them consistent with the new residential zones.

The problem with all this is that it is impractical and won’t work. Melbourne’s housing stock varies dramatically from suburb to suburb, from street to street and from one section of a street to another. Attempting to apply all-encompassing regulations and restrictions on large pockets of housing given this diversity is absurd.

Every property has a unique set of characteristics. Many variables apply: differing architecture, size of land, orientation, surrounding aspects and slope of land, just to name a few. Planning permit applications should be assessed based on the merits of each individual property, taking into account the impact on surrounding dwellings, the quality of architecture and constraints of the site.

Glen Eira was the first council to change their zones, applying the most restrictive zone, the Neighbourhood Residential Zone, to the majority of their residential land. This zone is significantly more restrictive than the previous Residential 1 zone.It has been suggested that Boroondara, Moreland, Kingston, Brimbank and most other councils will follow suit and apply the Neighbourhood Residential Zone to a significant proportion of their municipalities.

This type of policy risks some properties being inappropriately developed while other properties that have all the hallmarks for development are refused a planning permit. It will also be the final nail in the coffin for the smaller developer who produces homes that people want to live in, that is, low density developments in inner to middle ring suburbs. Unfortunately the new zoning policy encourages clusters of high density towers in areas that are zoned commercial.

The current system of applying specific overlays to streets and sections of streets should have been expanded. Efficient urban planning policy is about precision and discernment. Local council planning officers should be making assessments street by street and applying the necessary planning frameworks accordingly.

Prescriptive planning may be appropriate in areas where housing stock is homogeneous. However Melbourne’s streetscapes are amongst the most diverse in the world. A ‘one hat fits all’ approach is not how urban planning policy should be administered.


 

Don't Sign Here

After many painful months of pounding the pavement you are finally bidding on your dream home. Your heart is thumping, your palms are sweaty, and your thoughts are scrambled.

After a long bidding tussle, the property is knocked down to you and the beaming selling agent walks over and offers his congratulations. He invites you inside your new home to sign the contracts. Nervousness turns to elation, stress turns to excitement, and panic turns to euphoria; at long last your search is over.

As you sit down inside your new home you are confronted by a pile of contracts and vendor’s statements to initial and sign. Like a well-oiled production line the selling agent places each document in front of you. You are asked to either sign or initial multiple times for what seems to be an eternity.

You undertake this task without question; you have just made the largest purchase of your life and a combination of anxiety and europhia has well and truly set in. Right at this moment you’re not exactly thinking in a logical manner, and besides, you had your lawyer check the contract. What could possibly go wrong now, right? Wrong!

Towards the end of the signing process the selling agent places a different looking document in front of you headed section 27 statement. He nonchalantly informs you that by signing this statement you are merely acknowledging its receipt.

Don’t sign this document. At least not until you have understood and considered its consequences and discussed them with your conveyancer or lawyer.

Section 27 of the Sale of Land Act says that the deposit paid by the purchaser on the purchase of real estate can be released to the vendor prior to settlement if certain conditions are met. If you sign this document, your conveyancer or lawyer has 28 days to satisfy himself that the vendor has clear title to transfer at settlement.

If your conveyancer or lawyer does not object within the 28 day period, you, as the purchaser, will be deemed to be satisfied with the particulars provided and the vendor will request the deposit be released.

However, what most lawyers and conveyancers are not aware of is that section 27 (2) (a) of the Sale of Land Act states that the deposit can only be released “where the contract is not subject to any condition enuring for the benefit of the purchaser”, that is, where the contract does not contain any conditions which may protect or benefit the purchaser.

A standard contract of sale contains many general and special conditions that benefit and protect the purchaser. Therefore despite you signing a section 27 statement, there is no obligation to release the deposit after 28 days or at any point prior to settlement.

If your deposit is released, you are effectively giving 10 per cent of the purchase price to the vendor before having received title to the property. There are inherent risks to you in doing this.

It is still possible that a caveat could be placed on the property just prior to settlement. Or the vendor could withdraw funds from their mortgage account using a redraw facility and jeopardise repayment of their mortgages, in which case their bank will not release the title and settlement won’t be able to take place.

In both these circumstances you are jeopardising your deposit and placing yourself in a distinctly weaker position if that deposit has already been paid to the vendor.The fact is that you are under no obligation to sign a section 27 statement.

The only reason the selling agent wants you to sign this statement is so he can get his hands on the commission before settlement. Release of the deposit allows the selling agent to deduct his commission from these funds; his desire for you to sign this document is purely self-interest.

I recommend to all buyers that they should only sign a section 27 statement when advised to by their conveyancer or lawyer.


 

Market Snapshot

After subdued conditions throughout 2011/12, the Melbourne property market gathered momentum throughout 2013, peaking in October. It then eased, giving the majority of buyers the upper hand especially in late December.
 
Clearance rates throughout the year were between 60% and 70%; the Melbourne market is currently in a balanced state.
 
The Reserve Bank of Australia kept the cash rate at its current level of 2.5%.The nation’s gross domestic product edged up by 0.6% in the September quarter. Australian Bureau of Statistics figures show the annual growth rate is now at 2.3%. The national unemployment rate increased to 6% in January 2014, up from 5.8% in December 2013.Victoria's unemployment rate rose from 6.2% to 6.4%.
 
The Australian dollar plunged almost a cent, from 90.3 US cents to 89.4 US cents, on news of the increase in the unemployment rate.The local currency is down as traders again factor in the possibility that the Reserve Bank may have to cut interest rates again to combat rising unemployment.
 
The median house price for Melbourne in the December 2013 quarter was up by more than 7% to a new high of $643,000.
 
The low interest rate environment combined with greater confidence saw more investors enter the market in 2013. It doesn’t take a large increase in the pool of buyers to see prices accelerate upwards.
 
The real test of strength of the market is how properties are performing in secondary locations and at the upper end, i.e. properties sold for in excess of $1 million.These segments attracted multiple buyers in 2013 – a significant change on the previous two years.
 
In 2014 we will again see a buoyant Melbourne market. The quality investment segment will see capital growth of at least 10%.This segment of the market is becoming more and more tightly held and opportunities to purchase are few and far between.This will provide extra impetus to prices.
 
This segment of the market always experiences price growth at the start of the auction year in February. There have only been one or two exceptions to this over the previous 25 years.This is because of the pent up demand that is created by the Melbourne market going into hibernation from late December to mid February.
 
Continued low interest rates combined with an improving economy will provide higher levels of confidence for investors.This augurs well for the Melbourne market over the next 12 months.