No Risk v Low Risk

12 months ago, I was spruiking the prospects of an improving market from 2019. That has not happened due to three disruptive events.

The first was the election which has now gone and so have a host of political pygmies from both major parties. Another is the backwash of the BRC. The banks are now focussing on resetting practices and procedures as it relates to mortgage applications. The period from January – June 2019 was the worst that I have experienced in my 35 years in real estate and I have many friends who agree. As an example, Pt Lincoln, in any given year, has 400 property sales but in the last financial year there were only 188. This theme is consistent throughout Australia. Suffice to say, our major banks came within 12 months of generating our own GFC all in the name of greed and CEO bonuses. Thankfully, these two disruptive events of 2019 will be out of our system by the end of this year.

The third, and most important, is the low interest rate regime. The perception is that a low interest rate environment is a bad omen but in fact it is the “new normal” Here is a summary of the impact of low interest rates.

Currently there are 5 million mortgagors in Australia who have saved money due to the last drop of .15% in their interest rate. At the same time 18 million depositor accounts have lost money because the banks have adjusted their interest rate down by between .25 – .35%. Out of the 18 million depositors 30% are into retirement mode or near to. It is those that have now realised that they cannot expect to live a life of dignity based on a zero risk investment plan. A zero risk plan is based on term deposits that are now yielding on average 1.85% and that may go lower into the future. If you want to generate a salary of $37,000 on an interest rate of 1.85% you will need to invest $2m. Have you got $2m and is $37,000 enough? The time has arrived when you will need to take some risk. Residential real estate is a low risk option that now must be part of your investment portfolio.

To explain here is a recent case study. 18 months ago a client asked me to sell an inherited property when the tenancy expired. 3 months ago, the tenancy expired, and a meeting was held, and the opening remark was ‘I hope I don’t disappoint you but we have decided not to sell.’ 2 days prior the CBA advised the client that their rollover term deposit had dropped from 2.21% to 1.84%. He calculated that it was better to rent the property and earn double that at around 3.4% net.

It has been evident since the GFC that wage rises have stalled and at the same time employees are being signed up on casual rather than fixed contracts. A critical component in a mortgage application is job security and without that many mortgage applications will be declined therefore demand for rental properties will increase and this will underpin the growth prospects and reduce the risk elements of residential property. The properties that I recommend have a market value of under $300,000, rented at $280 p.w and with a borrowing rate of 3.6% on an investment loan of 70% of the purchase price you are cash positive. That means that no top-up is required in order to sustain the investment over time. Secondly it is best if you buy a property that needs an upgrade to cost $15 – $20,000. If done prudently with my guidance and assistance the value of your property will increase by between $25 – $30,000 which makes the upgrade process a very good investment in itself and the rent will rise above $300 p.w which will increase the yield.

Remember the story of Telstra where in 2011 you could buy the shares at $2.80 paying a fully franked dividend of 28 cents on a 10% yield. Those shares rose to nearly $6.75 in early 2015 but then the monopoly started to fade, and they dropped back to $2.60 in June 2018. Currently their share price is around $3.50, at a yield of 2.85%. That theme may be replicated with other high yielding blue chip stocks that are suspect to the disruption of the 4th Revolution.

Adelaide remains the only capital city that has not had a decent upward move in its residential property market, lower than even Hobart. Nothing has changed from the major infrastructure announcements of last year and accordingly the Adelaide residential property market presents as the best in Australia.

Between now and Christmas I will be ringing you to have a chat. It costs little to talk and less to listen and I will be all ears.

Leave a comment