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Not in may backyard say first time buyers

Date: 12th December 2007

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The mining boom is more likely to dictate the value of a property purchase than your home address, writes David Potts.

For Martin Perelman buying his first property was a case of "go west young man, and turn left at Adelaide".

That's correct, the unlikely boom town of 2008 will be Adelaide, if the experts are right.

Investors in other capital cities will be eating crow - oops, Freudian slip - as real estate prices taper off from what has been a good year everywhere but western Sydney, where they will just stay down, and Perth, where they have peaked.

Perelman, 29, looked to Adelaide for his first property purchase because he could snap up a two-bedroom two-storey townhouse within five kilometres of the CBD for $236,000. The property is already let for $245 a week.

He is paying more rent in Sydney than interest on his mortgage in Adelaide, in part thanks to his broker, Wayne Dive of Smartline, who organised a fixed three-year loan at 7.69per cent - four rate rises below the standard variable rate.

Rate rises

It is the threat of another interest rate rise that could yet put the mockers on property prices.

"The signs are that clearance rates have peaked. I could feel the hesitation last weekend," warns John Wakefield of CPM Research.

Once a rate rise is out of the way, the market will more than likely take it in its stride.

For all the bad press - who, me? - that rising rates get, they aren't the be-all and end-all of property prices.

With the rental market as tight as a drum, there won't be too many investors who will lose sleep over rising rates, which are tax deductible anyway.

Research group BIS Shrapnel is forecasting price rises of up to 10per cent next year despite its expectation of a rate rise about March next year.

But even three rate rises might do no more than halve the growth in price increases, says Robert Mellor, BIS Shrapnel building services director.

That should get things in perspective: a doomsday scenario for interest rates still has property getting off lightly. Home prices are driven more by population and job growth, location and land availability over time than interest rates.

Most of all, there is a shortage of places to live, in a period when we have record immigration.

BIS Shrapnel calculates the shortfall this year was about 30,000 houses and units.

Besides, there is likely to be a one-off boost next year to property investment because, as the panel shows, DIY super funds can borrow for the first time.

It is no secret that a lot of DIY fund trustees would prefer to be in property rather than shares - especially when the sharemarket is so volatile - but can't afford it unless they are able to borrow.

Michael McNamara of Australian Property Monitors has a theory that the natural ceiling for the property market is a median house price of $550,000.

"At $550,000 the market is maxed out. The debt train runs out of track," McNamara says.

That's why Melbourne and Brisbane prices can still rise another 10 to 15per cent, but Sydney and Perth will be flat except at the top end, where different rules apply.

Among all the capital cities, including Canberra, Hobart and Darwin, there is only a 16per cent gap between the dearest and cheapest unit prices, McNamara says.

That is unprecedented, lending weight to his argument of a natural ceiling.

Hot spots

But back to Adelaide.

Perelman invested there because "it's an up-and-coming place with all the mining opening up [at Roxby Downs]."

Good move. Adelaide home unit prices soared by 31per cent this year, the RP Data-Rismark Hedonic Index shows.

Mellor admits that: "Adelaide surprised us."

The city had not been doing well in the migration stakes, but the statistician rejigged the immigration figures and discovered South Australia is gaining more than 13,000 residents a year from overseas, while 3600 residents pack up their bags for other states.

Adelaide's only drawback for investors is not having the land constraints of Sydney and Brisbane.

With low vacancy rates and Roxby Downs on its doorstep (well, it's closer to Adelaide than anywhere else) prices should rise 8per cent, Mellor says. "Adelaide is quite affordable and remember it's extremely well placed for the resources boom," McNamara says.

"It never got the 40-per-cent-a-year growth of Perth and Darwin, so it's got much more sustainable double-digit growth."

Adelaide is even attracting investors from Perth, last year's hot spot, said Rod Cornish, head of property research at Macquarie Bank.

For all Perth's proximity to the resources boom, apparently enough is enough. Housing prices have reached those of Sydney, which is to say they are expensive.

So it is the same old problem of affordability, which also suggests the two property markets most sensitive to another rate rise would be Perth and Sydney.

Even then, a rate rise in the new year would mean "the return of investors in 12 months' time," Mellor predicts.

With the exception of Perth, where BIS Shrapnel expects a 1 or 2per cent drop in prices next year, everywhere within a bull's roar of a mine is hot. In fact probably very hot this time of year.

Financial adviser and property specialist Richard Sheppard is recommending Gladstone in central Queensland for residential and commercial properties to his clients.

With a population of 30,000, annual spending is worth $700,000 per person, he says.

Gladstone is one of the epicentres of the resources boom, and its port is being expanded.

Brisbane remains a hot spot, with spill overs to the Gold and Sunshine coasts.

Even so, the days when Sydney and Melbourne investors could pick up a property at half the price they would pay for next door are long gone.

Rents in Brisbane are starting to soar, a siren song for investors.

Mellor predicts 10per cent growth in prices in Brisbane next year which is better than Adelaide, but dearer to get into..

Melbourne hasn't looked back since the number of auctions took off after the footy grand final.

"Its fundamentals are very good," Mellor says. These include an unusually low vacancy rate, and prices should rise an average 7per cent next year. Rents will also rise.

Sydney's outer ring can expect stable prices or very low growth at best next year.

Affordability was worst in Sydney so "even a 10per cent increase in the middle rung would run out of steam very quickly," Mellor warns.

It is a different story for rental returns. Sydney will get the same growth in rents that other cities are getting from property prices.

"Strong rental growth will last three or four years," Mellor forecasts for Sydney, growing annually by 7 to 10 per cent.

Houses vs units

Units usually lag behind house prices - but not this time.

This year, the growth in unit prices has outstripped home prices, especially outside Sydney and Melbourne, the RP Data-Rismark Hedonic Index shows.

In top-end suburbs buyers are paying "similar money for apartments as they would for houses," says John McGrath, chief executive of McGrath Estate Agents.

"Apartments are increasingly attracting older couples with teenage kids, empty nesters and professionals," he says.

In inner Brisbane, prices of new units soared 32per cent in the September quarter, says Alison Timchur of Colliers.

But it is ahead of Sydney in terms of rental growth "by a couple of years", Mellor says.

"Many home buyers are considering medium- and higher-density housing as more affordable options in a market where affordability is very low," says Noel Dyett, president of the Real Estate Institute of Australia.

But McNamara is more pessimistic.

"I'm forming the view that unit price growth in Brisbane and Melbourne will come to a screaming halt this year," he says.

Oddly enough, rents are rising faster for houses than units.

Asking rents for Sydney houses jumped 14 per cent in the year to September compared with 12 per cent for units, Australian Property Monitors found.

In Melbourne, the gap was even wider: 16 per cent for houses and 12 per cent for units.

New or old

The other odd thing about this property cycle is that established houses tend to be cheaper than new ones.

The price hike is due to rising construction prices and the fact that this is the first time we have had a building slump when interest rates did not also drop.

"The gap has widened, especially in Sydney," Cornish says.

"Established home prices need to pick up before construction can pick up."

Office space will boom but don't forget local shopping centres

The hottest property category over time has been the local shopping centre with a supermarket in it, Perpetual's property outlook reveals.

Over 22 years, shopping centres have returned almost 15percent a year on average, comfortably ahead of the sharemarket, residential real estate or other properties. The way to buy one is through a property trust or syndicate.

But lately, office space in Brisbane - now the most expensive in the country - and Perth has been hot. In fact without office blocks, listed property trusts, which had until this year been one of the best performing asset classes for a good five years, would be in a sorry state.

Office property has "another year to run" predicts John Wakefield of CPM Research.

And although Perth and Brisbane have extremely low vacancy rates, Perpetual warns "office markets are cyclical and longer term the picture may be more subdued."

Macquarie's head of property research, Rod Cornish, says the Brisbane and Perth markets are "exceptional." But he says the likely hot spot next year will be office space in Sydney, mainly from stronger rents.

And don't think shopping centres are past it, either. Record immigration will boost spending on food which in turn will push up rents.

The only catch is that the easiest way to invest in retail or office property is through listed property trusts but they've become more volatile because of higher borrowings.

Also, LPTs compete with cash and bond yields, so rising interest rates hurt their unit prices.

"We are recommending some switching out of property trusts into a mix of infrastructure and high-yielding fixed-interest investments," says Justin McLaughlin, head of research at Bridges Financial Services.

It's a warranty: super funds can gear into real estate

Negative gearing was always a good tax rort, so just imagine if super funds could borrow too.

There would be the same breaks plus the ultimate prize of no capital gains tax when you sell the property. Just thinking about it is enough to make you drool.

For the first time, DIY super funds can be used to borrow for residential or commercial property thanks to a recent Tax Office ruling.

It has to be done a bit differently mind you but, hey, super will be super.

If you didn't know DIY funds can now be used to borrow you haven't been reading Investor, or perhaps you just didn't believe me. Gee, thanks.

Anyway, the borrowing is really an instalment warrant though it sounds trickier than it is.

You make an up-front payment which, for argument's sake, is the deposit, then down the track, you make a second instalment to pay out the loan. You still pay interest - deductible in the fund, naturally.

While it's a roundabout route for doing the bleeding obvious, if it makes the Tax Office happy, who's complaining?

But since you asked, it rather fancies the idea that if the property proves a dud, you can just skip making the second payment.

True, you'd lose it along with the first payment but from its point of view, that's better than defaulting on a loan allowing a lender to seize the property plus possibly everything else in your super fund.

The whole point of negative gearing - indeed, the only point since you're losing money in the meantime - is that you expect a nice juicy capital gain when you sell which will be taxed at only half your normal rate.

But if you're negative gearing in super, there's no capital gains tax at all once you move into pension payment mode or you're over 60.

The result is a spectacular gain. For example, if the property increases in value by 4percent a year, on a $300,000 loan the DIY super fund would do almost $45,000 better than negative gearing after 10 years.

At a 10percent rise in values, the DIY fund's advantage widens to more than $145,000 over negative gearing, says Quantum Warrants (

And that's only the half of it. Not only is there a huge tax break at the end, by salary sacrificing into it for the first payment, you're off to a good start too.

Why stop there? If you're self-employed or earn less than 10percent of your income from one employer, you'll get a tax deduction on what you pay into super.

Yes, you'd be getting a deduction on the deposit which you certainly can't do with negative gearing.

The only drawback to instalment loans is a higher interest rate because the lender can't force you to cough up.

For example, Quantum Warrants charges 8.95percent compared with the bank standard variable rate of 8.57percent.

There's also an annual fee of about 5percent which takes into account the fact that it will be managing the property since it will be the trustee.

By the way, that's another bonus. Apart from choosing the property (although Quantum Warrants will do that too if you ask) and signing on the bottom line, you don't have to do another thing for 10 years which is the term of the loan - sorry, warrant - apart from the annual interest payment. And yes, Quantum deals with any pesky tenant.

Quantum will lend up to 80percent for a residential place, and 65percent for commercial property such as an office, says national sales manager Andrew Bone.

You can sell at any time and repay the loan. And during the term of the warrant, your fund gets to keep the net rent even though it doesn't own the property till you make the second instalment.

Richard Sheppard (above) used his super fund and Quantum Warrants to buy the property for his business, inSynergy Financial Solutions, but he says, while gearing in super is better than nothing, it isn't necessarily better than negatively gearing yourself.

"You can't transfer losses to other income in super," he warns.

And there are "limitations in gearing as well as the costs of doing it through super. It's easier to gear with your personal income on high tax rates."

And since property should be bought and held, by the time you get around to selling it, capital gains tax shouldn't be an issue anyway.

"I wouldn't recommend selling a property so you could invest in it through super," says Sheppard.

But he says gearing through super "gave us the opportunity to own our business premises" and he's planning to use warrants to buy properties in the booming Queensland centre of Gladstone for his super fund.


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