Question Mark

Data released by the Australian Bureau of Statistics and JP Morgan this week support my view that, although the overall residential market will begin a slow recovery during 2006, the new property sector looks set for a much longer period in the doldrums.

ABS figures show that approvals for new residential property fell by 1.9% in January to 11,890 '” the lowest since April 2001.

Stephen Walker, chief economist with JP Morgan, believes there’s a clear reason for the drop in approvals. “Each year over the past four years there have been, on average, 170,000 building approvals,” he says. “According to our analysis, demand is only soaking up 155,000 new properties per year. This means supply has been exceeding demand in the new property sector by almost 10%.”

A 10% oversupply is quite a serious situation. The only way the new property sector will recover is if the pace of development continues to slow. Prices must also moderate or remain the same. This will allow demand to catch up with, and eventually exceed, supply.

The problem, in my view, is that this recovery period could take almost as long as the period of oversupply itself. It could be several years before the new property sector begins to reverse the downward trend. By then, the rest of the market will be well into the next growth cycle.

If you’re looking at buying investment property for capital growth, it’s essential to steer well clear of areas that have experienced a significant amount of new development over the past few years. Prime examples are CBD high-rise apartments and new outer-suburban estates. The time you have to wait for demand to outstrip supply and prices to rise could severely hamper your capital growth prospects, making initial benefits such as stamp duty exemptions look decidedly less lucrative.

PROPERTY MANAGERS

We own a three bedroom unit on the Gold Coast that we lease to the holiday market. We had a written agreement with a management company but the rights were sold to another company one month into the agreement. This company ignored the income clauses in our contract. We gave them notice and appointed another (much better) manager.

Now we have to take action against the ex-managers to recover the lost income. We would like to avoid the court system and we're trying to find the most appropriate authority to lodge our claim with. Could you point us in the right direction?

You are sensible to avoid legal action. It’s possible that the costs would be far greater than the sum you’re claiming.

As a first step, you should exhaust all avenues with your former property manager. Write a letter clearly outlining what has happened and the amount of money you believe you have lost. Include a date by which you expect their response.

If you do not receive a satisfactory response, write a second letter saying you intend to contact the Queensland Office of Fair Trading to lodge a written complaint.

If you still have no joy from the management company, the next step is to lodge the complaint. See the office’s website.

The written complaint must be as clear and detailed as possible: outline all the circumstances relating to the issue, and include all relevant supporting documents, such as the letters you have written to the management company.

Once the office has received the complaint they will contact both you and the agent to try and resolve the issue. This is a conciliation process and the office has no power to make judgements. The aim is the mediate between both parties. There is no fee involved.

If your complaint is still unresolved, your next port of call is the Small Claims Tribunal, which is able to make judgements. The fees are generally quite low '” $71 for claims between $1500 and $7500.

I wish you the best of luck!

OVERSEAS INVESTOR

I live in the UK and I’d like information on buying an investment property in Australia. I’d eventually like to retire to Australia and live in the property myself.

The Australian Government has reasonably strict criteria regarding residential investment purchasing by foreigners.

In most cases, it seeks to channel foreign investment into activity that increases the supply of new residential property and benefits the local building industry and suppliers. This is why, generally speaking, foreigners are not permitted to buy established property.

Within these parameters, there are criteria regarding the type of new residential property you are permitted to buy:

• Newly built residential property. Foreign investors are generally able to buy it, provided the property has never been lived in before.
• Vacant land. Foreign investors are usually eligible to purchase it, as long as continuous, substantial construction of a new residential dwelling commences within 12 months of purchase.

In most cases, foreigners intending to buy real estate in Australia must seek approval beforehand from the Australian Government through the Foreign Investment Review Board. This applies to properties being auctioned as well as those transacted privately.

If you don’t seek approval beforehand, the contract to purchase must be made conditional upon approval by the board.

I suggest you visit the Foreign Investment Review Board’s website for more information, and contact them directly for more information on the investment restrictions that apply to your situation.

WARY OF OVERVALUATION

We are interested in buying a three-bedroom property in Port Melbourne as an investment, with a view to moving in ourselves in 10 years’ time. We’re looking to spend about $700,000.

I read Shane Oliver's recent Eureka Report article. He said the property value in Melbourne was overvalued by 20%. If this is the case, do we wait for prices to decline by 20% before we buy? Also, in terms of capital growth, are Port Melbourne or Williamstown good growth suburbs?

Like you, I read Shane’s comments (click here) with interest. Saying that all property is 20% overvalued fails to recognise a fundamental characteristic of property as an asset class: Property is a three dimensional asset. Every property, and every location, has different characteristics, and therefore different rates of capital growth.

I have a more positive outlook on the market. You might like to read my response to his article.

I believe the Melbourne market as a whole is beginning to find its feet after a couple of years of stagnation. I think we will see low to moderate capital growth in most areas over the next couple of years; somewhere in the region of 2–4%.

Because each property and each location performs differently, there will be considerable variation in growth prospects within this broad context.

For example, the CBD market is dominated by rental property, so it’s particularly sensitive to the ebb and flow of demand from investors. The outer-suburban market is dominated by building activity in new estates, and the budgets of young home buyers. Both markets can therefore expect to see more fits and starts in capital growth than established inner suburbs, which have a more consistent demand from investors as well as first and subsequent home buyers.

Port Melbourne and Williamstown are both inner suburbs with a relatively consistent pattern of demand. Barring a worldwide economic catastrophe (!) there is no chance that property in these areas will fall by the 20% Shane believes is necessary. So if you really want to buy there, you’ll have to bite the bullet and get on with it.

Remember though: the fact that you’re buying in one of these areas doesn’t mean you’ll automatically pick a winner. To maximise your rental and capital growth prospects, make sure you stick to these criteria:

• Buy in an area with consistent demand, such as a quiet street dominated by residential housing.
• Buy a property with an architectural style that is in short supply and is difficult to replicate.
• Ensure the property is not over-capitalised (the building shouldn’t account for more than 50% of the property’s overall value).
• Buy a property that doesn’t require a complete renovation. Minor renovations are fine, but spending tens of thousands on structural renovations like a new roof or restumping will eat into the property’s future capital growth.

BORROWING LIMITS

I want to buy my first home. I like the idea of living in the city, and I’ve got my eye on a studio apartment in the CBD. I don’t have much of a deposit saved, so I’m looking to borrow 90% of the property’s value.

The apartment is quite small (38 square metres). All the lenders I’ve approached say they won’t lend more than 80% of the property’s value because it’s less than 40 square metres. What should I do?

Lenders spend a lot of money analysing the property market, to minimise their risk when assessing home loan applications. They believe the CBD residential market is riskier market than the more established areas. This is why they may lend up to 97% of a property’s value in an established area, but only a maximum of 80% in the CBD.

They’re particularly conservative when it comes to very small properties, which are usually studio apartments. Many studio apartments are rented to students, so the rental income is subject to fluctuation and there may be a higher risk of purchasers defaulting on the loan.

Recently, lenders have begun relaxing their criteria for some purchasers and some kinds of property. Some lenders will now consider lending more than 80% of a property’s value, even if the property is less than 50 square metres.

However, it’s really a case-by-case situation. For example, some lenders won’t lend money for a property without a laundry, or for a serviced apartment. Others will lend money, but on the condition that you pay mortgage insurance if you borrow more than 60% of the property’s value. This is a stricter threshold than they apply to less risky property, where mortgage insurance is usually required on borrowings over 80% of the value.

In short, the fact that lenders are generally adopting a more relaxed approach doesn’t necessarily mean you’ll qualify for a loan.

If you continue to meet with knockbacks, it is clear that lenders across the board view the property as too great a risk. In this case, I suggest you reconsider your proposed purchase.

Mark Armstrong is Director of Property Planning Australia www.propertyplanning.com.au, an integrated property advisory and mortgage sourcing service. He also writes for Australian Property Investor magazine www.apimagazine.com.au.

You can email any questions regarding property to Mark Armstrong right here, by clicking questionmark@eurekareport.com.au