Question Mark

Data released by two of the nation’s key researchers confirm my belief that the residential property market is beginning to make a gradual recovery. As for how good the recovery is, and where it’s happening'¦ well, that depends on whose statistics you choose.

According to property researchers BIS Shrapnel, which released its latest property index along with real estate agents LJ Hooker last week, the Sydney house market dropped by 0.5 per cent during the March quarter '” a good performance relative to the slide of the last few years. Brisbane remained steady, while Melbourne increased by a robust 4.7 per cent.

Over at rival research firm Residex, the quarterly median figures had Sydney dropping by 2.2 per cent, Melbourne jumping by almost 6 per cent, and Brisbane inching upwards, at 1.7 per cent.

Both firms had good news for Perth investors, though again the figures differed considerably. BIS Shrapnel pegged the city’s increase at 4.6 per cent over the six months to March, while the Residex data showed a more bullish increase of 10.1 per cent in the last quarter alone.

Differences in median figures issued by prominent researchers are frustrating for investors trying to get a feel for the market. And median values over a three month period can be skewed by exceptional sales results in a particular location. But at least both sets of data show a trend towards recovering prices. Sydney may still be going backwards, but the decline is slowing. Melbourne, where the housing market has been in more of a lull than a correction, is showing promising signs of a return to form.

Because they’re our largest cities, Sydney and Melbourne lead the market. If we see a couple more quarters of improvement, Brisbane and its smaller cousins will eventually follow. At that point, I’ll feel more confident in saying that the nation’s market is truly on the rebound.

Perth will be the exception to this rule, because its price hikes are primarily driven by the mining boom. When the boom subsides '” as it inevitably must '” it could be some years before the market recovers.

TRUSTING IN ASSET PROTECTION

I have a question about DIY super funds and purchasing property. I’ve heard you can buy a property jointly with your DIY fund. How is this possible, given that DIY funds can’t take out a property loan?

Also, if I’m using a discretionary trust as asset protection for my main residence (family home) and I nominate myself as the beneficiary for land tax purposes, do I run a greater risk of losing my home in the unlikely event that I’m sued?

Since I’m not an expert in DIY super funds, I sought advice regarding the first part of your question from Eureka Report’s Superannuation Editor Trish Power.

You’re right in saying that a DIY fund is not able to borrow to buy property. However, you can purchase property jointly with your DIY super fund.

You may be able to secure a loan against your personal assets, then use the borrowed money and the DIY fund’s money to purchase an investment that’s partly owned by the fund.

Because you can’t leverage against superannuation - in other words you can’t use funds in superannuation to borrow money - the fund must have enough cash to cover its share of the transaction.

The fund’s assets must also be debt-free. This means that the loan taken out in your personal name can’t be secured against an asset held in the DIY fund. This means that you can’t use the investment property that your fund is jointly purchasing as security for the loan.

In regards to the second part of your question, nominating yourself as a beneficiary should not increase the risk of losing your home if you’re ever sued. A beneficiary of a trust does not have any control over the assets in the trust, so the trust can’t be held accountable for losses incurred by an individual. This is one of the main benefits of a trust '” assets held in it are safe from actions against one of the beneficiaries.

DIY super funds are extremely complex and a world unto themselves! I suggest you seek advice from a specialist in the area who knows the full details of your situation.

NORTH SHORE DREAMING

We bought a unit three years ago for $365,000. Since then we have had two children. We found we couldn't live in the unit with the kids, so we rented it out for $350 per week.

We then rented a house on the Sydney northern beaches; an old shack that will probably be knocked down at the end of the year. We pay $370 per week.

We really want to buy a house in this area. Unfortunately, there is a glut of units on the market were we have our unit. We don't think we'll get much more for it that what we paid, even though we have renovated it.

At the same time, house prices in Sydney are at the lowest they've been for some years, but are still out of our reach. In the northern beaches, land value alone is over $600,000.

Six months ago I started freelancing two days a week, earning around $500 per week before tax and super. My partner earns around $60,000 a year.

Can you suggest any strategies that will help us be able to afford a house on the northern beaches? For example, should we buy another unit and sell both in five years’ time, or should we sell the unit we have now and invest the money elsewhere?

You are certainly in a tricky situation! Property in the area you want to buy is already considerably more expensive than the value of your investment property.

I believe the Sydney market has bottomed and will begin to firm up over the next year. As the market goes up, the growth in dollar terms will be greater for the property you want to buy than for your investment property, because property in the northern beaches was worth more to start with. As the months and years go on, the gap between what you want and what you can afford will widen, putting you further away from your goal.

I don’t recommend selling your investment unit right now. It’s never a good idea to sell at the bottom of the market because you miss out on the capital growth that occurs when the market goes up.

I suggest you only sell the apartment when you have found a home that you definitely want to buy.

In principle, the option of buying another apartment is valid. However, borrowing more money to purchase a second property will expose you to considerable risk, with no guarantee of success.

Ultimately, I believe your best option '” and the one you probably don’t want to hear! '” is to reconsider the area you’d like to buy in. I know you’re very attached to the idea of buying on the northern beaches but you probably need to align your lifestyle with what you can realistically afford.

DEVELOPMENT DILEMMA

My brother and I undertook a small property development in Werribee in Melbourne’s outer suburbs. We paid $500,000 for the land and have built six townhouses on it at a cost of around $120,000 each. This brings our total outlay to $1.22 million.

Before we began the development a couple of local agents said they believed each property would sell for $250,000 to $280,000 on completion. Based on this, we anticipated a profit of around $300,000.

The properties are now completed and we’re trying to sell. The agent we decided to go with advised that we should auction them. We decided to hold onto two properties and auction the other four.

On the day of the auction we did not get one bid. We had a later offer of $200,000 for one of the units. If we sell them at that price we will lose money. We are not sure what step to take next.

Firstly, sit down with you brother and work out the minimum sale price you need to achieve to make a profit you’re reasonably happy with. Based on the lack of activity at the auction, this may be less than the profit you were originally anticipating!

I presume you have borrowed the funds to complete the building. As more time goes by, the interest costs will be mounting. You need to factor in these costs when you’re working out the sale price.

Secondly, I suggest you withdraw the properties from the market. The success of auctions depends on strong competition among buyers. Advertising four properties in the same campaign and auctioning them together may have over-exposed them to the market and diluted competition. Interested buyers may not have seen any urgency to bid because they could always wait for the next property.

Thirdly, consider putting one of the units back onto the market after a couple of weeks. Focus your attention and advertising dollars on that property and aim to get the selling price as far above your pre-determined minimum level.

The sale price for the first property will set the bar for the remaining three. This puts you in a stronger position to negotiate with buyers.

This way of selling may take a bit longer, but you have a greater chance of maximising the sale price of each property '” helping defray interest costs and putting more profit in your pocket.

MINIMISING RENOVATION COSTS

I was interested in your response to the reader who was asking about the Capital Gains Tax issues in relation to main residences.

I need to move interstate for work but I’d like to move back here to Brisbane one day because I really like the area. So rather than selling my current home and buying another one, I’d like to move out, tenant it and rent another place interstate.

My home needs some renovations. I’d like to do them now, to make it more attractive to potential tenants. However, I’m not exactly flush with money and I’m looking to minimise my expenditure.

I understand that, if I wait until the property is tenanted to do the renovations, I could claim depreciation costs because it would be considered an investment property. Can I continue to claim depreciation when I eventually move back in?

You’re right; it would be best to make capital improvements while the property is tenanted and producing rental income.

Claiming depreciation, along with virtually all other property-related tax benefits, is only available to people who hold income producing property. Once you return to live in your home, you will be considered an owner occupier. The only tax benefit available for owner occupied property is an exemption from Capital Gains Tax, should you ever decide to sell.

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

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