Question Mark

Competition is hotting up between some of the nation’s most prominent number crunchers to come up with the most accurate way of measuring house price movements. But will the new measurements be of any real use to individual homebuyers and investors in making informed decisions about what and where to buy?

RP Data and Rismark International have joined forces to develop new house price indices. Rather than using the median value, which is simply the middle figure in a series of house price sales and can be skewed by a small number of unusually high sales results, the new indices will be based on factors such as location, number of bedrooms and bathrooms, and whether the property has a swimming pool.

Australian Property Monitors, which was chosen by the Reserve Bank to develop a new index, is also working on a similar product.

Median values are next to useless when it comes to gauging the likely sale price or ongoing performance of individual properties, so I’m in favour of anything that raises the bar.

However, I’m not sure that the models proposed by RP Data and Rismark go far enough to be of genuine help to the average punter trying to work out where to put their investment dollars.

The property market is extremely diverse, and each property has different characteristics that indicate how it’s likely to perform as an asset over time. I believe that truly useful indices should also take into account:

• population trends in the local area (increasing, stable, declining);
• the age of the building;
• land size;
• land value; and
• (for apartments) the number of dwellings on the block.

These factors apply to every property, to varying degrees. Therefore, they would provide a far more valuable measure of property values than (for example) whether or not the property has a pool.

Pools may add value in the warmer areas of Australia, such as Queensland, the Northern Territory or Perth. However, in cooler climates (where a large proportion of the population lives) the presence of a pool can actually detract from a property’s value, because buyers see it as a high-maintenance item from which they’ll derive little use.

Until the number crunchers come up with house price measurements based on the factors that really drive property values, investors looking for accurate information on prices at the local level will continue to be short-changed.

THIS WEEK I have selected four questions from subscribers, covering interest-only loans, investing in the Canberra residential market, dealing with builders' warranties, and the pain of being caught between buying one house and selling another.

INTEREST-ONLY LOANS

I am investigating the best mortgage for the purchase of our family home. The idea of me taking an interest-only loan has been raised even though it is not an investment property. It seems to make sense because my monthly payments are lower. I can control the repayment of any principal by making the loan part fixed/part variable and putting any additional income from bonuses, etc, into the variable component. I am interested in your views.

Interest-only loans can improve your cash flow by reducing the monthly repayment compared with a principal-and-interest loan.

If you are borrowing a large percentage of the property’s value and want to save money to renovate (for example), paying interest only may help you save faster.

You can pay off principal when you choose, and you’ll also have more available in redraw because the redraw facility won't decrease by whatever amount the minimum principal repayment would have been. Therefore, the your redraw facility will function like a line of credit during the interest-only period, in the sense that you will be to redraw up to the limit you borrowed.

On the other hand, paying interest only means that unless your property is achieving strong capital growth through market forces, you will not be able to improve your equity position.

If you need to do some unexpected work on the car or home, or you receive an unexpected bill '” something that happens to nearly everyone at some point '” you’re unlikely to have built up a reserve in redraw that you can use to cover the expense. This could put you under financial pressure and force you to use forms of finance with much higher interest rates, such as credit cards or personal loans.

Ultimately, you should carefully weigh up your personal and financial situation before deciding whether an interest-only loan is right for you.

CANBERRA APARTMENTS

I am considering a purchase in Canberra and am wondering if it has an oversupply of units. Have prices bottomed or is still some way to go?

The Canberra apartment market is oversupplied and there is still considerable construction going on. In the larger capitals, population growth can help soak up oversupply over the medium to long term. However, unlike the larger capitals, people usually move to Canberra primarily for work-related reasons, not lifestyle reasons.

This keeps population growth low and, combined with the city’s modest population base of about 320,000, means that oversupply takes a long time to be absorbed. I expect subdued capital growth in the new unit sector for several years to come.

For investors, the upside to this equation is that because Canberra’s population is transient, many people prefer to rent instead of buy. This creates demand for rental property close to the hubs of government department activity, such as the Belconnen, Woden and Tuggeranong town centres. Canberrans also have the nation’s highest median incomes, which puts positive pressure on rental returns.

If you do decide to buy in Canberra, I suggest you focus on established houses and townhouses.

BUILDER’S WARRANTY

We bought a house in the Melbourne suburb of Footscray three years ago. The house had been renovated two years beforehand, and a second storey with a balcony was added. After living in the house for about a year we noticed water coming through the ceiling in our bedroom downstairs. After investigating we found that the balcony upstairs was leaking.

We contacted the previous owner who gave us the builder’s contact details. We got in touch with the builder and he came out and fixed the problem. Or, so we thought! Recently we have found the same water marks appearing on the ceiling in the bedroom. We tried to contact the builder but the phone number is no longer current. Given that the builder only repaired the damage two years ago, we think he should wear the cost. What do you suggest?

The first thing you should do is dig out your property’s Contract of Sale, which includes a document known in Victoria as a Section 32 statement. Any property that’s being sold and has been recently renovated at a cost of more than $12,000 is legally required to have builder’s warranty insurance, which is designed to protect you from financial loss when your builder failed to complete the work or meet certain standards.

Builder’s warranty insurance is valid for up to six years after completion of works, so it looks as though the insurance on your property still has a year to go.

The certificate of insurance in the Section 32 statement will have the builder’s registration number and the insurance company that has underwritten the insurance. Contact the insurance company and you should be able to make a claim for the repair work.

UNSETTLING TIMES

We bought our second home in January this year on a 120-day settlement. It settles on May 15. We have to sell our current home and settle on it before we can settle on the new one. I’m getting a bit stressed because it’s close to the end of March and we have less than two months to sell and settle on the new property. I know this is a common situation but I’m worried. What happens if we’re unable to settle on May 15?

The first thing you should do is contact the vendor’s solicitor and tell them what is happening. Even though the Contract of Sale says settlement is May 15, you can amend the date if the vendor agrees. Be aware, though, that the vendor has a right to charge you penalty interest for each day after the original settlement date. The penalty interest rate can range between 11% and 20%; check your Contract of Sale for the rate that applies in your case.

The vendor also has the right to serve you with a Notice to Rescind, which gives you 14 days from the date of the notice to complete settlement. If the contract is rescinded you may lose your deposit.

While you’re considering whether or not to negotiate an extended settlement, I suggest you also take a close look at the sale process for your current property. Why is it taking so long to sell? If the market is quiet in your area, you may need to review the asking price and reduce it slightly to meet market expectations. You may find this price reduction is less than the costs you will incur in not settling on the new property.

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