January Perth Property Update- The Affordability Factor!

Welcome to the first Perth Property Update for 2011, where we bring you the latest on what is happening in the property market as well as take a closer look at the white elephant in the room that everyone seems to be ignoring…. The Affordability Factor!

We are also lucky enough to have insights from our own REIWA Property Manager of the year Denise Thompson on the rental market and Michael Mckenzie from Select Mortgage services on everything finance… all facets play a critical role in shaping the overall property market. So grab a drink, sit back and get stuck into this update!

What are the latest statistics telling us?

The supply of houses on the market reached its peak for 2010 at the start of December at 22,297 and tapered off towards Christmas, with owners using the holiday time to prepare their properties to hit the market in early January. I alone had 8 properties to bring on at various pricing points, so was concerned that the flood of new properties would not help what is already an over supplied buyers market.

Buyers have however come out in higher numbers and sales for the month across Perth are marginally up on December, with overall supply of homes for sale trending down (see table above)… Will this be the turning point for the Perth Market?  It’s too early to tell but I will be watching things very closely.

Rental market update- record tenant inquiry!

Insert By Denise Thompson, REIWA Property Manager of the year for 2010.

The Rental Market is HOT!

January has seen a welcome change for investors in the Perth rental market compared with the last quarter of 2010. We have had record levels of inquiry on all rental properties and in most cases we have been receiving multiple applications with some applicants offering in excess of advertised rent.

December was the flattest month for rental inquiry in 2010 with many properties coming up for re-letting having to reduce their asking price for rent. With the record low levels of demand we made the decision to write all leases in December with a 13 month period to expire in January next year instead of December. Some forward planning will see the tenancies now reviewed at the time of maximum rental demand.

The vacancy rate across our rental portfolio has now dropped to just below 3% and we historically see this lead to upward pressure to increase market rents being achieved. An increase in market rents usually precedes an increase in house prices , so we will be watching this closely as we go into February. As always we are reviewing all rents every 6 months to ensure we maintain the highest property returns.

We are noticing that the expectations of tenants have risen with it now almost impossible to let a property if it does not have air conditioning. There are lots of deals on split system air conditioning units available at the moment on interest free terms so there is no excuse to not provide it. Not only can you increase the attractiveness of your property and the rent but you should be able to write this expense off against your tax and use the deduction to help pay for it. After all, would you rent a property with out air conditioning?

Strengthen your purchasing position before buying!

Despite seeing more buyer numbers at home opens, the gap between someone being interested in a property and actually being in a position to purchase seems to still be a wide one. I am finding a large number of buyers having trouble with their finance and plenty of others needing to sell their home first before they can put an offer in on another with any certainty to complete the transaction.

In the past we have looked at first home buyers as being in a weaker purchasing position when making an offer but I am finding them to have the least complications and baggage. They may require more education on the purchasing process but it has been well worth the time and effort to help them make an informed decision.

So as a buyer where possible make sure you have your property sold before you purchase, that way you know what you can spend and don’t have to make a subject to sale offer. If you are concerned about not having a roof over your head in the change over, you can always make your settlement terms longer to give you enough time to find your next home.

Plus have a pre-approval in place before you start giving up your weekends to search for property, that way you can act decisively and have strong negotiation power coming from the certainty of your finance.

Carrying the finance on 2 properties

Insert By Michael Mckenzie, Select Mortgage Services

Although selling your home first will give you a much stronger and certain buying position, we are finding that a lot of our clients in this situation are trying to complete the transaction carrying the finance on both properties. This is due to a stronger negotiating position of an ‘unconditional offer’ and not a ‘subject sale offer’. This method also guarantees they don’t miss out on the purchase property, if another ‘unconditional’ offer comes in.

In these cases we are suggesting they consider having a longer/ extended settlement period for the purchase, giving them more opportunity to sell their current home without higher repayments. We also make sure they know the rental position for their property (as a fall back) and the cost of holding both properties per month, to help them make a more informed sale decision.

Before going to the market with the sale of your place, it is a great idea to get a certified valuation so you have an independent value position and can proceed with more confidence.

The Affordability Factor!

This month I wanted to discuss a major factor affecting underlying demand that is not going away… Affordability!

With the current interest rate at 7.0% for a no frill principal and interest home loan and the Perth median house price at $480,000 (REIWA:Sept Qtr) this gives an average loan payment $3386 per month or $40,637 per year!

So to live comfortably and not be on the brink of poverty the combined annual household income would need to be around $121,911 (3x mortgage payments). That is a big pay check for the average blue collar household!

We all want to live in a home that we can be proud of but sadly the “have it now” Y-generation are pushing the financial comfort zone and taking on bigger loans to get that dream home. It breaks my heart to see what happens when things don’t go according to the dream, one of the incomes is lost, interest rates rise, unexpected expenses creep up and there is no savings buffer in the bank… the dream becomes a nightmare and the home has to be sold.

3 tips to prevent financially over extending yourself

1. Adjust your expectations and work your way up the property ladder, no home is ever perfect so look to purchase a home that suits your needs and the wants can come later.

2. Base your decision on what you can afford to borrow, not the maximum you can borrow.

3. Keep a savings buffer of at least 3 months expenses, a mortgage offset account is a great place to keep this and save on interest.

Building v’s Established for 1st homebuyers

Insert By Michael Mckenzie, Select Mortgage Services

Historically the first homebuyer has embraced building, but since the late 90’s we have seen the cost of building go from sub $50,000 for a 4×2, to an entry level of about $200,000 for a similar product.  Granted the house size has increased over this time, but not enough to justify a rise of 200%.  Since the mid 90’s blocks of land in new release suburbs have also increased fourfold to a current average of $220,000 while average block size has decreased by over 20%.

So for first homebuyers just getting into the housing market at around $380,000-420,000, there is often no provision to make their house a home, given floor coverings, rear landscaping and window treatments often aren’t part of the package. These combined factors, not to mention most of the affordable blocks are well in the outer reaches of Perth, and incomes not increasing in line with property and building costs, are seeing clients go back to established dwellings, as close the the CBD or other major centres as their budget permits.

The need for affordable housing solutions and the opportunity for investors to profit by providing them

Clearly if we are to have affordable housing that is close to places of employment, public transport, services and amenities we need to start thinking differently about how and where we live.

Block sizes have already gotten smaller in the latest land releases with 400 sqm, the new BIG and we are finally starting to embrace inner city apartment living.

Shared independent living and alternative building methods

Imagine instead of living in a 4 x2 on the edge of the urban fringe, where 2 of your bedrooms are never used… You could choose to live in a better location in a shared dwelling with another independent couple or single for less than half the cost.

Hear me out- you would both have a master bedroom with ensuite, two living areas, lockable storage, guest powder room and could come and go as you like without interruption to the other.

Modular Housing

Now imagine instead of building with double brick you could readily use a quicker and more affordable building method- singlebrick, steel frame, wood frame or pre-cast modular housing…. If only we could be so open minded?

This does not have to be somewhere you live forever but a stepping stone that allows you to get ahead.

Sure there will be many challengers in the details but don’t you think our best minds could work them out if they gave it some attention?

I believe there is so much potential demand for this type of housing from many segments of the market- Retirees who want some extra cash to enjoy their later years, to investors who want a better return, to first home buyers who want to get into the market… there is the opportunity to profit from providing the solution!

Signing off…

Thanks for investing the time to read my January Perth Property Update, I would love to get your feedback so please let me know what you think on these topics by posting your comments below…

Remember that we are only too happy to sit down and discuss how we can help you over achieve your property goals for 2011. Just send me an email on jarrad@investorsedge.com.au to arrange a time to talk or grab a coffee.

You can contact Michael Mckenzie from Select Mortgage services for any of your Finance needs at michael.sms@iinet.net.au and Denise Thompson for any of your Property Management needs any where in Perth at denise@investorsedge.com.au

To Your Investing Success,

Jarrad Mahon

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