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I may stand-alone here, but Sydney’s done – there I said it!
Normally, locations go flat when they become unaffordable or major infrastructure projects are abandoned but this time it may be at the hands of the banks, the governing bodies and the ATO.
Now making a statement like this is bold. Firstly, you need fundamental facts to back it up and these are the things I research – knowing where and when to invest, along with when to stop investing in an area. And lastly, we need an alternative place to invest. So, here we go:
The first sign for me that Sydney was on the cusp of a change was on April 23rd. A fundamental bank policy change that two major banks announced was the reason. This change stated that effective April 24th at 5pm, all Non-Resident lending Loan to Value Ratios (LVR) would be reduced from 80% of purchase price to 70%. Meaning borrowers must have another 10% cash to put towards the purchase.
One of those banks was the biggest lender to Chinese borrowers. The myth that the Chinese are all paying cash for houses is simply not true. The best Business Development Manager (BDM) that this bank employs has seen an immediate drop of 25% in mortgage volume since this change. Now that’s one BDM, for one bank, in one district of Sydney.
There is no question the overseas buyers are pushing our prices up but it’s not just the Chinese. They accounted for $27.7 billion in property transactions last year but the USA purchased $17 billion, Canada $15 billion and Malaysia $7.2 billion. The falling Aussie dollar has made our property much more attractive to them along with a buoyant property market.
But like usual, when there is money, there are Sharks looking for loopholes. So bringing sunshine to my eyes, are the ATO. Yeah, you won’t hear me say that too often. They are currently investigating 150 cases of unlawful purchases from overseas buyers. The loophole is done through trusts and companies. There appears to be a loophole in the FIRB’s (Foreign Investment Review Board) approval process for developers too. The great thing is that the ATO are a big enough player to bring this behavior to a halt and prosecute those offenders. Watch this space!
With the rate drop in May, one would think this would fuel more buyers to pay more. The funny part is that even though interest rates dropped, as a borrower your borrowing capacity hasn’t increased. wHy?
Banks are servicing your loan application at the 7% mark. This is a protection mechanism to safeguard you when interest rates rise in the future. This 7% mark hasn’t shifted in the last 3-5 interest rate drops. So no matter how much the rates still go down, your ability to service more debt will not increase unless your income does.
Banks must now also hold more funds in managed accounts per mortgage they approve. Meaning for every $300k mortgage the bank must hold $600k in managed funds. This has doubled in recent years. Hence we’ve seen Managed Funds increase to 3.05% in May when interest rates decreased. This was done to attract more consumers to invest their money. Consequently, this reduced the banks profits by another 0.25%. So it comes as no surprise that in mid May the interest rate war between the banks ended. One major bank no longer discounts interest rates for investment loans. The others will follow.
The governing body for mortgages, APRA (Australian Prudential Regulation Authority), have also told the banks that if their investment portion of their portfolio has increased by over 10% this year, then they must hold another $500 million in managed funds. Meaning banks will now be reluctant to pass this level and reduce interest rate discounts on investment loans.
The Median house price in Sydney has topped $900k. Insane, I know. Now according to the ABS, the Median income is $80,048 per annum. So a couple with two children, who each earn $80k, have a maximum borrowing capacity of between $800k – $1 mill. They have reached their cap.
So to summerise:
<ul>
<li>The banks are slowing up lending to Non Residents</li>
<li>The ATO are stopping illegal overseas transactions, plus reversing illegal purchases</li>
<li>Interest rates have dropped, but you can’t borrow any extra funds</li>
<li>The banks are stopping interest rate discounts to investors</li>
<li>The Sydney property market has seen fantastic capital growth for over 2 years</li>
<li>Property prices are unaffordable</li>
</ul>
Now given that investment loans now account for 50% of all mortgages written, the above corrections will see a drastic decrease in investor activity. This decrease will significantly impact consumer confidence across the board. And the end of the Sydney property cycle will be here.
Think about it… You have been inspecting houses for the past 2 months and you’re used to a high volume of purchasers inspecting and turning up to auctions. Then, the next week the volume is halved. Would that get you thinking? Is there something going on that I don’t know about? Your consumer confidence has just been shot.
So, after all this doom and gloom, wHere and wHat do we invest in?
The key to investing, is buying in great locations in the low part of the property cycle. Where consumer confidence is at its lowest. wHere is this the case?
South East QLD is an emerging market where those who get in RIGHT now will benefit. If you wait until Christmas, you have missed the boat. But the market to really focus on right now is Perth. Currently Perth is on the “No Go” list, which is exactly why I am there. With no-one buying, consumer confidence is non-existent. Hence, we have seen some significant price decreases. This makes for some great buying.
But why is Perth not performing currently?
The reason is that most people consider Perth as purely driven by mining, like it’s a giant mining town. I laugh when I hear this, as Perth is a capital city with over 2 million people. The same size as Brisbane, yes that’s right!
Sure, Perth has mining influence (as does Brisbane) but it has a whole bunch more too. The fall of the mining boom has made for some great buying though. Discounts off list price we have not seen in a few years. In fact, we are buying most of the properties at pre 2006-07 prices.
There are two points to be wary of though. Firstly, the rental market is also seeing a correction with rents dropping around 10% in the last year. Do your numbers with a low 5% yield not 5.7%+ and adjust your purchase price accordingly.
Secondly, Perth is winning across the country in the ‘smallest residential blocks’ award. They are down to 200m2. No, that’s not a typo! Stick to blocks over the 400m2 and above, as these will be the properties to see land value growth in the years to come.
So, I will be monitoring the property market in Sydney over the coming months, as property data is all past tense. And a change now won’t be reflected for another 3-6 months. But one thing I know for Sydney is – get ready for a significant correction, the writing’s on the wall.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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Sydney's insane - where to next? Todd Hunter

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The Sydney real estate market is nothing short of idiotic…
So-called experts, along with the media, are hyping up the situation, stating that Sydney is still affordable to the average punter.
What a load of bollocks…
The median income being around $75,000 does not equate to being able to afford the Sydney median house price now, at over $900k.
Even if a couple were earning $75,000 each, it still doesn’t mathematically work.
Unless my calculator is broken?
So, when does all this mayhem start to correct itself?
Well, today I stand-alone and say the change started from last week…
But why you ask?
There was a fundamental bank policy change that took affect on April 24th. The change in policy affects non-residents trying to borrow in Australia.
Where Non-Residents were able to borrow up to 80% of the purchase price, this has now been reduced by 2 major banks down to 70%.
The statistic’s published by the FIRB this week show that the Chinese have taken over as the major buyers of real estate in our country – no surprise there!
But how much are they actually buying? Well we can only work out these numbers based on the approvals they have. I say that as many are buying properties without approval.
Joe Hockey forced the sale of the $39 million Sydney mansion recently that has now been sold… but this is happening on a much larger scale. We recently had a client call us who wanted to invest. This lady had a large home mortgage on a property already but wanted to buy an investment property with cash that she was receiving from her mother from overseas.
We rightly refused the business, but I am sure they managed to buy a property using another property company.
By using the approval figures published, let’s number out the volume of purchases. The stats say that the Chinese have spent 27.7 Billion on property this year alone. The majority of these sales would be in Melbourne and Sydney.
Using the new median in Sydney of $900k, this would equate to 30,777 property transactions.
Monthly this equates to 2,564 deals per month.
If we say that one third were in Sydney, one third in Melbourne and one third for the remainder of Australia, then the number now looks more like 855 sales per month in Sydney.
That number doesn’t look that big now does it???
But, we need to add in the other major players too. The US spent $17 Billion, Canada $15 Billion and Malaysia $7.2 Billion.
So the volume now becomes more substantial…
Everybody is saying though that the Chinese are paying cash for all these houses?
Are they? – I think not!
If they were, why have 2 banks reduced their LVR for those borrowers?
<ul>
<li>Could be that they are over exposed to overseas borrowers.</li>
<li>Could be APRA now have a close eye on them.</li>
<li>Overseas borrowers are much harder to chase, should the properties go into mortgagee in possession.</li>
</ul>
But think about it like this… wHy would these two banks broadcast this through a major announcement for no reason?
Simply because they want to curb the volume of mortgage applications that come in!
Even the banks Business Development Managers (BDM’s) are nervous as they know the exact volume of loans that do come in from Non-Residents. They are nervous as they are paid on volume and they know the volume will now reduce.
The effective date of this change was April 24th and it was effective immediately as well. Now usually banks will allow a grace period for those loans already pre approved to still proceed under the old policy, for a period of around 2 months. That didn’t happen here. Any loans that had not found a property within 24 hours of the notice would now fall under the new policy.
Now call me skeptical, but that seems very definite to me!!!
So what does all that have to do with the Sydney Property Market?
Consumer confidence…
What Sydney has at the moment is a massive consumer confidence problem. This is fuelled by the media and the hype of overseas buyers, along with investors paying more for houses than what owner occupiers can afford. There is a huge fear of missing out and consequently people are paying way too much for a property.
After two solid years of capital growth in Sydney, not only do overseas buyers now have to pay another $200k more for the same property, but they now must also put another 10% – $90k cash towards the purchase. The new extra $5k tax they pay won’t affect things but it all adds up.
So, if you take the sting out of the market, you take away consumer confidence and markets begin to turn…
Why would this occur when we have the lowest interest rates we have ever seen? Even after interest rates were cut this week?
Low interest rates will not save the market. They may prolong it a little, but not save it.
APRA have stopped the banks and consumers hanging themselves for a while. When you apply for a loan, the bank will assess the deal at 7.1% even though interest rates are almost hitting 4%, after this week’s announcement.
APRA forced them to do this to stop potential future mortgagee possessions. But what it has meant, is that for the past 4-6 interest rate cuts, your borrowing power has not increased in the eyes of the banks. Sure your actual repayments have but they wont allow you to borrow any more than what you can afford at 7.1%.
But those house prices continue to rise… meaning that there comes a point where your affordability in a mortgage wont allow you to pay anymore for a property.
The other interesting point to make here is, if the interest rates stay low for ten years, will this market continue?
No Chance!!!
We already have low interest rates in Perth and the market there is dead. Why? Because the vast majority believe that Perth is a mining town. That’s not the case… Perth is a major city of two million people… the mining is a mere blimp in their overall economy.
But this perception has knocked the wind out of people’s Consumer Confidence.
Canberra, until very recently, had the same problem too. The government announced 16,000 public servants to be retrenched and consumer confidence flew out the window in the ACT. It never happened, but this lack of confidence took control and dictated what the market did.
Greece, Spain, Japan, USA all have extremely low interest rates and their property markets are terrible.
So, I make the stand and say, I believe from today we will see the start of a change. Many less overseas buyers, far less affordability and a strong property market where many buyers who have already purchased are out of the market, will see a turn towards slowing down.
I guess we will have to go back and check in six months or so, as this is how long it takes for property data to take affect. The deals being pre approved in May, might buy in June. Which then settle in August. The banks bulk stamp transfers these days around twice a month which would take the data into September… ready for reporting by Christmas.
Time will tell…
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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Low interest rates will not save all markets: Todd Hunter

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GUEST OBSERVATION
My most read and commented on blog was <a href="https://www.urban.com.au/news/25963-sept-5-flicker-3-todd-hunter-&amp;sa=U&amp;ei=7FMrVdjsLILksAXor4DgBQ&amp;ved=0CAQQFjAA&amp;client=internal-uds-cse&amp;usg=AFQjCNGqLbshlgPB4R7fTCAJq4VGF2NneA" target="_blank">my thoughts on the NRAS “scheme</a>”.
Well, I can say I was right and the story of this “scheme” only gets worse I’m afraid.
Earlier this year I had a client call me and let me know her NRAS property in Sydney that she purchased through another property company had been trashed. She only found this out after not receiving rent for two months. This sparked her to inspect the house to find they had fled the house and left it damaged along with rubbish everywhere.
When she investigated it further, she found that four bedroom house had eight people living in the house. The lease agreement was only approved as having four people living there. The consortium managing the property had not done any of the required property inspections, like they had said they would do.
And funny enough, they now don’t return her phone calls.
So after spending several thousands of dollars in repairing and cleaning the house, they thought they may want to sell it. The bad experience had put a foul taste in their mouth. I offered to refer her to a friend who is an agent, who works in the area and they have done an inspection. Now the fun begins…
The agent gave them what they believed to be fair market value price in a strong Sydney market and this dollar figure was still $80,000 less than what they paid for the house.
So, now they have a house that has been trashed, now vacant and worth far less than what they paid for it.
Could it get any worse?
Yes it can.
Now I don’t know the reasons why, but it would appear that the government department responsible for NRAS has amalgamated with another government department and as a consequence many (and quite probably all) of the tax refunds for NRAS were not paid for the last financial year, due to a software glitch that they couldn’t repair.
These payments amount to close to $10,000 per annum that the investor is supposed to receive back in compensation for letting out their property 20% below market value.
To make it even better, they have no ETA on when the problem will be fixed, if at all.
This was money these investors could have really done with to help pay for the trashed and damaged property they have been left with.
So I am sorry, but have I missed the positives of NRAS?
TODD HUNTER is a buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
This article was originally posted on <a href="https://www.wheregroup.com.au/blog/todd-hunter/" target="_blank">Todd's blog</a>.
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NRAS – you've got to be kidding me: Todd Hunter

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GUEST OBSERVATION
Why is it that people say property is forever and that we never sell?
Talking to as many investors as I do each year, I pick up on similarities that investors have mentioned to me after they have spoken to other property companies.
And it’s scary stuff.
We recently did a 'James Bond secret spy mission' and did some research on other companies, what they offer and their sales speeches compared to what they actually do.
It meant we had to make dummy customer calls, pretending to want to invest and ask them all about what they do and offer. We also ordered a ton of those free reports online, where you put an email address in and get a free property report.
We even have attended seminars and heard all the hype first hand.
And I will say it again, boy it’s scary stuff!
Now, company names will be left out of this, along with locations, but we are going to reveal the latest shark scam.
The problem is that it is so basic and consumers are buying into it.
It is simply sharp sales people earning peoples trust then bam, they get blindsided.
So what am I talking about; all over the internet, throughout all the investment magazines, inundating social media and being promoted through thousands of emails every month are property companies and so called "buyer's agents” saying one thing, and then offering the complete opposite.
To try and gain credibility in the market place these so called experts offer commentary and advice on all topics relating to investing in property.
Now I am for various people making comments on different types and ways to invest but if you do offer commentary on certain topics as a great way to invest, then you should also be practicing the same way in your business.  Practice what you preach.
The classic one that comes to mind is buying properties that are under market value in locations that you get the inside word on before all the herds come running in and pump up the values.
Pretty much what we do.
They even offer tips on how to negotiate a huge discount on the purchase price.
Then you call them and they then earn your trust to then simply offer you a house and land package or townhouse or unit development off the plan.
But weren’t you just telling me how to negotiate a property under market value?
But there’s no negotiating price on a house and land package? You are actually paying retail and, in most cases, well beyond the retail price because of the huge hidden kickbacks up to $60,000 per property.
How’s that under market value in a location secret to all other investors?
Then the classic property investing line comes into play, you never sell property because it’s a long-term investment.
Ever wondered why they say that?
Because you just paid $60,000 over retail in the way of hidden kickbacks and that property market requires a good ten years to recover.
To recover the $60,000 loss on top of the retail price you paid but also because some of those investors will liquidate after a few years and take a huge loss, creating a downward spiral effect in that suburb.
That loss can be as high as $140,000 on houses that were worth $480,000 when sold.
And guess who’s there ready to buy these houses at that point. Yep that’s right, the guy who practices what he preaches.
And that is why so many property companies say property is forever, to cover their bum.
So if your looking to invest shortly, do yourself a favor and read through the magazines, websites, social media and You Tube videos and make notes on who says what. Then call em and have a chat and see if they back up what they say.
TODD HUNTER is a buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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The latest property shark scheme catching buyers out: Todd Hunter

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GUEST OBSERVATION
The performing Sydney and Melbourne property markets are no secret. They are all over social media and the news.
And for those home owners and investors who have had the great fortune to see their property values skyrocket, what’s next?
Why not take advantage of the fantastic values currently on offer and tap into some of that equity and keep investing?
But what does “tap into our equity” actually mean?
Similar to when you purchased your property, the banks would only allow you to borrow up to so much of the value of that property. This is called your Loan to Value Ratio (LVR). Well, provided you can service the debt at the increased amount (make the repayments), the banks will allow you to increase your loan up to a certain LVR and use that cash for a deposit on an investment property.
The great part about that is, that the increased amount that you use as the deposit on another property is tax deductible, even though the banks used your home as security for the funds.
Why?
Purely because what makes a loan tax deductible is the purpose for which those funds were used.
Like usual, let’s number this out.  
Say three years ago your home was worth $600,000 and your home loan was $480,000. Your LVR is 80% because $480,000 is 80% of $600,000. But in the last three years your home has seen some great increases in value and it is now worth $850,000.
The banks will now allow you to increase your loan to 80% of $850,000. So your new loan would be $680,000. But you only owe $480,000 so there is $200,000 available for you in available funds, in your offset account or in redraw ready for you to use when you locate another property.
Now to keep your accountant happy, it is best to split the $680,000 into two loans, one split for $480,000 and the second as $200,000. That way your accountant can easily work out the interest on the loan that they can claim on your tax each year.
Obviously, this is how we would structure your loan and explain all this to you as we go.
At the same time as arrange the extra cash for you to use as a deposit, we would arrange a pre approval for you so that you could purchase an investment property.
Even if you have some extra money paid off your home loan, do not use this but instead continue to make the extra repayments on your home loan to pay this off first. Simply because this debt is not tax deductible.
You should restrict the maximum amount you aim to spend on an investment property, and that should be nowhere near the value of your home.
Even as a professional investor I don’t spend over $425,000 on a property. My last four purchases were for:
<ul>
<li>$410,000 – ACT</li>
<li>$40,000 – in the USA</li>
<li>$356,000 – QLD</li>
<li>$134,000 – Tassie</li>
</ul>
The advantages of spending less are:
<ul>
<li>Diversify</li>
<li>Less to lose, if by some chance everything turned pear-shaped (always invest with worst case in mind)</li>
<li>Potentially be able to invest in different markets and take advantages of different property cycles</li>
<li>Baby steps – especially if this is your first go, I see couples where one of them wants to invest much more than the other, and it’s not worth fighting over. You’ve only got one life and it ain’t no dress rehearsal. (Sorry if I just went all Dr Phil on you)</li>
<li>Yields are generally more attractive and the properties will pay for themselves</li>
</ul>
So back to the story, we have set up a pre-approval at the same time for you for a purchase price of $375,000. The loan would be for $300,000 which is an 80% LVR.
But there are some set up costs along the way to, for example:
<ul>
<li>Stamp duty – varies state to state</li>
<li>Legals to purchase</li>
<li>Building inspection report</li>
<li>Pest nnspection report</li>
<li>Depreciation schedule report – for tax purposes</li>
<li>Government charges</li>
<li>Buyers agent fees – because you will want me to buy you a property</li>
</ul>
The great thing here is that you can pay for all these from the $200,000 loan you have already set up.
Yep, that’s right nothing from your pocket and the interest these fees attract on that loan is also tax deductible.
Now to make that transaction work you only require around $100,000 and you have borrowed and extra $200,000, meaning you have the option later on to possible purchase a second investment property. But by tapping into the equity now whilst the values are high, could give you the option at a later date. When values go through a correction you may not get that privilege. And you only pay interest on the money that you have used, e.g. the $100,000.
Now, not everyone is in a position to tap into their equity and invest, as they may have borrowed 95% of the purchase price when they recently purchased.
What you may have been experiencing, is that there are some much better interest rates on offer. They can be as much as 0.5% better.
So what can be done about this?
Firstly, interest rates are now allocated as rate for risk, meaning those higher risk borrowers to the banks are not on the same interest rates as those borrowers who own 20% or more of their properties.
And this risk is judged on the value on the day that a valuer puts a dollar figure on your property. So as we have experienced some great growth in the Sydney and Melbourne property market, you may now find that you do own 20% of the property value now.
But be quick, because this great market isn’t going to stick around much longer and you want to capitalize on the maximum value you can achieve.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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Time to tap in to some equity and keep investing: Todd Hunter

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GUEST OBSERVATION
It’s no secret that when I invest I am looking for a bargain.
In fact, I am looking for the property owner who needs to liquidate and exit from their property (either home or investment) fast and take a significant loss in the process.
But with interest rates at historic lows, this task can become a lot tougher and probably more difficult, as we look like having another interest rate drop or two.
That said, it may surprise you that even in an awesome property market, like what Sydney is experiencing right now, that 2.7% of all property sales were sold for less than what they were paid for.
And if we were to include entry and exit costs like:
<ul>
<li>Stamp Duty</li>
<li>Legals to purchase</li>
<li>Loan application fees</li>
<li>Transfer registration fees</li>
<li>Mortgage registration fees</li>
<li>Building reports</li>
<li>Pest inspection reports</li>
<li>Depreciation Schedules</li>
<li>Ongoing council rates</li>
<li>Ongoing water rates</li>
<li>Legals to sell</li>
<li>Real estate sales commissions; then this percentage would probably be more like 15%.</li>
</ul>
Now, ‘time in market’ could, and can, play in whether you make a profit on a property or not. But that said, 3.2% of those sellers who owned their properties for between 10-15 years sold for a loss. Work that one out.
I know who would be happy, those Sydney purchasers who made it into the 2.7%.
But I thought property prices never went down? Ha, try and tell that to these old owners.
Now the vast majority of property sale losses occurred for owners who only owned their property for three to five years (18.2%) and five to seven years (15.6%).
Basically from the global financial crisis (GFC), but not limited to.
Now not to pick on Sydney, but they got off the lightest. Their percentage of losses in sales were low, but the number of property transactions are high.
Nationally the numbers are scarier, with 9% of all sales making a loss for the June 2014 quarter. That’s 6,332 property owners across Australia who sold their property for a loss within that three month time frame. Units in Cairns, Queensland and Widebay, South Australia were the worst performers though, with close to 50% of sales losing money.
And backing what I have been yabbering on about for many years now, are the oversupply of units in Melbourne, with 18.3% losing money. That’s almost one in five properties sold for a loss. It’s an interesting figure given the buoyant property market there currently.
So, what’s the point in all this?
In trying to locate a deal on a property purchase, they are still there, but you need to be more diligent on your research to find these awesome deals. They are still around in ‘hot’ markets like Sydney and Melbourne but are much more prevalent in cooler markets like Adelaide or ACT.
For our recent investors though, in locations like the Gold Coast (15%), Bunbury (15%), Wyong (7.8%) Mandurah (18.9%) Armadale (6.4%) and Townsville (27%), you can be happy knowing that we have located deals for you in these small percentiles of owners who made a loss.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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Sometimes, someone else's loss can be your gain: Todd Hunter

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GUEST OBSERVATION
So two weeks ago I babbled on about how <a href="https://www.urban.com.au/expert-insights/38589-time-for-a-reality-check-property-prices-certainly-can-and-do-go-down&amp;sa=U&amp;ei=xlGTVKj0IKirmAXS14DICg&amp;ved=0CAYQFjAA&amp;client=internal-uds-cse&amp;usg=AFQjCNGFXFdD1_onPGFfIQQOa8KwxvEPKw" target="_blank">Sydney property prices will go down in value</a> and how many property buyers live in a fantasy world where they don’t think it will or has ever decreased.
So I thought I would go into one Sydney suburb, diagnose the stats and show you that it can be a reality for this suburb.
There was no science in choosing Castle Hill as the suburb of choice. I didn’t troll through pages and pages of data to choose this particular suburb though.
Looking at the latest CoreLogic RP Data stats as at September 2014, <a href="https://www.urban.com.au/property-observer" target="_blank">Castle Hill</a> has a median house price of a whopping $982,000.
Yep that’s right, its going to cost you just shy of a $1 million to buy in Castle Hill. In fact, it will probably cost you more. Even a three bedroom unit sold over weekend for $920,000. Yes, a unit.
According to CoreLogic RP Data it has grown in value 19% in the last year and 49% over the last five years. So in English, in 2009 you could buy in Castle Hill for $650,000.
With an average ‘days on market’ of 29 days, it is showing that the market is still red hot. So I would assume that we will see the magic million mark passed by Christmas, if not already.
Yields have failed to keep up, like many Sydney suburbs. They do their best work in a quiet market where no new houses are being built and the supply dries up. That said, the median rent is $650 per week.
So forget investing there, with a yield at 3.4% you can achieve this in a bank account without the risk. It’s one of those suburbs where it is cheaper to rent than to purchase! And the volume of sales, 576, shows significant numbers that can be relied upon. Be wary of sale figures in a low sales volume environment.
Now we need to add some income and other fun facts into the mixing bowl from the 2011 Census. Of all the working families, 41% had one major breadwinner whilst the other partner either worked part time or not at all. The suburb averages three people per dwelling and they own two cars.
The median family income is $2,059 per week – that’s a tidy $107,068 per annum.
But hang-on, that’s the whole household income and that’s gross before tax. So take home in hand is $1,487 per week, well for 41% of families it is.
Now lets go back and look at the house figures again and put the income and other stats in.
Let’s stick with the median house price at $982,000. If you were to purchase with a 20% deposit you would require around a $230,000 deposit and have a loan for $785,600. With an interest rate of 4.8% the principle and interest payments it equals $951 per week over 30 years.
That’s a whopping 63.9% of your net income per week going towards your mortgage. Does that sound like it makes financial sense? Better hope interest rates do not ever go up, or that you have a child, or both. That’s a recipe for bankruptcy.
But hang on, wasn’t the average people per household three? Oh, so they do want to have a family and a house in Castle Hill. Uh oh.
Now I have gone and checked with the banks that they would even lend you the money, and I can confidently tell you that even the banks are not that crazy. So if that’s the case, then how are people affording to buy these properties if the banks wont give them a loan that size?
Well, there are possibly several answers here:
<ul>
<li>They have larger than 20% deposits</li>
<li>They could be investors from other suburbs, so their incomes are different</li>
<li>The lower incomes earners may have owned property for a while when prices were lower</li>
<li>The higher income earners are buying the properties today</li>
</ul>
As the median income is the middle income achieved in the area, this means there are certainly income earners on a higher income than $107,000. It is more than likely these people, who are on incomes of $135,000 or higher, who are purchasing properties at this level. Doing some numbers here on servicing and income categories, it is those families in the top third percentile that could only realistically afford properties at this level. 
But hey, let’s go crazy and pretend interest rates will go up (we all know that never happens) and let’s say they go up to 8% – that same scenario above with the higher income earner at $135,000 can no longer afford to get that loan.
Can they afford to make the loan repayments though?
$785,600 principle and interest at 8% equals $1,329, which equates to 73% of their income, which leaves them $485 per week for:
<ul>
<li>Food to feed a family of three</li>
<li>Fuel for two cars</li>
<li>Rego</li>
<li>Council &amp; Water rates</li>
<li>Alcohol and possibly cigarettes</li>
<li>Bills</li>
<li>School fees</li>
</ul>
So it could potentially be done, but you would be living on bread and water and in reality this family would go bankrupt.
Remember my tip: Always do your sums on 9%.
And the figures are telling me that this is going to be a common story for Castle Hill in the coming years.
The numbers are leaning towards a suburb that is living well beyond its means and I would say that there a little of the “keeping up with the Joneses” going on here too and that’s a recipe for one mighty price correction.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
Picture of a Castle Hill house courtesy of Wikimedia Commons.
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Falling down Castle Hill: Diagnosing a suburb living way beyond its means

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GUEST OBSERVATION
In the past few weeks, I have spoken to several people who all think that property prices never fall and will only plateau. 
One guy even convinced himself that house prices didn’t go down in the global financial crisis (GFC). 
Wow, memories are short lived and the power of current day marketing can sure twist and make people believe whatever they publish. 
It’s scary to think that people are so naïve to think property always goes up. Look at historical numbers, it’s not the case. In fact Google it and see for yourself. 
Now some may call me a 'doomsdayer', but nah, I’m a realist who has lived through two major price corrections in the property market, along with a few smaller ones too. 
I’m sure the owners and investors on the Gold Coast would agree with me. The GFC took a hard hit on this region, in particular places like Hope Island, with the median house price dropping 19% over four years. Yes that’s right, for four years the house prices keep reducing. Even today, they are still not back to 2009 levels. 
We all remember the huge unprecedented WA boom of 2005-2007. House prices in Wannanup (Port Bouvard) dropped 17% in two years. So think about it this way, your $60,000 house is now worth $500,000 two years later. 
But given that Sydney is immune to this, lets look at Caringbah (where I live). The median four bedroom houses in 2010 was $997,500 and then it went down to $884,500 in 2012.
Huh? No way, it can’t go down, Caringbah. In Sydney. Must be a misprint.
No – it did drop, and dropped by 11% in two years, only two years ago. 
Sure, prices have since jumped again and surpassed previous levels but there were many who realised that loss. Remember, the median can only be calculated by actual sales, meaning many in Caringbah sold cheap for those two years. 
We have been purchasing houses in Brisbane that were sold to investors in 2007 for $460,000 and seven years later we are picking them up for $360,000 – $375,000. That’s a lazy $100,000 loss plus stamp duty and legals and real estate sales commissions, so it’s more like $130,000. Or around a 22% drop in value. 
Units have a similar story. Don’t be the owner of a two bedroom unit in Crestwood NSW (near Canberra) as they have had negative growth for over three years totalling 16%. 
Now I can already hear some of you saying “well you only lose if you sell”. Well yes, if you like to sell it to yourself that way then that’s fine, but the value of your property has reduced. 
Let’s explain it in a different way – if you had $460,000 in a cash management account and then seven years later you only had $360,000 would you think about it the same way? I don’t think you would; the same way self-funded retirees don’t.
Now the figures I have quoted are on house sales or actual experiences and not the general median house price. The reason is because the general median house price is incorrect. I have<a href="https://www.wheregroup.com.au/the-median-measurement-is-misaligned/" target="_blank"> written this previously</a>.
Well, the winners of this huge upswing in houses prices, particularly Sydney property owners, are those who are selling or those who are taking advantage of higher valuations and using the equity to invest in more property. But not those home owners who sell and buy in the same market, they are virtually in the same place. 
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Those buying now in Sydney are nothing short of crazy in my opinion. Even if Sydney continues to rise a little more, all that means is the correction will hurt even more. Historically low interest rates and borrowing to your maximum borrowing level is suicide. Rates are going to go up at some stage. 
Now if you have been living in a cave lately and not up to date on whats going on in the Sydney/ Melbourne markets, let me explain.
List prices are set by real estate agents as the properties fairly true value. Negotiations generally take place from there, downwards. But of late, the list price is a starting guide to head upwards from. Auctions see the hammer falling far beyond the reserve price and by all accounts foreign investment is also driving prices above where they should be. 
Looking at that practically, when you pay more than retail, are you not buying your own future capital growth? 
In what world does that make sense? 
It seems I am not the only one here either. Bank of Queensland (BOQ) recently announced it is restricting all lending for Sydney and Melbourne securitized loans. All of the majors have tightened their belts in relation to investment lending and high LVR loans are more and more difficult to get approved. 
It would appear the hierarchy hob knobs are also getting a little nervous.
But it’s not the same picture in all capital cities, so here are my thoughts on each of them: 
<ul>
<li>Sydney – Don’t touch, not until interest rates are over 7% and prices drop dramatically. </li>
<li>Melbourne – Don’t touch, major oversupply issues in many markets. Not sure when it’s a good time to re-enter at this stage. </li>
<li>Adelaide – some good buys but yields are low.  </li>
<li>Hobart – some good buying, timing is right but stay to low purchase prices under $250,000.  </li>
<li>Darwin – sorry haven’t researched of late but never found anything worth while buying up there.  </li>
<li>Canberra – timing is right but be wary of oversupply issues in Gungahlin area.  </li>
<li>Perth – coming off the boil. Some opportunities will start to reveal themselves soon.  </li>
<li>Brisbane – Market is hitting full swing, still some good buying opportunities but you must be Johnny on the Spot and make quick decisions.</li>
</ul>
So be smart, don’t be a statistic! Do your numbers on a minimum 9% interest rates and if you can afford the mortgage at that level then you should be fairly safe to proceed. That is, of course, that your own personal circumstances don’t change in the future. 
And don’t kid yourself that interest rates wont go up. From late 2010 til early 2012 (18 months) they were over 7% and from early 2008 til early 2009 they were almost 9%. That’s twice in the last six years. 
Now, I know I am just barking and no-one is going to really pay attention to this… blah blah blah… but when I invest: 
<ul>
<li>I do my numbers at principle and interest at 9%. </li>
<li>Invest with an exit strategy in mind as you never know what life throws at you. </li>
<li>Always have rainy day money aside.</li>
</ul>
So I guess time will tell, one thing I know is, that I will be cashed up ready to pounce for when rates go up and Sydney house prices go down.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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Time for a reality check: Property prices certainly can, and do, go down

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We all know how ridiculous house prices are currently in Sydney, Melbourne and Perth – so how are our children ever going to be able to afford a house in 10 or 20 years?
The answer is that they are not.
Well, not without some serious heartache or help from you.
Yep, Mum and Dad, you aren’t out of it yet. They may have left the nest but they are still going to be dependent on you for a while to get a place of their own, unless they have a fantastic well paying job, have a strong business head on their shoulders, or get help from you.
So why not be smart about the help you are probably going to have to give anyway?
Sure, you can tap into some equity in your home in 20 years and give them a deposit for a house. But that may mean you are now back in debt, when you really shouldn’t be.
Or you may not even be in a financial position to be able to offer them that privilege. You should be looking at your own retirement plan and you probably don’t want to have to factor in this huge financial hurdle.
So why not do it now?
Why not get them into a cheap property right now – in the right location of course – and let it sit there for 10 or 20 years and grow in value. Then once the property is sold, they have a ready-made deposit without you having to dip into your own savings or equity further.
Given that kids are not buying their first home until they are in their late 20s or 30s, doing this when they are in their late teens is not too late.
I would stick to cheaper properties as they tend to pay for themselves, meaning the rent pays the interest on the loan, so any extra payments they make go directly off the principal of the loan.
So let’s work this out a bit more for you.
You have one child, 12 years old. You buy a cheap property for them. Now when I say cheap, there is no reason why you cannot buy a property for under $250,000.
Where are they?
All through regional New South Wales and Victoria, Tasmania (where you can buy for $150,000) and regional South Australia in good areas that, over the long term, will perform well enough to help the kids out.
Sure Sydney and Melbourne will be better locations to invest in generally, but remember: we are trying to build a deposit for the kids over a 10 to 20 year time frame.
You also want properties where the rent pays for the interest on the loan. 
You can invest in higher priced properties but this will depend on the level of help you want to give, your affordability to invest and the number of children you have, so we've have kept it at a budget level for you.
As your gift to them, you fund the deposit (under $30,000) on the property and you pay the council and water rates plus insurance each year at around $2,500. You could use equity to fund the $30,000 if you have this available.
Be wary of the trust structure as land tax may kick in and the savings you may think you are making over 18 years can be outweighed by the cost of selling the property and paying CGT and stamp duty again. Talk to your accountant here first.
Now you have invested in a regional location for $250,000, which rents for $290 per week. Given these are long term investments, it would be advisable to lock in the loan at a good fixed rate whilst they are low.
But don’t keep the property a secret, let the children know what you have done.
Let them get an appreciation of what you have done for them along with knowing that the property is theirs, ready for when they want to buy their own home.
You could even go as far as creating a photo folder, so they can look at the property often. This will help spur their interest in bricks and mortar. Let them file the rental receipts and loan statements into the folder so they have a sense of ownership.
Even better, why not get them to start paying off the principal now?
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How?
Start teaching them the value of a dollar, so when they start earning pocket money by doing chores, they start to put 50% of their pocket money onto the loan.
Even if its only $2, make sure they put that aside. At first, they will not want to - but after a while, they will insist that they put it onto the loan.
Teach them the effects of compound saving – there are plenty of websites that can help you explain this.
But you must put this money on the loan, don't forget – and show them the effect of their actions on internet banking.The penny may not drop straight away, but it will. When the loan statements come in for the loan, make sure you give them a copy to put in their folder so they can see the benefits of what they are achieving.
You are teaching them good financial practice.
As the rents increase over time, and the loan starts to become more positively geared, put all the extra rent onto the loan, paying down the principal.
You may even find that they start wanting to mow the lawns of the entire street to earn more pocket money.
This desire will increase when they get their first pay packet in their part time job. Same deal: 50% of their pay packet to go towards their loan.
So by the time they get their first full time job, they will be in tune with the right savings attitude and put aside as much as they can towards the loan. Half of their pay would be ideal, but may be unachievable pending their lifestyle at the time. They should be able to put at least 30% aside if they still live at home.
Now until they have a full time job, the principal will reduce very minimally. But now they are working full time, and earning, say, $30,000 per annum. This means they earn $532 net per week.
So putting aside 50% each means they are putting $266 per week onto the loan. That equals $13,832 per annum.
At this rate, the positive gearing is increasing weekly and creating a snow ball effect, getting bigger and bigger as it rolls on.
From here it gets hypothetical. But let's work on one scenario. The kid stays home until they are 25 years old. They increase their income each year by $2,000 gross from 18 years old til 25 years old. Very easily achievable.
In the time before they've reached 18 years of age, they have accumulated $10,000 onto the loan through doing chores at home and working part time.
I have assumed an interest rate at 5% (although it won’t stay there forever, but you will lock in for the first five years).
They stick to their 50% net income savings regime while living at home. The rent on the property increases by $10 every six months = $20 per week per annum. This would be the loan balance after each year.
<ul>
<li>Year 1 = $214,637   (Principal reduces by $25,363 – includes initial $10k)</li>
<li>Year 2 = $195,408   ( by $19,229)</li>
<li>Year 3 = $173,420   (by $21,988)</li>
<li>Year 4 = $148,530   (by $24,890)</li>
<li>Year 5 = $120,641   (by $27,889)</li>
<li>Year 6 = $89,699   (by $30,942)</li>
<li>Year 7 = $52,551   (by $37,148)</li>
</ul>
So as you can see the snow ball effect is created by an increase in income, increase in rent and compound interest savings.
Now I don’t need to show you that if they went on until they were 30 years old, that they would fully own the property. 
And here’s the kicker: If we use a minimal 4% capital growth (this is low) on the property for the 18 years between the ages of 12 and 30, then that $250,000- property is now worth $526,000 – and it cost you around $75,000 ($30,000 initially, plus 18 years of $2,500 holding costs per annum).
Now we’re talking. $500,000 will certainly get them started in the property game.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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Cheers Mum and Dad: How you can invest in your child's future

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GUEST OBSERVATION
We have had a client that has had their loan declined in recent times due to the minutest details and strange circumstances.
Let me paint a picture – They are existing clients with one of the majors and they have an investment loan, credit card and savings account all with the same bank. So they are loyal bank clients.
Being very diligent with their money, they put everything they earnt onto their home loan and left a small amount in their savings account to live off. Then when their loan repayment was due, they would redraw money from their home loan account and put it back into their savings account. The bank then direct debited their loan repayment from their savings account.
A small oversight saw their savings account overdrawn by $100 with a direct debit they forgot about.
So now, when they applied for a new loan, we obviously went with that same bank and the $100 overdrawn account sent a red flag to the lender.
Upon further digging, they then assumed that these clients were redrawing funds to simply make their loan repayment. Now this was true, but only because they were putting everything onto their home loan to save on their interest, but the lender did not see it this way.
Even though they had over $80,000 in their redraw.
It does beg the question as to why the bank allowed them to over draw a savings account in the first place? If there is no money in the account, then they shouldn’t be able to access credit. Were they ever approved for this credit? Was there an application? I think not.
There was also no practicality taken into account for this decision; it was a pure black and white policy that they adhered to. As a consequence, they lost that client and will now lose all their business in the near future.
And it’s this kind of stupidity that clients remember for life.
So what can you do to ensure you have everything up to scratch when you apply for a loan? 
<ol>
<li>Make your everyday account an offset account, that way there is no shuffling of money. 
</li>
<li>Always have a buffer in your working accounts – lenders frown upon overdrawn accounts now with the new credit reporting. 
</li>
<li>Regular ATM withdrawals from clubs and pubs (if you love a beer or a punt, then get your cash out from the banks ATM’s prior), lenders see everything now. Think twice before you withdraw funds at these type of establishments. Not to mention, it will also save you the $2.50 plus ATM fee. 
</li>
<li>Credit cards, do not go over your limit, another big no no. Regardless of whether you pay the whole credit card off at the end of the month, as soon as you start going over your limit, it’s a red flag and even the best of applications get declined for this reason alone. 
</li>
<li>Any bills that are late, even your phone bills, by more than five days etc, these are all recorded on the new credit reporting system. So if you think you are winning by paying late, be prepared for a surprise the next time you apply for a loan. Regardless of what you earn. 
</li>
<li>If you do move money around a lot to save interest, then set automatic transfers in case you forget.</li>
</ol>
So, I guess the moral of the story is pay your bills on time, every time.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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Todd Hunter

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