Do government handouts work, or do they artificially inflate the property market?

source: SMH http://tinyurl.com/c7m4ypk

The number of people in NSW looking to buy their first home fell to its lowest level in 21 years in December, showing that the government's bid to encourage first-timers to buy new homes still has some way to go.

The senior economist at Australian Property Monitors, Andrew Wilson, said there were just 998 loans (for both new and existing homes) taken out by first-timers across the state, compared with 2217 in Victoria and 1556 in Western Australia.

The fall coincides with changes to first-home buyer incentives. The First Home Owner Grant was withdrawn on October 1 for purchasers of existing homes. It was replaced with a $15,000 grant to buy a new house or apartment priced below $650,000.

"It's the lowest number of first-home-buyer home loans approved in a month since January 1992," Dr Wilson said.

"And the proportion of first-home-buyer loans to total loans is 8.1 per cent in NSW, the lowest proportion ever recorded.

"The average over the 20 or so years is 18.7 per cent.

"We've seen a significant collapse . . . this shows that first-home buyers have not been activated to buy new homes."

A year earlier, in December 2011, 4256 first-home buyers took out loans. At that time first-home buyers were rushing to beat the end-of-year deadline on stamp duty savings of $22,490 which applied to all properties under $650,000. They also got the $7000 grant.

Fast forward to December 2012 and buyers had the same stamp duty exemptions, and a $15,000 grant, but only for new properties. They have until the end of this year to take up the O'Farrell government's carrot.

The decision to withdraw the stamp duty incentives for existing properties was announced in September 2011 as part of the state budget. Back then real estate agents were scathing. The Raine & Horne chief, Angus Raine, had urged the government to reconsider its decision because first-home buyers wouldn't go for new property, primarily as it was more expensive.

"This is not going to help young people jump off the rental market treadmill and into their own homes," Mr Raine said. The chairman of Ray White, Brian White, said the decision to cut the incentives wasn't "quality thinking".

Yesterday the BresicWhitney principal Shannan Whitney was surprised at the extent of the first-home buyer collapse. "Those numbers are quite dramatic," he said.

Mr Whitney said it showed that first-home buyers had rejected the government's goodies. "Frankly I think existing stock is a better-value option for them because you pay a premium for new."

Nationally the proportion of first-home buyers taking out home loans was 14.9 per cent. After the 8.1 per cent rate in NSW, the next lowest proportion of first-time loans was in Queensland at 12 per cent. "That was the lowest ever recorded in Queensland, too," Dr Wilson said.

The Master Builders Australia chief economist, Peter Jones, urged the Reserve Bank to cut interest rates at its March board meeting. "The decline in first-home buyers that continued in December is a concern, given the various incentives across several states to entice them into the market," Mr Jones said.

So what do you think? Do governments hand outs still work? Or are they designed to artificially inflate the property market?

I was in a writing mood, but SOOS Vs WARGENT have done all of the work for me!

Firstly, I really do need to thank Pete Wargent for saving me a hell of a lot of time in forming my own opinion regarding the recent article written by Philip Soos. I have a great deal of respect for the views and commentary Pete Wargent publishes on a regular basis.
Philip Soos is a Masters research student at the School of Humanities and Social Sciences, Deakin University, working towards a doctorate in political economy. He holds MBA and IT degrees from RMIT University and Swinburne University of Technology, respectively.
Here is where you will find his recent article http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/. Now, I do need to mention that back in July 2012 I did report on some of the findings from the cencus data that was collected in August of 2011 on Real Estate News - Sky Business. In fact Philip Soos said at the time "the 2011 census revealed Australia had 7.8 million households, 900,000 fewer than the NHSC’s figure, with population also growing by 300,000 fewer than previously estimated. These figures have come as such a shock that the NHSC chairman has reported that an undersupply could be incorrect".
  http://www.realestnews.com/html/ep185_7.html
 However, I have always said and I firmly believe that common sense will always be the best barometer there is. With findings that suggest there are 900,000 fewer dwellings than previously estimated, we would have seen a huge correction in the property market by now. Of course, this has not happened.
Enough from me. Take it away Pete Wargent! http://petewargent.blogspot.com.au/

Enjoy,

Iggy 

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The never ending credit card limit!

Raise The Debt Ceiling!!

Federal Reserve chairman Ben Bernanke has urged US lawmakers to lift the country's borrowing limit to avoid a potentially disastrous debt default, warning that the economy is still at risk from political gridlock over the deficit.

Likening Congress to a family arguing that it can improve its credit rating by deciding not to pay its credit card bill, Mr Bernanke said that raising the legal borrowing limit was not the same as authorising new government spending.

"It's very, very important that Congress takes the necessary action to raise the debt ceiling to avoid a situation where our government doesn't pay its bills," he told an event sponsored by the University of Michigan.

The US Treasury says the country bumped into its borrowing limit on December 31, and it is now employing special measures to enable the government to meet its financial obligations.

US leaders did agree at the beginning of January to extend tax cuts for all American families earning less than $US450,000 a year to avoid a portion of a "fiscal cliff" of policies that Bernanke had warned would likely tip the economy into recession.

But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic spending cuts that were postponed until March 1.

"We're not out of the woods because we are approaching a number of other fiscal critical watersheds coming up," Mr Bernanke warned.

The Fed last month opted to keep buying $US85 billion worth of Treasury bonds and mortgage-backed securities a month until it saw a significant improvement in the labor market outlook, in an aggressive bid to push down borrowing costs and spur hiring.

It has held interest rates at nearly zero since December 2008 and has said it will keep them at this ultra-low level until unemployment reaches 6.5 per cent, provided that inflation does not look likely to breach a threshold of 2.5 per cent. US unemployment in December remained at a lofty 7.8 per cent.

The president of the San Francisco Federal Reserve Bank, John Williams, said earlier on Monday that he expected the central bank's bond buying would be needed "well into the second half of 2013."

Minutes from the Fed's December 11-12 policy meeting released earlier this month showed several policy makers favored ending the bond purchases well before the end of this year, while a few officials thought the purchases would be warranted until the end of 2013.

A third policy-maker who spoke on Monday, Dennis Lockhart, president of the Atlanta Federal Reserve Bank, stressed that the open-ended, or meeting-to-meeting nature, of the Fed's commitment to buy assets did not mean the policy would continue indefinitely.

"'Open ended' does not mean 'without bound.' The program is not 'QE Infinity,'" he told the Rotary Club of Atlanta.

Read more: http://www.smh.com.au/business/world-business/stop-squabbling-and-raise-debt-ceiling-bernanke-20130115-2cqh0.html#ixzz2I2BJspHZ

A great read from Pete Wargent, author of Get A Financial Grip, shares and property investor, a good bloke - and retired!

http://petewargent.blogspot.co.uk/2013/01/what-advice-would-you-giver-your-16.html

Big Issue

I saw a potentially interesting article in The Big Issue magazine over the weekend, which posed the question: “What advice would you give to your 16 year old self?”

Unfortunately most of the respondents were self-satisfied celebrities who gave such useful hints as: “I would advise myself to once again accept that million dollar role in Spielberg’s film” or other such guff.

Celebrities, like politicians, are well versed in the art of not side-stepping questions, rather preferring to answer any poser with some pre-planned self-promotion (did you see my appearance on Weekend Sunrise? Oh stop it, I’m joking!).

You often hear people say things like “I have no regrets” or “if I had my time again I would nothing different”.

While it is true that we are ultimately the sum of our past experiences, I, like most people, would aim to do a whole range of things differently if I had my time again. I would try to spend less of my youth drinking Guinness. I would definitely try to smoke less. Most pertinently I would try to spend less of my time being an obnoxious twit.

For the purposes of today’s blog post, however, I will restrict myself to discussion of personal finance and investment. After all, I am highly doubtful that you have visited the financial Blogosphere today to hear such pearls of wisdom as “don’t be such a twit” (however incisive and enduring that little gem of advice may be).

Instead, the eight ideas that I would pass on to my 16 year old self would be these:

1 – Start today

The earlier you get started the longer you will have to compound your wealth and small progress today can snowball into great returns later. There will always (and I do mean always) be those telling you that now is a bad time to start. Resolve to get started and if you make some mistakes, so be it – resolve to learn from them.

2 – To compound your wealth, compound your education

Resolve to start learning about personal finance and investment and just keep learning.

I started 2013 I the same way that I started 2012, 2011 and 2010, by reading The Intelligent Investor by Ben Graham. This book is decades old but the relevance it continues to hold never fails to amaze.

If you understand investment then you don’t need to rely upon hot tips, hearsay and hogwash from others – you will know for yourself what constitutes a sound long-term investment.

Graham noted that after the Great Depression and a World War fewer than 5% of surveyed people believed that stocks represented a good investment. In fact, the dreadful run for the markets in the period after the Wall Street Crash from 1929-1945 stocks were seen by most as no better than a pure “gamble”.

And yet think back to 2007: virtually anyone who bought a stock was considered to be “an investor” – there was even talk of “nervous short-selling investors having been burned” which is about as big a contradiction as it is possible to make.

The reality is that when everyone else believes the sky is falling this is probably a fair indication that you will soon be able to buy quality assets at under intrinsic value. Thus it proved in the decade or so after the Second World War, with the Dow increasing an astonishing fivefold from around 100 to above 500.

So it is in property. A spate of commentators opining that “property goes up 10% per annum” or “property is safe because you can see it and touch it” was a sound indication that the end of the last great bull market was finally drawing near.

3 – You don’t have to spend all of your money

You often hear people say that they have come into some money so they had better spend it on a car or holiday before a commitment comes along that sees it ‘wasted’ on necessities. We should be very careful about the vocabulary that we feed our brains as it tends to be far more powerful than we ever realise.

I sometimes get asked if “anyone can make a million”? It’s a bit of a loaded question, but it’s certainly true that most people will come into a million dollars through their lives. Consider this: if you earn, say, $50,000 a year over a working lifetime of 40 years, then you will earn $2 million without taking into account wage increases for inflation.

So the question of whether you can make a million dollars is probably the wrong one. The real question is, can you keep a million dollars?

Oh, but what about expensive living costs, holidays and car running costs say you might ask? Well, I never said that it will come easy, I just say that it can be done. What are you prepared to sacrifice for your financial success?

By the way, the sacrifice needn’t be forever. You might have to forego expensive holidays when you are younger, but once you have achieved a certain level of financial success you will be able to go on holidays better than any you ever dreamed of.

4 – Mates are only impressed by cars for one month

16 year old boys desire flash cars to impress people with. Come to think of it, so do 35 year old boys. New cars tend to only interest your friends for a relatively short period of time - then they just start to cost you a lot of your hard-earned money.

By the way, see point 3 – you can buy amazing cars when you are older and wealthier. Better still, you can rent the cars of your dreams (and then give them back afterwards).

5 – A big house can be a bind

Conventional wisdom suggests that we should buy the most expensive house we can afford as a principal place of residence. This is by no means necessarily bad advice. What tends to happen is that people reach the level of attaining a well-paid position then proceed take on an enormous mortgage somewhere between the ages of 30 and 40.

If you are successful in paying down the debt over the duration of the mortgage this can lead to a good result, perhaps allowing you to down-size for your retirement. Be wary, however, that taking on ever-greater mortgage debt for your residence can restrict your ability to build a portfolio of other investments.

6 – Invest for the long term

All the evidence shows that if you can build a plan for the long term and invest in quality assets you will finish well ahead. Don’t focus too much on trying to outsmart the market over the short term – for most us it’s no better than guesswork.

7 – Don’t listen to people who don’t know what they’re talking about

Every weekday the news tells us that the All Ords has gone up or down by 20 points and everyone seems to have an opinion on what will happen to the market next. In truth, most people are fooled by randomness: they have sometimes guessed the market’s direction right before so they think that they will be able to do so again.

It’s fairly easy to work out whether someone knows their stuff: ask them what the All Ords actually comprises and how the index is measured or what the market’s average PE ratio and dividend yield are.

Much the same applies to the property markets – we all have some experience of property markets which seemingly creates instant experts of us all. Everyone seems to ‘know’ where the property market is headed, despite the greatest investors in history concluding that short-term outcomes are not predictable.

8 – Never, ever give up

When you hit upon problems, this is just the universe testing your resolve...now go get ‘em tiger!

Looking at refinancing your home loan? Then look beyond your monthly repayments....

 Many people look for cheaper interest rates out in the market place. It makes perfect sense, yet many only give importance to the monthly repayments. You should really look at the overall picture and by that I mean the 25 or 30 year commitment you are making when taking out a home loan, or recommitting to another lending institution when refinancing.

Let's use some very basic figures for the purpose of this example. I am going to use the figure of a $300,000 mortgage. This seems to be the figure the media like to use when there is a shift in interest rates up, down or neutral.
So here goes;

Mortgage $300,000 x 30 years x 7.5% (average over 30 years)
= $2,097.64 per month 
= $755,151.67 in repayments over 30 years 
= $455,151.67 in interest repayments over 30 years 

The industry average tells us that customers refinance their loans every 4 years. There is nothing wrong with refinancing, in fact since the introduction of the "No Exit Fee" legislation; it makes perfect sense to shop around and continue to shop around throughout the period of time you have a mortgage.

The biggest mistake people make when refinancing is refinancing for another 30 years. Of course the monthly repayments look attractive - they are meant to look attractive. Take a look at this example below assuming you had of locked in a fixed rate at 7.5% some 5 years when many panicked and fixed their home loan during the years when we were experiencing interest rates rising.

Mortgage $300,000 x 30 years x 7.5% (5 year fixed)
= $2,097.64 per month
= $109,710.92 interest paid over 5 years 
= $16,147.69 principal paid over 5 years 

Now, you may be starting to see where I am coming from. For the $16,147.69 paid off in principal over a 5 year period, you pay close to $110,000 in interest. To be able to make the absolute most in refinancing your mortgage, you should really refinance the amount that is owed for the number of years left on your original mortgage so that the $110,000 does not go to waste.

If you were to refinance the remaining amount owing over 30 years of say $285,000, the repayments per month would be $1,688.62, a difference per month of $409.02. The monthly difference would be very welcomed by the vast majority of families, however,  if you were to refinance for 25 years (taking in to account you have already paid 5 years worth of interest), the repayments would be $1,817,14.

The difference in total interest paid between loans at 5.89% over 25 years compared to a loan at 5.89% over 30 years is $62,758.67. That is a hell of a lot of money people should be taking in to consideration when looking for a cheaper monthly repayment. Of course the likelihood of seeing interest rates stay neutral over a 25 or 30 year period is 0, but the point of this example is to demonstrate just how much money people are willing to give away by constantly refinancing for a further 30 years. The only true beneficiaries of people refinancing for another 30 year term are the shareholders of banks.

Happy 2013 to all!!

Iggy Damiani

The RBA is doing nothing for the 5%...Boo Hoo!

The RBA is doing nothing for the 5%...Boo Hoo!

Over the past few months there has been so much talk about what the RBA should do, how they should move, over what period of time and…the banks being b*stards!!

Today I would rather focus on what the RBA has or hasn’t done and the way things are playing out for the 95% of the property buying market in Australia.

The RBA decided to leave interest rates on hold this November, and this was the first time in six years on Melbourne Cup Day that the RBA decided to not move the official cash rate.

The official cash rate currently sits at 3.25%, just 25 basis points for the historic lows during the financial crisis (GFC) of 3.00%.

There are many commentators that say we should not be looking at the current cash rate of 3.25% and comparing the “emergency lows” of the 3.00% cash rate at that time - it's simply nonsense.

In fact Stephen Koukoulas, the Managing Director of Market Economics and Senior Economic Advisor to the Prime Minister, Julia Gillard had this to say: “People talk of near 3% emergency cash rate now with no idea: during the GFC, AUD 65c, fiscal stimulus, 5% GDP; now AUD 104 cents, fiscal cuts 4% of GDP”.

Those figures are not at all disputed from my point of view. However, I’m sorry, but I do look at the current cash rate and ask questions. I also look at the figures during the GFC but I am more focused on what we are experiencing today.

Newton’s law

I personally use a very basic principle when investing (predominantly) in property. I use the principle of Sir Isaac Newton's 3^rd law – every action has an equal and opposite reaction.

So it brings me to this point.  Notwithstanding the fact that we are at or close to historically low interest rates, we see articles that highlight matters of concern and I quote:

“Almost 16 per cent of the nation's first-home buyers are in severe mortgage stress.

Those in Tasmania are leading the crisis with 17.2 per cent falling behind in repayments, being driven to refinance or pressured by banks to sell. This was closely followed by Northern Territory (17%), New South Wales and South Australia (both 16.4%), Victoria and Queensland (both 16%), ACT (15.2%), and Western Australia (14.4%).”

Now, reading that comment, one would have to ask: “Why are these people in severe mortgage stress”?

We are just 25 basis points from the historically low interest rates since the GFC. This week on the Property Observer website, John McGrath has gone on to say and I quote:

“The real recovery has been limited to the first-home buyer markets. Above $1 million there is no real depth.”

Now, this is where my issues begin.

The very fact that a high profile agent/entrepreneur/celebrity agent is willing to identify the fact that the property market has been recovering thanks to the first time buyers in the market, is a real concern to me, in particular when you take in to account the article that was released by the Herald Sun, even if we assume there may be 10% margin for error, the figures remain extremely high in terms of mortgage stress for the first home buyers.

Now, let’s be real for a moment. How many of you reading this article is out in the market place looking for a $1,000,000 plus property to purchase? According to statistics, only 5% of property transactions per annum are sold above the $1,000,000 price range in Australia. Yep, just 5%!

Let’s focus on the 95%!

Have a look at these comments from Christopher Joye on 1 May 2012:

“The problem was that these folks, who were typically punters from the financial services industry, were looking at house price falls in, say, Bondi, Bellevue Hill, and Vaucluse, and using these suburbs as a benchmark for the rest of the country. Yet with a median price of more than $1 million, these areas are representative of only around 5% of the national housing stock. They therefore tell us little about the remaining 95% of homes”. 

I spoke with Christopher Joye a few days ago regarding the comments he made in May 2012 and he informed me that the numbers remain the same. Only 5% of property transactions are above the $1,000,000 mark per annum.

Why there is so much focus on this million plus market is beyond me. The affluent markets typically see auction campaigns and not private treaty sales. When we look at the sub-$600,000 property market, the potential purchasers usually have a pre-approved loan based on their borrowing capacity subject to the size of deposit they have available for the property transaction.

Purchasers looking at $1,000,000 plus properties cannot borrow 90% of the value of the property as the LMI (lenders mortgage insurance) providers will not assist and they typically draw the line at $750,000 in borrowings - and if you have experienced trying to deal with LMI of late, we are pretty close to having to provide a DNA sample to get the loan over the line.

The moral of the story – let’s focus on the 95%!