A wage is not enough

Superannuation and/or retirement savings simply can’t provide you with the lifestyle you want.

As Australians are living longer and healthier lives, we are looking forward to rewarding and active retirements. Unfortunately, funding them is going to be a challenge. The average savings in superannuation, even when combined with government assistance, are simply not enough to provide most people with the lifestyle they would like. Investing in fixed rate interest products, such as term deposits, doesn’t bring as much growth in value as is possible from other investment sources. Therefore it’s important to invest in other assets, such as property or shares.

Capital growth

Property increases in value faster than inflation.

One of the most attractive reasons to invest in property is that the value of your asset grows over time. Australian capital city house prices have grown by an average of 8.6% per year since 1955. This is 2.7% more than inflation has risen each year in that time. The capital growth in the value of your property is separate from the rental income you earn from your property. In essence, strong capital growth means that your are able to buy a property, own it for a period of time, and sell it later for more than what you paid for it, even taking inflation into account.

Rental income

Property provides a regular monthly income indexed to inflation.

By purchasing an investment property, you will enjoy regular monthly income from your tenants. In fact, the income you receive in rent will help you pay off the loan used to buy the property. While you do run the risk of your property standing empty, traditionally Australians have aspired to own their own home. This means there is often a shortage of properties available on the rental market, so vacancy times are short.

Investing in houses is as safe as… houses!

The property market displays lower volatility than the share market.

Unlike the share market, the residential market is dominated by owner-occupiers (homeowners), rather than professional investors. This means it’s much more stable over time, because even in an economic downturn, people still need somewhere to live, and aren’t likely to sell off their home in a panicked fire sale. In fact, while some say a weakness of property investment is that it’s hard to quickly liquidate your assets (it can take six months to sell a property) for the part time investor this is a great insurance against volatility in the market. In contrast, decisions in the share market are often taken quickly and under pressure, and investors have the ability to rapidly move large sums of capital around.  This results in high volatility that creates great potential but also great risks.

Predictable cycles

The property market moves in well documented cycles that allow you to buy low and sell high.

It’s certainly possible to lose money on property investment. You could buy at the peak of a boom and then watch the value of your asset drop dramatically in the next 18 months. However, property values move in well documented and predictable cycles of boom and bust, and with reading and research you should find it straightforward to identify which areas are in a trough and which are peaking. Even if you do buy at the peak of a boom, the price should eventually recover – it’ll just take a while. Buy carefully at lower points of the cycle, and you should have no problems. In addition, ‘vanity’ purchases at the top end of the market tend to suffer the most volatility, whereas affordable housing, which is always needed, has much more stable price trends. The chart below from RP Data demonstrates this trend. You can see that the most affordable segment of the market (grey) has much less pronounced peaks and troughs than the middle and upper segments of the market.

It’s easier to mitigate risk

It’s straightforward to insure your investment against common risks.

One benefit of owning property is that although there are risks to your investment, these are generally well known and easy to insure against – such as fire, damage, theft, or even vacancy. In contrast, while you can insure the value of your share investments, it’s much more complicated to firstly identify hidden dangers in the market and then take action against them using complicated financial instruments such as hedge funds.

You don’t need a huge amount of knowledge

Common sense and some targeted research can get you going quickly with property investment.

Understanding the basic principles of property investment is pretty straightforward – buy low, and sell high, and minimise your costs in between. While it’s important to do your research on where and when to buy, deciding on a property often boils down to asking yourself these two questions: Would I like to live in this area, and in this property? What are the long term price trends in this region, for this type of property? Once you’ve gathered the data necessary to answer those questions, you’re well on your way to making a buying decision. In contrast, developing a share investment strategy can take months or even years. Many advisers recommend that you begin with several months of ‘paper trading’ – that is, just making imaginary purchases on the market and seeing how they perform. That’s a big time investment before you start making real money.

Control

Make your own decisions about your investments.

When you own a residential investment property, you are in complete control of your investment. As long as you comply with the relevant laws, you can decide when to renovate, subdivide or sell your property. In contrast, as a shareholder you are subject to the decisions made by the staff and directors of the companies you have invested in.

Tax benefits

Reduce your tax obligation while your property asset grows in value.

Another great benefit of property investment is the tax savings you can earn. One common strategy is known as ‘negative gearing’. This means that in the initial years of owning a property, you will likely record a loss from your investment as the loan repayments are higher than the income you receive from rent. This loss can be set against your tax obligations to reduce your tax bill. These losses are reduced as the market rent rises and your loan repayments diminish. In time, the capital growth in the value of your asset will offset your initial losses.

Leverage

Banks will loan more against property than other investments, so your wealth grows quicker.

An important principle of property investing is leverage. This is the idea that you can make a small initial investment work very hard for you. Let’s take an example where we compare an investment in shares and in property. You can borrow up to 90% of the value of a property investment, but only 60% of the value of shares purchased. Therefore, if you have $30,000 to invest, you could buy a $300,000 property or $75,000 worth of shares.  After one year, if both investments had the same capital growth of 8%, you would own a $324,000 property or $81,000 worth of shares. By purchasing a property, you increased your initial funds from $30,000 to $54,000. By purchasing shares, your investment increased only from $30,000 to $36,000.

You can touch and feel it

Have the satisfaction of physically seeing your success.

Many property investors say they get a real kick out of being able to see, touch and drive past their investment. Upgrading, renovating or even routine maintenance of the property can bring a real sense of satisfaction of a job well done. While it’s not directly a financial advantage, any investment strategy requires you to spend time on it, so it may as well be something you can enjoy. In fact, like an exercise program, the most successful investment strategy for you is almost always the one you enjoy doing.

You don’t need lots of money to get started

Property investing is not just for people earning high incomes.

One of the great things about investing in property is that you can get started without a big salary, or even a lot of savings. For a start, lenders take into account the rental income from the property when deciding if you can afford the loan repayments. Additionally, you can borrow up to 90% of the value of your purchase, so you only need to save around 15% of the purchase price (the other 5% is for additional costs such as stamp duty or mortgage insurance). If you already own your own home, you could find this 15% by borrowing against your existing property. If you don’t already own property, a parent, relative or friend could make a joint investment with you, by providing the upfront capital while you agree to meet the loan repayments.

You’re not on your own!

Enjoy the support of a strong property investment community.

Investing can sometimes feel lonely or overwhelming. Trading in shares often means being stuck behind a desk for hours each day. Investing in property allows you to get out and about, checking out neighbourhoods, meeting property agents and sharing your experiences with others on a similar journey. You can also benefit from the support of a range of professionals, from experienced entrepreneurs to legal advisers, conveyancers and mortgage brokers, who can help make your investment a success.

Here is the bad news, if you’ve listened to the property outlook videos from John Edwards and Tim Lawless you’ll have picked up that Melbourne as a whole is not looking too flash in comparison to most of the other capitals.  Where other capitals are on the move with capital growth, Melbourne is considered to be in a low point in the market cycle.  Property values have slumped in the last two years meaning that people who purchased at the peak in 2010 may have gone backwards. Furthermore at a median rental yield of 3.77% for houses investors aren’t going to be happy.

But let’s take a reality check here for both people who have Melbourne property and people who are considering buying property.

First reality check here is that not everyone in Melbourne purchased property in 2009 and 2010 when prices were booming.  Frankly if you purchased investment property then you were really buying at the wrong time in the cycle. But if you look at the graph below anyone who purchased Melbourne property before 2009 (and especially before 2007) should have had capital growth in their property.

Of the various predictions from market researchers that I have seen none that are saying that the Melbourne market is in for further price falls.  Most are saying this year will be flat with growth expected in 2014.  Residex are predicting 3% per annum capital growth in Melbourne over the next 5 years – not spectacular but solid.

Whilst I accept this view I suspect that the Melbourne spring auction season could bring some strong growth.

On this analysis you’d have to say Melbourne is at or near the bottom of the cycle and this is where property investors should be buying.

For property investors, yes, yields are down overall but for those with longer term tenants that may not have an impact and indeed, depending where your property is, this yield figure may be totally irrelevant.

Which leads me to the key point I want to make – Melbourne is not just one market.  It is a large enough city to have many marketing niches.  To illustrates this point let’s look at the inner northern suburb of Coburg.

Median unit prices in Coburg have eased from their 2010 peak of $420,000 to $394,000 at the end of 2012.  But add in 2009 and we see the last three years capital growth has averaged 3.1% per annum and over the last 10 years it’s been a respectable 5.8% per annum.

But more importantly for those buying now, Residex is predicting 5% capital growth in the Coburg unit market over the next 5 years which is above the prediction for Melbourne as a whole.

Rental yields also provide a good story.  Coburg rental yields are at 5.0% which is higher than the 10 years average of 4.7%.  These are good yields over-shadowed of the overall Melbourne picture.

In an era where all the analysts are complaining about affordability Coburg is well positioned with a median unit price of $394,000 which is $33,000 below the Melbourne metropolitan median price of $427,000.

But if you think this story is a once-off for Melbourne you’d be wrong.  Let’s just have a quick look at Abbotsford where median prices for units are higher than Coburg.  Median prices were $562,000 in 2012 and while prices have dropped by 5.4% over the last two years this is off the back of a 27.2% growth in the previous two years.

Residex predict capital growth in Abbotsford units to be a very respectable 5% over the next 5 years.  Again, higher than Melbourne as a whole.

Finally, rental yields are running at 4.7% for units which is above the 10 year average of 4.1%.  So the story is much the same as Coburg.

As I said earlier I was prompted  to look at Coburg because we have just released NRAS properties in Coburg.  They are very well priced so I highly recommend you click on the links to these properties.  If you want to look at properties in other Melbourne locations click on this NRAS Melbourne link.

I can also provide you with the Residex research reports for these areas that I have quoted.  Just send me an email at nras@onyx.net.au

See if you can pick the common ground and the areas of difference between them.  It might help you to decide what to do with your property investing this year.  Here is a simple piece of advice – remember that investing is about working out where the market is heading not where its been.

Tim Lawless – RP Data

John Edwards – Residex

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While you ponder this, imagine that this city is located on the coast with surf beaches, national parks and lifestyle streets. Imagine also an influx of health and biotech professionals and fly-in-fly-out (FIFO) mine workers.

Now as a property investor, with historically low interest rates at your disposal, if you could time your entry into this market at the bottom of the property cycle you’d have to be taking a very keen interest.

You now have a picture of how my eyes have been opened to this very situation unfolding on the Sunshine Coast. I really want to let you know about it because, like me, if you are from out-of-town you may not know what’s going on.

By the way, the reason I started to focus on the Sunshine Coast is because we now have three really great NRAS projects available there. But I’ll come to that later.

So in brief, here is the Sunshine Coast property investment story which starts with the Kawana Health Hub.

Kawana Health Hub

The core of the hub is the Sunshine Coast University Hospital which will be the world’s sixth-largest teaching hospital. The Sunshine Coast University Hospital (SCUH) construction is planned to start in 2013, with stage one of 450 beds completed in 2016, expanding to 738 beds in 2021. The hospital will create 2000 construction jobs and 3500 permanent jobs once complete. It is expected that over 15,000 people will visit the hospital each and every day.

Other components of the hub include:
• Ramsay Private Hospital. Co-located with SCUH. Construction is now underway and in late 2013 this 200-bed private hospital will house 700 permanent employees and create 360 jobs during construction.
• Skills, Academic and Research Centre will provide teaching and research within the hospital campus. A $61 million capital investment, with 150 academic and support staff catering for 1,300 students each year.
• Kawana Health Innovation Park will be a commercial precinct distributed across a number of sites across the hospital campus.
• Kawana Town Centre and medical precinct. The town centre – adjacent to the SCUH, will commence in 2013 too. The town centre is expected to generate around 5000 jobs during construction and similar in permanent positions upon completion.

New Maroochydore CBD

The CBD of the Sunshine Coast at Maroochydore and is squashed between the beach, river and the Horton Park Golf Course. The Golf Course is being re-located and in 2014 construction will commence on a new CBD on the current golf course site. The CBD will house the Sunshine Coast Convention Centre, the Maroochydore railway station, 160,000m2 of commercial office space, 45,000m2 of retail shopping, new Council administration offices as well as a 25 hectare public park and open space.

Sunshine Coast Airport Precinct

Plans are advanced for the the Sunshine Coast Airport to become an international airport. The proposed airport expansion project which is currently going through the Environment Impact stage is expected to include a new 2,430 metre runway, new terminal, expanded public transport and aviation business precinct. The new runway is expected to be operational in 2020 and provide access to both domestic and international traffic. Well-known business identity Clive Palmer has unveiled plans for an associated hotel complex .

FIFO Workers

While we are on the subject of flying, the Sunshine Coast Mining and Gas Association is currently working on expanding the number of FIFO workers living on the Sunshine Coast. The story makes sense for the workers (work in the Queensland mines while living on the beautiful Sunshine Coast) and brings the mining boom to town.

Economic Development

The local council is very supportive of economic development. The Sunshine Coast is emerging as a hotspot for entrepreneurial and innovative businesses. This has been partly fuelled by a new wave of around 80 start-up businesses – mainly in ICT, cleantech and creative industry sectors – generated by the University of the Sunshine Coast’s Innovation Centre.

The University site at Sippy Downs is designated as a ‘Knowledge Hub’ as part of the Queensland Government’s South East Queensland Regional Infrastructure Plan and is master planned as Australia’s first university town based on the UK models with the potential for over 6,000 workers in knowledge based businesses. Sippy Downs was highlighted as an ‘Innovation Hotspot’ in July 2010 by top European Business magazine CNBC Business with the potential to be ‘Australia’s no-worries-answer to Silicon Valley’.

Property Market Bottoms

So let’s turn to the property market. Property analyst Michael Matusik says the Sunshine Coast is now at 6 o’clock on the property clock so it has bottomed. Valuers Herron Todd White reported in relation to the Sunshine Coast there is an air of optimism around the Sunshine Coast. They say that “The main market where this has been felt has been the sub-$500,000 house market. Properties have been turning over more quickly, with some agents making noises about running out of stock.” Vacancy rates are also tightening having reduced over the last 12 months to around 2%.

Affordable Housing Market Pressure

Don’t think Noosa holiday homes when I say Sunshine Coast – there is more than one market niche. Consider the people who work in the Sunshine Coast looking for housing. The area has incomes lower than average but housing prices are higher than average. This means that affordable housing will be highly sought after.

Three NRAS projects in Sunshine Coast

Onyx has three NRAS projects available on the Sunshine Coast. Each provides a different character to suit your investment preferences. Just a few minutes walk from the centre of Maroochydore is the Emporio project – a 7 level apartment development with prices from $267,500.

To the south in Kawana and close to the new hospital is a Lake Haven Townhouses – a new townhouse project with 2 and 3 bedroom NRAS properties.

Finally right in the heart of Maroochydore we have Primary Central Townhouses which is a small boutique terrace/townhouse development just completed in a well-established street location Read more about these developments below.

Sunshine Coast on Your Radar

Property investment conditions could not be better than this. Not only are the general economic conditions in our favour – low interest rates, low prices, sound economy, buyers’ market – but some of the regional locations like the Sunshine Coast are just ripe but going under the radar at the moment.

If you’d like to know more about these NRAS properties, feel free to call myself on 0412 309 571 or Greg Clough our CEO on 0409 029 922 or email us at nras@onyx.net.au.

Regards,
Ruby Janssen

You’re invited to join us at an exclusive first-to-market launch of NRAS Apartments in Brisbane’s lifestyle hub of Fortitude Valley. These apartments will suit individual and self-managed superannuation fund (SMSF) investors. There’s something for everyone with a selection of one and two bedroom apartments from $335,000 in a brand new development being released for the first time next week by one of Queensland’s premier developers.

Join us at the high-tech development display suite in Fortitude Valley at 6pm on the 14th November for after-work refreshments so you can hear, see and feel the quality of these apartments. Register here.

This is a not to be missed opportunity to be the first to buy cashflow positive property in the lifestyle hub of Brisbane which was recently predicted to be the world’s number one fastest growing mature city between 2012-20.

If you’re into numbers then they’re very compelling for Fortitude Valley:

• The fifth most affordable suburb in Brisbane
• Double digit growth (11%) price growth between 2007-2012
• Median Gross rental yields of 6.1%
• New apartments can expect rental yields of 8-9%
• Very tight rental market with vacancy rates at less than 1%

The capital growth boxes you want to tick include lifestyle location, transport access, new infrastructure development, and strong employment market. So here are just some of the ticks to whet your appetite:

Lifestyle

Fortitude Valley is the stomping ground for Gen-Y with 53% of population aged 20-34. It is an entertainment, leisure and cultural hub with 350 retail outlets, an estimated 30 bars and 85 restaurants. It includes the Brunswick Street Mail and Chinatown.

Infrastructure

These new apartments are very close to the 22 hectare $3 Billion RNA Showgrounds redevelopment into a new lifestyle precinct. The Bank of Queensland’s new head office is to be completed 2013 adding to the growing number for brand name corporates moving to the area.

Transport

The recently completed $4.8 Billion Airport Link freeway means Fortitude Valley is now just 15 minutes from the airport. Fortitude Valley Station is one of four stations which service all train lines across South East Queensland.

Employment

Fortutude Valley is walking distance to CBD and well served by public transport options. It is well located to the Port of Brisbane which is Australia’s fastest growing container port. It has landmark commercial buildings eg. Brisbane City Council’s Green Square, Virgin Airlines, Energex. The Royal Brisbane, Royal Women’s and Royal Children’s Hospitals collectively employ 7,200 staff and within 10-15 mins walk to these apartments

So please, whether you live in Brisbane or out of town, get on a train, plane or automobile to Fortitude Valley on the 14th. There is no excuse because it’s so easy to get there.

You need to register.

There are many great apartments to choose from so bring a friend, or if you can’t make it, send them along. But please do register to attend because the numbers who can fit into the spacious display suite are still limited and we’d hate you to have to queue. Register Now.

A recent suburb profile produced by Resolution Research Strategists highlights some of the great aspects of this area from a property investment perspective. Key points include:

- New apartments are expecting high yields of 8-9%
- Very tight rental market with vacancy rates at less than 1%
- Strong employment growth, with an estimated 12,000 new jobs to be created over the next 20 years

You can download the report here and see all the details on this blossoming suburb.

The RBA’s recently announced drop in the cash rate of 25 basis points has seen the major banks slow to pass on the rate cut to their customers, arousing a not atypical level of ire from mortgage holders. None of the majors has decided to pass on the rate cut in full, with ANZ, NAB and Commonwealth dropping 20 basis points, and Westpac 18.

The banks have defended this decision, arguing they need to balance the needs of borrowers with those of savers dependent on the income earned from interest on their deposits, such as retirees. However little sympathy is finding its way to the banks, with reports surfacing that the majors earn an estimated $6 million every day they delay passing on the cuts, overwhelming their already “swollen coffers”.

But despite the media obsession with reporting movements in the bank standard variable rates you need to be aware to some extent these rates are almost irrelevant because almost no one looking for a new loan today pays the published standard variable interest rate.

Given this situation, when commentators such as Paul Clitheroe advise us to shop around for a lower rate, it seems the kind of sensible advice but can be so hard to follow in practice – like standing up from your desk once every half hour, or using those impossible to remember passwords with fifteen punctuation marks. Even if it could net you a substantial cut off your current rate, it seems like a lot of hard work to sift through all the different offerings.

The banks seem to be aware of this inertia on the part of their customers, and that’s why they are able to get away with actually punishing loyalty instead of rewarding it, by doing things like not passing on the full rate cut to existing customers and deepening discounts to new customers.

The discounts available from the headline or widely quoted rate have actually increased in recent years at the same time as the banks have been holding back rate cuts. In the past it was possible to get a 50 basis point discount for standard loans and 70 for loans over a certain size – say $500,000. Now a 70 basis point reduction is the standard and an 80, 90 or even 100 point reduction is possible with larger loan volumes.

Essentially, they are holding out on their current customers to underwrite their financing for attracting new ones.  The maths are obvious when you think about it -holding back a small rate reduction from a large number of existing customers allows you to offer deeper discounts to a smaller number of new customers. Ultimately for you this means that if you haven’t renegotiated your rate or refinanced in the last couple of years then you are paying more interest than you need to.

The other important point to understand is that the banks are increasingly concerned with their total revenue per customer, not simply per loan. So if you have a range of services with one bank (e.g. credit cards, home insurance, super), you are a more valuable asset to the bank and so you may be able to renegotiating the terms of your loan on the basis of your broader use of services.

A simple phone call asking for a lower rate may have some impact but you do need to be able to credibly threaten to take your business elsewhere if you are going to be successful in your negotiations.  If you’re going to renegotiate with your lender you need to be prepared to leave them. This is where it can be really helpful to get a broker’s point of view on the situation.  Your bank branch isn’t going to help with loan options from other banks but your broker will.

Furthermore you may find on investigation that there is genuinely a better option than you have now even if your current bank is prepared to lower your rate.  We work with all the majors and many smaller lenders and you’ll find that the features of their product offerings are very similar so moving bank may not be as difficult as you think. While we’ve seen disincentives to competition disappearing, such as exit fees on mortgages, movement from bank to bank remains sluggish. There is a belief among consumers that the banks reward customer loyalty, when this isn’t necessarily the case. Perhaps most people’s inherent conservatism on money matters contributes to their inertia.

The whole process can be made a lot easier by using a mortgage broker. There are a couple of strong reasons why this is a good idea.

• While you can research your options yourself, it saves a lot of time to get this information directly from a professional broker who is constantly keeping up to date with the various products available on the market.
• If you’re not the hardnosed negotiating type, your broker can handle the renegotiating process for you – it also makes your threat to take your business elsewhere more credible.
• Relationships between brokers and bank branches have significantly improved since the immediate post-GFC wariness. In many cases, your broker may already have a solid working relationship with your bank’s staff, which can streamline and expedite the process.

Ultimately, it’s a great time for borrowers.  While the banks are holding back rate cuts interest rates are at historic lows and the banks prepared to offer significant discounts on their published rates to attract new customers. So if you’re looking to refinance (and you should be) your first question shouldn’t be “Which bank?” but “Which broker?”

In fact, here’s my top five reasons why it’s time to invest in property.

Interest Rates Are Low

The RBA’s cash rate is down to 3.25%, and is expected to drop even further to 3.00% in November. This is the RBA’s fifth consecutive cut, and interest rates are now around half what they were 4 years ago. This makes financing your property purchase much more affordable. Low interest rates also have added bonus of encouraging more investors to enter the market, increasing demand and driving prices up. You want to get into the market early before this starts to happen.

Rents Are High

Rental prices across Australia have risen considerably in the past year. The Financial Review reports that “Sydney rents rose 5.5 per cent in the year to the June quarter, according to Australian Bureau of Statistics figures, while in Perth they added 5.3 per cent. In Canberra, they rose 5.4 per cent; Melbourne by 3.5 per cent; and in Adelaide 2.9 per cent.” In this period, median house prices across Australia actually dropped. This means that you are now in the position to buy into the market at a lower price, with lower finance costs, and receive a higher rental income from your property than you could a year ago.

Supply is Tight

As I discussed last week, new residential properties are simply not coming onto the market fast enough to match our population growth. BIS Shrapel reports a shortfall of 37,000 dwellings across the country.  SQM Research reports that listings are down 2.6% year-on-year and ANZ figures show new dwelling approvals have fallen 22% since their peak in early 2010. This is causing increasing tightness of supply, which will help to drive house prices up in the coming months.

House Prices are Going Up

The Australian capital cities enjoyed their best monthly house price growth in 30 months in September, climbing an average of 1.4%. While house prices dropped 1.2% in the year to the September quarter, there are good indications that the market has turned the corner.  SQM Research Managing Director Louis Christopher described the auction results for September as “very good”, and that “Up until four weeks ago that trend wasn’t evident, it just wasn’t there.” SQM is predicting growth in house prices of up to 7% in 2013. Property moves in well-document cycles of – it looks like we might be approaching the perfect point in the cycle to buy, just before prices begin to rise again.

Investor Confidence is High

API Magazine reported in September that nearly half of all Australians believe now is a good time to buy property, putting homebuyer confidence at its highest level since before the GFC. Affordability and low interest rates have motivated many to enter the market, which will increase demand and ultimately, house values. A recent spate of articles supporting this notion is only going to fuel this confidence further.

So, what do you think – is now the right time to invest in property? Leave your comments below.

HIA Chief Economist, Dr Harley Dale, indicated that he thought the RBA rate cut announced earlier this week would help to improve this situation as lower interest rates lead to increased demand.  “A fresh round of interest rate cuts will help rebalance this situation, although financial institutions obviously need to play their role in cementing this outcome,” he argued, highlighting the importance to the industry that the banks pass on the rate cuts.

However, while Dr Dale would also welcome the anticipated Melbourne Cup Day rate cut, he maintains that lower interest rates alone are not enough. “It remains the case, however, that rate cuts won’t single-handedly generate the new home building recovery Australia requires. Governments have an important role to play in driving reform measures to lower the excessive tax base faced by the sector.”

Dr Dale has long been a strong advocate of reducing the tax obligations faced by the residential building industry, which he emphasises are the second most onerous among the 27 largest sectors of the economy. His analysis is that although demand for housing remains somewhat weakened in this post-GFC period, as households are more cautious and are going through a process of consolidation, weak demand is not the sole reason for the current sluggishness of new home sales. In fact, he states, discretionary household spending remains far stronger than spending on new housing, pointing to a clear problem in supply.

Here the problem is characterised as one of an excessive tax base creating barriers to efficient delivery of new housing stock to the market. Firstly, the sector is undeniably very highly taxed. The HIA has previously found that up to 44% of the price of a new house and land package was comprised of local, state and federal taxes. Secondly, the mixture of taxes at all levels creates administrative costs in and of themselves. Because new housing is more highly taxed than existing dwellings at sale, this creates an incentive for the market to prefer established dwellings rather than new ones.

Now, while a cynic may argue that of course an industry body is going to argue for lower taxes for its members, Dr Dale’s arguments here are worth examining in more detail. Australia’s undersupply of housing is an undeniable issue driving the increasing unaffordability of dwellings across the country, but particularly in the major capital cities. Data from BIS Shrapnel show there is a shortfall of 37,000 dwellings across the nation.

The idea that the industry slow down is a supply side issue rather than a demand side problem is also borne out by RP Data’s findings, released this week, showing that the difference in median sales prices of houses and apartments has increased significantly over the past few years, with the difference reaching as much as $76,000 across the combined capital cities and $35,000 across the nation.

This indicates that despite the economic downturn, demand is still strong enough across Australia to pay a premium for the kind of housing that most Australian’s still prefer: detached, one-family homes.  This preference is one problem that RP data points to as also being a constrain on supply – Australians are simply resistant to higher density infill development, although this attitude is changing. RP Data also found that the complexity of the planning and development process and the fact that developers are now obliged to bear the costs of major infrastructure development such as roads contribute to a sluggish supply of new homes.

At Onyx, we’re strong supporters of the notion that affordability of housing is a both a social and an economic issue – one of the reasons why we’ve stood behind the National Rental Affordability Scheme initiative since the very beginning. It’s becoming clear that there are in fact significant barriers for developers and builders to bring new homes to the market. Programs such as NRAS or the First Home Owners’ Grant have had a positive impact on this situation, but for a lasting change that will reinvigorate the whole sector, rationalisation and consolidation of tax obligations and streamlining of the planning process can be powerful tools in the hands of government.

At Onyx we’re welcoming the RBA’s decision for a number of reasons. Firstly, it brings some relief to families and individuals who are paying down mortgages on their own home. The added $50/week should bring a nice stimulus to the retail sector, which remains soft. In addition, it will encourage more investment in the property market, helping to address our supply shortage in residential buildings.

More significantly, RBA Governor Glenn Stevens has indicated that he sees the rate cut as a preemptive move given that the ‘peak in resource investment‘ is likely to occur next year. In layman’s terms, the height of the mining boom will probably happen next year, with investment in Australia’s extractive industries likely to slow in 2014. In addition, growth in China, while still a healthy 7.6%, is slowing. In this context, Stevens and the RBA board have concluded that it’s best to lower the cash rate now to provide some encouragement to other areas of the economy to ‘take up the slack’ as the commodities boom eases off. Also worth noting is that the lower cash rate will help to reduce the value of the Australian dollar, making our exports more attractive.

As Ruby pointed out last week, the apparent ‘end of the mining boom’ has been severely overrated. Growth in mining towns and their suburbs remains some of the strongest in the country, with some suburbs reporting annual growth rates in the mid 30s. While it’s true that the very high levels of growth we’ve seen in the past five to ten years can’t continue forever, Australia’s commodities sector is likely to remain strong for the foreseeable future.

What’s impressive about the RBA’s decision this week is that it is anticipating events in the upcoming 12-24 months and taking action now to limit the impact of Australia coming down from the peak of the mining boom. It’s great news as property investors to know that 1) this context is likely to provide a more attractive investment environment in the form of lower rates and 2) Australia’s economy is in the hands of stable and careful managers who have seen us through the financial crisis that rocked Europe and the States and continue to make solid, strategic decisions about our future.