With the Reserve Bank of Australia cutting rates, the official Cash Rate in Australia is just 3.25%. The mortgage rates have dropped to just a little over 5% for investors who are on standard variable rates.

Investors are looking to lock in their rates once the official Cash Rate drops below 3%. I see a perfect opportunity to acquire residential properties in Australia with positive cashflow at least for the next 5 years, provided you have loans that are disbursed between now and 2010. The rental yield for residential properties is about 5% and with mortgage rates falling below 5% or even 4%, rental income will be more than the outgoings, thus increasing your cashflow. Besides with the AUDSGD at below 1.0000, there hasn’t been a much better time to acquire residential properties in Australia.There’s a small window of opportunity. However there are risks involved. Here are some of the reasons why you SHOULD NOT look into acquiring properties NOW:
1.    You don’t have instant equity now.
The best approach now is get into House/Land that can be built between 6-9 months. Loans will be disbursed at the time when Cash Rate is low; hence fixing your interest rate for the next 5 years means positive cashflow for you.

2.    You are highly suspicious that prices of properties in Australia will drop. House/Land packages are basic housing required in Australia. If you acquire a House/Land in the region of $320,000-$350,000, that’s pretty close to replacement cost. The risk of prices sliding further is minimal.

3.    You are worried if banks will ask you for ‘margin calls’ if property prices dip.
Singaporeans can relate to prices of properties dropping 20% and banks asking owners to ‘top up’. In Australia, banks don’t practice that. As long as you keep up with your interest repayments, banks don’t do margin calls for property investors.

According the Australian Bureau of Statistics, Melbourne is growing at a rate of 1000 people per week and developers are just not building enough houses to accommodation the growing population. The recent bushfire in regional Victoria further deepen the need to increase the supply of accommodation for residents in Victoria.  In the current credit environment, financing for big projects can be a challenge for developers and we have already seen developments stall because of lack of financing.

House/Land packages may be a good option for investors to get into the market quickly. Like Warren Buffet says, ‘Be fearful when others are greedy and be greedy when others are fearful’. I see more upside rewards than downside risks in the current market.

The Reserve Bank of Australia (RBA) and the Government have caused an outcome which was better than we might have expected, the rapid reduction in interest rates has increased yields and reduced holding costs making most investments cash flow positive, and the Government has increased incentives to first home buyers and reduced some taxes.

2008 was a year that proved to all that housing is a lower risk asset than any other. We have seen share markets adjust by about 40% and our super funds suffer a reduction of something in the order of 40% also. Had the same people invested in housing many investors would not be facing wealth destruction. This is not to say shares do not have a place in a diversified portfolio, it just highlights the advantages in property as a very stable investment.

Below highlights the median property values over the last 10yrs along with current rental yields.

 

Houses
Area	Median Value	Growth				Rent
		10 Years     % p.a.	Year Nov 2007 to Nov 2008	Nov 2008 Qtr	Nov 2008 Month	Rate Month Ending Dec 2008
ACT	$450,500	11.00%	0.87%	-2.52%	-1.21%	4.87%
Adelaide	$373,500	11.09%	7.75%	-0.43%	-0.24%	4.19%
Brisbane	$447,500	11.97%	4.48%	0.08%	-0.06%	4.20%
Darwin	$430,000	10.22%	9.44%	2.76%	1.08%	5.70%
Hobart	$350,500	12.26%	1.00%	-2.12%	2.01%	4.46%
Melbourne	$479,500	10.20%	2.36%	0.31%	0.51%	4.80%
Perth	$491,000	13.32%	-3.05%	-2.78%	-1.37%	3.72%
Sydney	$565,000	7.06%	-3.32%	-0.72%	0.45%	4.52%
Australia	$398,500	10.38%	2.97%	-0.08%	0.53%	4.58%

Source: Residex

On current market data, demographics, labour movements, etc. we believe that Perth still has adjustments to come. Perth in sheer dollar terms probably has the largest adjustment still left in it. Again our best guess is that it will probably revert to being the fourth most expensive capital city in Australia. Having said that it is not our expectation that it will achieve this via any dramatic falls. Currently, it would need to fall in value by about a further 5%. The more likely outcome is that we will see another couple of points fall over the next few months and then minimal growth, while places like Brisbane and Melbourne which have a less exposed economy, will provide higher rates of return. We need to recognise that Perth until recently was a city where home ownership was more the norm than rental, probably due to affordability, hence the pressure to sell properties other than in the top end will not be overly significant.

Looking further forward and given the global and domestic situation, growth of 2 to 5% would be expected. Over the last 5 years the property market has under preformed as the vast majority of capital flowed into the share market, however we are now seeing signs of that capital shift back into the property market. For example, Melbourne had an annual growth rate of only 4.5% between 2003 to 2008 compared with an annual rate of 9.5% between 1980 to 2003, Sydney also has a long term growth rate of 9.12% and has traded below this trend for some time. The old saying, “time is your friend”, is true in all markets and history tells us that when the share market loses momentum the key property markets like Melbourne and Sydney serge. The two years following the 1987 stock market crash, Melbourne grew from $100,000 to $185,000 and Sydney climbed from $130,000 to $185,000. Both cities had growth of about 20% per year, more than double their long term growth. While industry and share markets can expect lower cash flows, our housing markets will continue to provide increasing cash flows (rents) which will reduce the risks even further in an environment where interest rates are reducing. The massive shortage of supply will continue to cause increases in rents, with most major cities having a vacancy rate of only 1%. The more expensive suburbs in our cities will ease slightly due to job losses in the finance sector. Properties with rents under $450 per week will continue to remain strong.

The points below highlight why the Australian and US market are very different and will not suffer the same fiat.

USA Market	Australian Market
Millions of empty homes	Undersupply of more than 100,000 homes
Collapsing banking sector	One of the strongest banking sectors on earth
Non-recourse loans, without penalties	Australian owners cant walk away from loans
30% of all loans sub prime ( No doc loans)	Less than 2% sub prime ( No doc loans)
Credit crunch, bank lending almost stopped	Strong lending into the home sector
Stagnant population growth	Over 220,000 immigrating in 2009
No movement left in interest rates	RBA can still reduce rates by 4%
10%+ unemployment expected	Stable labour market currently at 5.1%
Trillion $+budget deficit	Budget surplus

 

 A tale of two markets.

A year ago, the danger to the housing sector was increasing interest rates and an ever increasing stock market. In 2009 the threat is unemployment. As this increases consumers are less likely to take out large mortgages, build new homes, or look at investment properties.

Australia is not the US or the UK and general house prices are not going to suffer the same decreases. However the prestige end of the Australian market place (A$700,000 to A$2M) has been rocked by the financial crisis, margin calls on shares, over exposure and retirement dreams have been shattered, country properties and holiday homes are flooding the market in many areas and these properties are coming onto the market by distressed sellers. With a reduced number of buyers, prices are taking a hit in this area and unfortunately this pulls the median house price down. As always the impact will vary in the luxury end of the market, “AAA, unique, irreplaceable” residences (A$5M to A$10M) will always have buyers, the second tier prestige homes are the most at risk. Areas like Brighton in Melbourne, the Gold coast in Queensland, holiday areas and many overpriced properties in mining towns across Australia will see significant reductions and may drop by 10 to 15%. Confidence is zapped, February and March will see the real pain in these areas and I don’t think we will see the bottom of this market until Sept/Oct 2009 when the prime selling period kicks back in. Falls in prestige house prices should not be extrapolated to the broader house prices, the million-dollar price point is less than 5% of the Australian market and does not represent the broader market.

The lower end of the Australian market (A$300,000 to $450,000), which represents 75% of all properties, remains strong and demand is consistent in most major city areas. The First Home Owners grant of up to $28,000 has provided a strong incentive, add to this mortgage rates have fallen by 30% over the last 12 months, and this has made home affordability in some areas the lowest since 1999. With rents still increasing due to undersupply, yields are increasing drawing more and more investors back into the market. Many vendors are already seeing opportunities to increase prices, many land developers have seen a jump of more than 15% in demand for land to build and with a reduction in apartment construction across the country due to the credit squeeze, this only adds to the undersupply. This area of the market is set for interesting times.

In short, housing continues to demonstrate its long term, low risk status having adjusted relatively little and is unlikely to adjust much further as the Government and the RBA takes action to put a floor under housing prices.

Australia will continue to provide a safe haven for capital flows, with a very stable Government and added lifestyle choices, Australia will always be a destination for international migration. Property is controlled by two basic factors - population growth and capital flows - both of which find their homes in Australia.

Article is contributed by Stephen Arnold, Director of PPG International Pty Ltd, a Melbourne based property acquisition and investment firm. PPG International specializes in helping investors in the area of wealth creation with residential properties in Australia. Stephen can be contacted at steve@ppgi.net.au.

The Reserve Bank of Australia lops rate by 100 basis points to bring the cash rate down to 3.25%; the lowest rate since 1960. So now depending on how much the banks react, this will give us market leading rates of around 5.00%pa.

This means that for every $100,000 borrowed, principal and interest repayments (30yrs @ 5.00%pa) will now represent about $536.00 per month (interest only will be $416.00 per month)

”There was a significant deterioration in world economic conditions late in 2008,” said RBA Governor Glenn Stevens in a statement accompanying the cut. ”The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world.”

All the major lenders, National Australia Bank, Commonwealth Bank and Westpac said they will be reviewing their rates.

The rate reduction comes hours after the Federal Government announced a $42 billion stimulus plan aimed at keeping the economy out of a recession. The spending includes some $12.7 billion in cash payments and $28 billion on new infrastructure projects including roads and schools.

Some industry experts are expecting another 50 basis point cut when the RBA meets in March; while some reckoned they will be a pause in March followed by another round of cuts in April to bring the cash rate down to 2.75%.

Today’s RBA’s rate cut follows the Federal Government’s revision of growth forecasts for the economy. The Rudd Government expects Australia’s growth to slow to 1% this fiscal year to 0.75% next year - one of the few economies to continue to expand.

For property investors who are seeking to lock in low rates, the time will be right for them in the coming months as RBA continues to cut rate and major banks passing the savings to investors. There is a small window of opportunity for investors to fix their rates, i.e. before the economy recovers and RBA putting up rate again.