Amid news that finding a rental property may have temporarily gotten a little easier with asking rents for units dropping 1.1 per cent during the first three months of the year, comes a warning that the easing won’t last.

Dr Andrew Wilson, the senior economist at Australian Property Monitors, says ongoing shortages of accommodation, low levels of new supply and continued inactivity by investors, will lead to upward pressure on rentals this year.

APM figures show weekly asking rents for units either fell or were steady across all capital cities in the first three months of the year.

Median weekly asking rents for houses remained unchanged in Sydney, Melbourne, Brisbane and Perth.

Minor relief was handed to house renters in Canberra with a 2 per cent fall, and in Adelaide to a lesser extent, where the asking rent for houses dipped 0.6 per cent.

The ongoing tight rental situation has led to renewed calls from two experts for the Federal Government to take a fresh look at negative gearing.

Dr Chris Martin, a senior policy officer at the Tenants’ Union of NSW, says bluntly: "There’s a bunch of things that could be done to negative gearing that would go some way to changing what it currently does to our housing system, which is screw up house prices and distort the rental market to the disadvantage of low-income renters.

"We have such a large number of landlords who have small holdings, typically most of them [own] only one property, and they are amateur speculators," Martin argues.

"They are more interested in being able to sell the place when they judge the time is right to either realise gain or lever up into some new, even higher-value property. And so their … strategy, depends on being able to get vacant possession when it suits them.

"Even more than our renting laws, it’s the nature of our landlords and their strategy that makes renting as insecure as it is."

Martin says the tenants most acutely affected by a shortage of rental properties are low-income earners who don’t qualify for social housing.

The union has found backing in Saul Eslake, who recently took up a role as chief economist of Bank of America-Merrill Lynch Australia.

Eslake has been following the Australian property market for more than three decades.

"Interests associated with landlords and the real estate industry more generally will always tell you that the abolition of negative gearing would be the worst thing that could possibly happen to tenants, not to them but to tenants, because they think it would lead to a landlord strike and huge increases in rents," says Elsake.

"They sometimes argue that ‘look at what happened in 1986 when the Hawke Government temporarily abolished negative gearing for rental property investment’, which they allege was a surge in rents as evidence of their assertions.

"In fact there was a significant increase in rents in Sydney and to some extent also in Perth … but it was only in Sydney and in Perth and in other parts of the country, the rate of increase in rents either slowed or actually fell.

"The truth is that negative gearing was abolished temporarily everywhere and if the abolition of negative gearing was going to cause a problem then … rent should have gone up everywhere rather than in just two cities.

"That’s a sort of an urban myth that has been living for the last 25 years to the detriment of informed policy making."

However, Eslake isn’t just advocating the abolition of negative gearing on investment properties.

"That would be quite unfair," he says. "I mean why should property investors be denied tax breaks that would still be available for investors in shares or bonds or artworks or gold? So I think it should be abolished for everyone.

"I’d even support, as a compromise, what the Henry Review proposed, which is that expenses association with property should be deducted at the rate at which the income from property is ultimately taxed on i.e. at the capital gains tax rate, that would be, to my way of thinking, a reasonable compromise, even though it falls short of what I’d regard as the ideal."

Story by Carolyn Boyd, Story source: www.domain.com.au

Knowing your limits and the market will help to expand your property portfolio.

Why do some people struggle to buy one investment property and yet others manage to own five or six? The answer isn’t simply that they have more money.

Investors who are creative in their approach to financing and who thoroughly research the important real estate indicators routinely achieve their goals faster and with less hassle.

There are several well-known ways to increase a property portfolio. You can take out an interest-only loan, buy with partners as ”tenants in common” or tap into your home equity.

Owning an investment property is not out of reach, it simply requires an astute approach. Photo: AFR

All of which help free up cash flow, enabling you to make more substantial contributions to a principal place of residence or to access cash flow for other investments. Coupled with buying investment properties in the right place at the right time, these tactics have reaped financial rewards for many people.

But savvy investors take their strategies to the next level. Let’s look at some of the less-traditional approaches to more profitable property investing.

Varying your income tax

If you’re negatively geared, a good way to improve immediate cash flow is to ask your accountant to submit an income tax variation form to your payroll office.

This reduces the tax rate charged on your wages by estimating your total end-of-financial-year tax position in advance. Rather than receiving a lump sum tax refund, you receive money evenly throughout the year.

Line of credit with a global limit

This is a line of credit home loan with a ”global” or ”umbrella” limit and several sub-accounts. It gives you maximum access to your equity to optimise your investment opportunities. The loan can be operated with multiple accounts under one global limit.

Mortgage Choice spokeswoman Belinda Williamson says line of credit accounts can be attached to a credit card. ”If you earn a decent income, using a credit card for expenses should mean that most of your income stays in the loan until the credit card payment is due, which helps to reduce the loan balance.”

Targeting distressed vendors

Successful investors don’t appraise the properties on the market in an area, they try to work out why they are for sale. Paul Osborne, of the buyer’s advocate firm Secret Agent, says it’s a smart move to understand household indebtedness in specific areas to snare a bargain.

He says many households are managing to service only the interest repayments, not the principal amount, of their home loans. As a consequence, the best buying opportunities tend to be in suburbs that have high proportions of household debt.

A secondary dwelling as an investment

Building second dwellings, such as granny flats, on the land held by either an owner-occupied or an investment property has become a growing trend. These dwellings can generate extra rental income and increase the property’s future value.

They also provide depreciation benefits and must be council-approved. Lending criteria for secondary dwellings varies from lender to lender and it’s smart to monitor how such additions in an area have shifted property values.

Choose a loan tailored to your needs

Depending on your finances, lifestyle and investment portfolio, there are a range of property loans to consider. Ms Williamson recommends checking the health of your home loan at least once a year.

”You should make sure that your loans not only meet your current needs but also take your future needs into consideration,” she says. ”Make sure that you are managing your loan, rather than letting it manage you.” Always be aware that new products are entering the competitive housing finance market constantly.

Story source: www.domain.com.au Story by Chris Tolhurst

There’s still money to be made out of property if you are careful and hard-headed.

It has been the wealth strategy of a generation. Buy a home. Look after it, improve it, upgrade it. And if cash flow allows, gear up to your eyeballs to buy more property for other people to live in. For the baby boomers and for many from generations X and Y, it has been an easy path to success.

But the prospect of lower rates of capital growth and possibly even falls, if the doomsayers are right and the global economy takes another big turn for the worse, has changed the outlook for property investment.

Home owners and investors will need to be smarter about property. Solid rental yields, buying the right property at the right price and less dependence on gearing will be the key to making money. The days of certain returns made by gearing up and hitching a ride on the market boom are gone. At least for now.

THE OUTLOOK FOR PROPERTY

In November, The Economist magazine said Australian housing prices were still 38 per cent overvalued when compared with incomes and a hefty 53 per cent when compared with rents. Household debt levels in Australia exceeded those in the US at the peak of the boom, which makes us highly vulnerable to falling prices if the worst case of a second crisis – worse than that of 2008-09 – happens.

In December, ratings agency Moody’s said Australian house prices were unsustainable and last month a leading US real estate analyst, Jordan Wirsz, predicted Australian house prices could fall by as much as 60 per cent.

Last week, the Demographia International Housing Affordability Survey found Australia was one of the least affordable countries in which to buy a home. The median house price in capital cities was 6.7 times the median annual household income – with only Hong Kong being more expensive. Sydney was the least affordable city in Australia, with a median house price 9.2 times the average annual household income.

Many commentators say prices might be fully valued, or overvalued, but a crash is not the only way the market can correct itself. The head of property and financial system research at ANZ, Paul Braddick, says talk of a big crash assumes a doomsday scenario for the economy. While not impossible, he says it’s unlikely.

”Our base case is that the labour market will remain soft for the next six months but will start to pick up again in 2012-13,” he says. ”It won’t be a boom in any sense but [the economy] should bottom and start to pick up again.

”But there are risks and that does overlay sentiment. There’s a fear of the unknown and if Europe does implode, how will that affect us? As we saw in 2008 at the height of the global financial crisis, if overseas conditions get worrying enough, the Reserve Bank will react. In 2008-09, it lowered interest rates and boosted the housing market, though that was also helped by the new first-home owner boost and changes to the foreign investment rules, which are less likely to reappear this time.”

Given that, Braddick says the most likely scenario is that house prices will fall further in the next six to 12 months but once they have found a floor, prices should start to rise in line with household incomes. He says that means longer-term growth of about 4 per cent to 5 per cent a year on average, though there will be cycles around that.

The chief economist at AMP Capital Investors, Dr Shane Oliver, says historically, prices get ”stuck in a range” for five to 10 years after they have been pushed to extremes. He says research on house prices since 1920 shows they have risen about 3 per cent a year after inflation in the longer term.

He says in the 1990s, prices were below that long-term trend (see graph below) but they took off in the early 2000s and are now about 25 per cent above the trend line. Though not predicting a US-style collapse, Oliver says it is hard to see prices growing at the rate they were because affordability is so poor and people are more reluctant to take on debt.

Australian Property Monitors (APM) is predicting national growth this year of 3 per cent to 5 per cent (see table above).

It says Brisbane, Perth and Darwin have the potential for higher growth while Melbourne, Adelaide and Hobart are likely to underperform.

POTENTIAL STUMBLING BLOCKS

The managing director of SQM Research, Louis Christopher, says buyers need to ask what would trigger a major selloff in housing and assess the likelihood of those events happening. One strong trigger (thanks to high levels of household debt) would be a return of rising interest rates. ”All it took was the cash rate to get to 4.75 per cent to cause problems in this country,” he says.

He says buyers also need to watch for signs of the banks reducing loan-to-valuation ratios. He says house prices in most big British cities fell by about 20 per cent when British lenders suddenly cut lending ratios from 100 per cent or more to 80 per cent.

”Think about it,” he says. ”If you had a $50,000 deposit and someone was willing to lend 95 per cent, you could borrow up to $950,000. But if they would only lend 80 per cent, you could borrow $200,000 and your maximum purchasing power would be cut from $1 million to $250,000. You can see the havoc that would cause in the market.”

Why would banks cut their loan ratios? Like most things, it comes back to Europe. At worst, if Europe unravelled, we would be likely to see significant bank defaults that would limit the ability of other banks to raise finance outside their own countries. Australian banks have already raised the threat of another credit squeeze.

Other risks include unemployment rising to levels in which forced sales become a problem (Christopher says SQM Research’s modelling suggests problems would occur if unemployment broke through 7 per cent) and banks lifting interest rates independently of the Reserve Bank’s changes.

Oliver says the most vulnerable are heavily geared buyers, because they are most exposed to negative equity and forced sales. RP Data recently found slightly less than 5 per cent of Australian houses were worth less than their purchase price. Queensland had the highest levels of negative equity while Victorian households had the strongest equity positions. In Melbourne, 1.9 per cent of houses were worth less than their purchase price. However, the figures did not take into account debt, especially mortgage redraws.

The research director at RP Data, Tim Lawless, says coastal lifestyle markets are also vulnerable to a downturn and have already suffered from a downturn in tourism and sea-change migrants, as well as weak demand from second-home buyers. He says many of these lifestyle markets experienced dramatic appreciation before the GFC.

He says markets that had a big run-up in prices during the most recent growth periods are now also potentially more exposed to weaker conditions. ”The Melbourne market, for example, has seen home values appreciate by almost 50 per cent since the start of 2007,” he says. ”Rental yields in Melbourne are now the lowest of any capital city and new housing supply has been much more sufficient than [in] other cities.”

WHERE THE OPPORTUNITIES ARE

In this market, most analysts say the old strategies no longer guarantee success.

Buyers will need to do their sums and ensure they are buying well rather than simply picking the next ”hot suburbs” and riding the boom.

Success will also depend on having the flexibility to decide when to sell. That means buyers will need to keep borrowings at a manageable level so they are not forced to sell at the worst possible time.

Christopher says he is loath to tip particular areas, given that any recovery might not be long-lived. But he does favour the outer ring of Sydney, particularly the western and south-western suburbs.

”We see a big movement to more affordable housing,” he says. ”Rents there have already been rising by about 5 per cent a year, infrastructure has been improving and they have the potential to outperform over the next five years. We think 7 per cent growth there is possible.

”More average and above-average income earners are moving west because they don’t want to raise a family in a unit and it makes the mortgage more manageable.”

APM forecasts growth in Sydney this year will come mostly from middle- and lower-band suburbs, supported by high rents and an undersupply of housing. In his 2012 outlook, the senior research analyst at RP Data, Cameron Kusher, also predicted Sydney might perform better than in 2011. ”Home values across Sydney have increased at an average annual rate of just 4 per cent over the past 10 years,” he says. ”Although value growth has been limited, rents have increased by 5.4 per cent for houses and by 6.4 per cent for units in 2011. Estimated sales activity as at September 2011 was 6 per cent above the five-year average. Sydney’s market continues to be hampered by an undersupply of new housing at a time when demand remains strong.

”Although we don’t expect property values to increase at a rate above inflation, we anticipate Sydney will continue to be one of the better-performed markets, especially considering that when adjusted for inflation, values remain below their 2004 peaks.”

A property adviser at Lachlan Partners, Ana Bennett, says areas along the main Sydney transport corridors ”should do well”, given the undersupply of housing – ”areas that aren’t reliant on having two cars to get to work” – though she says Melbourne is a different prospect.

”The large volume of stock coming onto the market in Melbourne is a concern,” she says.

For investment, she favours ”the groovy, funky areas with a younger demographic”, such as South Yarra, Richmond and Middle Park.

”The other opportunity is the old house on the corner block in suburbs like Cheltenham where there is the potential for multi-residences down the track,” she says. ”Investors can rent them out for five years or so with a view to either selling the site or developing themselves. People are saying they’ll build one residence for themselves and sell the second for profit.”

Braddick says buyers should be aware that states are likely to perform differently. ”NSW has the advantage of being the most undersupplied market but it’s tricky to look at particular sectors.” He says if the construction and resources sectors continue to boom, this could support the upper end of the market, while soft conditions in retail and manufacturing could dampen the middle and lower parts of the market.

”But ultimately it will come back to the ‘atmospherics’ – the number of properties on the market, current sentiment and so on,” he says. ”Over the short term there could be significant increases or falls but on average the market is unlikely to achieve much.”

A GREATER FOCUS ON YIELD

To a large extent, buying a home is a lifestyle decision and you can afford to trade off slower capital growth against the desire for a place to call your own.

But if you’re considering putting your hard-earned money to work in investment property, you’ll need to be hard-headed.

Braddick says investors in the 2000s ”got away with non-focused property buying because most prices were going up.” But with capital gains likely to play less of a role, investors will need to focus on yield for more of their return.

”You need to look at the yields now and what they will be in the future,” Bennett says. ”The initial yields in the inner city may be lower but newer stock can balance that with depreciation allowances and if you get income growth, the yield will bounce back.”

Lawless says units have outperformed detached dwellings in terms of value growth in recent years.

”This is probably due to both improving demand related to price sensitivity [units are generally more affordable than houses] as well as the fact that units generally provide higher rental yields than houses. With more focus on urban renewal and higher densities around transport hubs and employment nodes, we would expect that well-located units will continue to be a popular choice for investors,” he says.

”Another tactic that is likely to remain popular among investors is buying within close proximity to the capital cities. The 10-kilometre to 15-kilometre ring should continue to provide reasonable housing demand with tight supply constraints. Public and private transport options are becoming even more important and these factors will be one of the primary drivers of long-term capital gain.”

Oliver says investors might also want to consider looking outside the residential box.

”You can argue that if you’re going to buy investment property, you’d be better off looking at commercial property where the yields are higher and there is less evidence of overvaluation,” he says. ”Listed property trusts have gone back to their roots after going through a more speculative period and are offering yields of 5.5 per cent to 6 per cent, unlisted property trusts and syndicates are an option [though you have to be careful], or you can invest directly in something like a shop, warehouse or strata office.”

The new rules to property success

When it comes to gearing, less is more. ”It’s not what you own but what you owe,” Shane Oliver, of AMP Capital Investors, says.

Think affordability. The more expensive your property, the smaller the list of potential buyers or renters.

Buy well. What’s the point of being in a weak market if you don’t get to dictate terms? ”You make money in property when you buy, not when you sell,” Ana Bennett, of Lachlan Partners, says.

Don’t count on making a quick buck. ”If you think you’re getting a bargain, you’re usually not,” Bennett says. She says property should be regarded as a long-term investment. ”Particularly for investors, you have to ask whether you can really afford it,” she says. ”There’s no point struggling and realising you have to sell in two to three years.”

If you’re investing, think income. In the absence of strong capital growth, investment returns will increasingly depend on a decent, and growing, rental yield.

Do your homework. While average returns might not look promising, the property market is highly segmented and demand for the right properties will remain strong. Look for properties that are in undersupply, not a dime a dozen. ”I would be wary of locations that have recently experienced a large surge in home values or where rental yields are lower than average,” RP Data’s Tim Lawless says. ”Areas where housing can easily become oversupplied should also be treated with some caution.”

Understand that property prices can be volatile – especially in the short term. Just because your house price isn’t quoted on the news each night doesn’t mean it can’t go up and down. ”If you put a large proportion of your money into a particular investment, it is a risky position, particularly if you’re also leveraged,” Michael Sherris, from the Australian School of Business, says. ”There may be half the volatility that you get with shares but people think there’s no volatility at all.”

Look for areas with strong population growth, strong demand and good infrastructure that is improving.

Think outside the box. Will it be possible to add value to the property in the future? If residential property doesn’t stack up, what about commercial?

Don’t expect history to repeat itself.

Story by Annette Sampson, source: www.domain.com.au

INVESTORS will be allowed to improve properties in their self-managed superannuation funds, following a tax office move to abolish a ruling that banned the practice when money had been borrowed to buy the property.

Investors have always been allowed to maintain their properties, but they were banned from changing them because it would negate the concept of the "single acquirable asset" that the Australian Taxation Office had come up with to more clearly identify assets in SMSFs.

Ken Reiss, a director at accounting firm Chan & Naylor, said the new ruling was a "huge win" and would turn around a situation where investors had lost the desire to use their SMSF to use debt to buy property.

He said the previous rules meant, for instance, that "if an SMSF had used debt to buy a property in Queensland that was destroyed in the recent floods, the insurance proceeds could only be used to pay down debt rather than rebuild".

"In that case, the investor would be left with a block of land that they had no option but to sell" because any reconstruction, even an identical one, would be classed as a new asset.

The new ruling still insists that the improvements be paid for by cash resources in the SMSF rather than by borrowing.

The draft ruling will not, however, allow SMSF investors to buy and bulldoze houses and put up units using borrowings, for example. Allowable changes include pools, extensions and bigger kitchens, but they must not "fundamentally change" the property.

It also gives owners more room to move when buying a rundown property that needs more than maintenance, although, again, the new work cannot be financed by borrowing.

The decision caps a succession of policies that used to allow borrowing to buy property in super funds until June 1999, which was then banned except for existing arrangements until September 2007. The ATO brought in the no-improvements rule last year.

Story by Andrew Main, source: www.theaustralian.com.au

One in 10 Australian households is in housing stress and at risk of financial hardship and poverty, a new report says.

Renters and first home buyers are most under pressure, with 26 per cent of renters and 15 per cent of first home buyers in housing stress, the Australians for Affordable Housing (AAH) said on Monday.

"There is an entrenched and significant group of people in Australia who face day to day hardship because of their housing costs," AAH spokeswoman Sarah Toohey said in a statement.

Overall, 850,000 households across the country are at risk of financial hardship after paying for housing costs, of which nearly 300,000 are in NSW.

The report, commissioned from the National Centre for Social and Economic Modelling (NATSEM), found 21 per cent of first home buyers in Melbourne are more likely to experience housing stress, compared to 15 per cent in Sydney.

Hobart and Sydney put the tightest squeeze on renters. Hobart has the highest rate of renters in housing stress at 33 per cent, while Sydney has the highest number with more than 100,000 households facing poverty because of the high cost of renting.

"A secure home is a fundamental building block for everything else we do in life," Ms Toohey said.

"We need to create a housing system that works for everyone."

Story source: www.ninemsn.com.au

The decision by the State Government to remove the stamp duty home concession will flatten the struggling Queensland residential property market and cost homebuyers thousands of dollars, according to the Real Estate Institute of Queensland (REIQ).

The government announced today that from 1 August the concession which non-first home buyers receive when buying a new or established home as their principal place of residence will be removed. For a median-priced house in Brisbane, homebuyers will now be hit with more than $15,000 in stamp duty – an increase of more than $7,000.

First home buyer stamp duty concessions will remain for homes up to $500,000.

The government also announced a $10,000 grant for new-home builds. The Queensland Building Boost grant will be available for all people building, or buying, a new-build home or unit priced up to $600,000 between 1 August 2011 and 31 January 2012.

REIQ chairman Pamela Bennett said while any incentive to increase housing supply and create jobs in the construction sector is a positive for the economy, the removal of the stamp duty concession for non-first home buyers will wreak havoc on the Queensland property market.

About 60 per cent of all dwellings financed in Queensland in April were to non-first home buyers.
“The market is already the lowest it has been in many years and today’s announcement will just make it worse,” she said.

“The government is obviously trying to fill the financial void that has been left by the weak property market, and the subsequent lower stamp duty receipts given the marked reduction in property sales over the past 18 months.

“A better way to stimulate the economy would have been to provide financial incentives for all buyers of all types of properties which in turn would have increased activity and therefore helped the government’s bottom-line.”

According to the REIQ, the $10,000 grant for new-builds might provide a much-needed shot in the arm for the building sector but its value will be greatly diminished by the increased rates of stamp duty that non-first home buyers will have to pay. It is also unlikely to assist more first home buyers into the market.

“There has been a huge reduction in first home buyer activity over the past year and this grant is unlikely to change that state of affairs to any significant degree,” she said.

“While the grant means first-timers will be able to access $17,000, as well as stamp duty concessions, purchasing a new-build home or unit continues to be out of the financial reach of most prospective homeowners.”

When the First Home Owners Boost was available in late 2008 and throughout 2009, 74 per cent of first home buyers purchased an established home despite $21,000 being available for constructing a new home or the purchase of a new-build.

The head of the Bank of Queensland has warned that Queensland’s economy is at its weakest level in the past five years due to falling tourism and deflated real estate values, and that any additional interest rate hike would only serve to cause more damage, according to a report by The Australian.

David Liddy added that the strength of the mining and manufacturing sectors is overshadowing significant weak points elsewhere in the economy, and joined business leaders in expressing concern over the possibility of an interest rate hike by the Reserve Bank of Australia in its determination to cap inflation.

The concern expressed by Mr Liddy and business leaders at Monday’s Australian Agenda event came on the heels of the release of minutes from the RBA’s May board meeting, where board members suggested that higher interest rates may be necessary to fight inflation.

Speculation suggested a rate hike could come as early as the RBA’s next board meeting, which occurs in two weeks, according to The Australian.

THE government should relax foreign direct investment regulations, the Organisation for Economic Co-operation and Development says.

THE government should consider relaxing foreign direct investment regulations, which have discouraged overseas investors from investing in Australia, the Organisation for Economic Co-operation and Development says.

The existence of these restrictive barriers have led some overseas investors to refrain from applying to the Foreign Investment Review Board for approval, while others have withdrawn their applications because of the uncertainties and costs involved.

Australia ranks relatively high in the OECD Foreign Direct Investment restrictiveness index — ahead of the US, which has more generous criteria, an OECD report says.

Australia occupied the seventh worst position in the index with Korea, Canada, Japan and Mexico having even more restrictive barriers on foreign ownership of assets. The report says in Australia, “restrictions apply in certain sectors — international aviation including airports, domestic shipping, telecommunications, media and real estate — and investments above a certain amount are subject to screening, increasing the regulatory costs for investors.

“The criteria for approvals, especially with respect to the national interest, are not always clear, although the government released national interest principles in 2008 with further clarity provided in June 2010.”

However, since FIRB had only rejected about 1 per cent of investment applications, this indicated that the restrictions were not that onerous after all.

The OECD estimates that if investment restrictions were removed, foreign direct investment into Australia would “increase noticeably over time”.

The report also calls for more transparency and accountability on the application criteria to help investors better assess the outcome of their applications.

If foreign direct investment regulations were relaxed, this would help promote a rebalancing of the structure of foreign liabilities and improve longer-term financing of the economy, the report says.

Australia’s foreign liabilities are virtually all held in Australian dollars or hedged back to Australian dollars. As foreign investors seem happy to hold assets in Australian dollars, domestic borrowers are protected against exchange rate risks. During the global financial crisis this helped shield the country against the increased volatility of the exchange rate.

“Nevertheless, the high and rising share of debt in gross foreign liabilities might make Australia more vulnerable to changes in world financial market sentiment and rising cost of debt,” the report says.

Story by Teresa Ooi www.theaustralian.com.au

View the original article here

The Reserve Bank of Australia unexpectedly increased its benchmark interest rate on concern stronger growth will cause inflation to accelerate, driving the nation’s currency toward parity with the U.S. dollar.

Governor Glenn Stevens raised the overnight cash rate target a quarter point to 4.75 percent in Sydney, saying the economy has “relatively modest amounts of spare capacity” and citing risk of “inflation rising again over the medium term.” It was the RBA’s first move in six months.

The move signals Stevens wants to avoid a repeat of 2007, when he held off raising rates for months as slowing inflation masked a build up in price pressures. Growth in Australia, which skirted a recession during the crisis, may strengthen as energy companies such as BG Group Plc add construction jobs.

“They’re trying to nip inflation in the bud,” Matthew Circosta, an economist at Moody’s Analytics in Sydney, said on Bloomberg Television. “Back in 2007 they were behind the curve” in raising rates and “I don’t think they want to make the same mistake this time around.”

The Australian dollar climbed to 99.71 U.S. cents as of 3:31 p.m. in Sydney from 98.82 cents before the announcement. The S&P/ASX 200 Index of stocks was little changed at 4,702.70.

Economists’ Forecasts

The decision, predicted by seven of 24 economists surveyed by Bloomberg News, was the second straight in which Stevens defied the majority of economists’ forecasts.

Stevens’s move comes a day before the U.S. Federal Reserve meets to consider pumping additional stimulus into the world’s largest economy. The divergence in monetary policies has stoked the Australian dollar, which has gained about 11 percent this year against the U.S. currency.

Australia’s jobless rate, at 5.1 percent in September, is about half the level of unemployment in the U.S. and euro zone. The International Monetary Fund predicts Australia’s growth will advance to 3.5 percent next year from 3 percent this year as resources investment intensifies.

“While the labor market is not as tight as in 2007 and 2008, some further strengthening would appear to be in prospect, judging by the trends in job vacancies,” the central bank said in today’s statement. “After the significant decline last year, growth in wages has picked up somewhat, as had been expected. Some further increase is likely over the coming year.”

End of ‘Moderation’

A “moderation” of inflation for the past two years “is probably now close to ending,” the RBA said.

Two days ago, BG Group said it will begin building a $15 billion liquefied natural gas venture in Queensland state, generating 5,000 construction jobs. Investment there and in Western Australia, including Chevron Corp.’s A$43 billion ($42.5 billion) Gorgon liquefied natural gas project, is growing because of stronger Chinese demand for raw materials.

“The bank still sees Australian interest rates as likely to continue to rise as the mining boom progresses,” said Ivan Colhoun, head of Australian economics at Australia & New Zealand Banking Group Ltd. “This likely reflects the need to move nominal rates higher to match any rise in inflation and, at some stage, to also raise real interest rates too.”

Today’s increase was announced half an hour before the running of the Melbourne Cup, dubbed “the race that stops the nation,” and means the central bank has moved borrowing costs in the past five meetings on the day of Australia’s richest horse race.

Banks’ Response

Borrowing costs at ANZ, Commonwealth Bank of Australia and Westpac Banking Corp. are under review, according to spokesmen at the lenders. National Australia Bank Ltd. spokesman George Wright said no decision has been made “at this stage.”

Treasurer Wayne Swan has urged banks not to boost borrowing costs by more than any central bank increases. Australia lawmakers are sensitive about the RBA’s rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.

Australia’s central bank signaled after its Oct. 5 meeting that the decision to leave borrowing costs unchanged was “finely balanced” with the case for an increase, as a rising currency helped ease inflation concerns. Most economists had forecast a quarter percentage-point increase at that meeting.

Job Market

While the government’s consumer price index rose 0.7 percent from the second quarter, less than the 0.8 percent median estimate in a Bloomberg News survey, that may be shrouding intensifying price pressures. An Oct. 7 report showed the biggest back-to-back monthly job increases since 1988.

The central bank’s measures of core inflation showed annual price increases also slowed last quarter. The bank aims to keep inflation in a range of 2 percent to 3 percent on average.

Stevens had paused after boosting borrowing costs in six quarter-point steps from October 2009 to May this year, the most aggressive round of rate increases among Group of 20 members.

Companies such as BHP Billiton Ltd., Rio Tinto Group and BG, the U.K.’s third-largest oil and gas producer, have helped spur a hiring surge as they increase shipments of iron ore, coal and energy to China.

The growth in mining investment was a reason IMF staff last week said Australia is starting to exhibit “early signs” of inflation pressures.

“With inflation projected to remain close to the top of the 2-3 percent target band, the RBA needs to guard against inflation expectations becoming anchored at too high a level,” the IMF staff said in an Oct. 29 report.

Among 33 members of the Paris-based Organization for Economic Cooperation and Development, Australia last year was the only advanced economy to avoid two consecutive quarters of contraction — a standard definition of a recession — along with developing economies Slovakia and Poland.

To contact the reporter for this story: Michael Heath in Sydney at mheath1@bloomberg.net;

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

IT is only a matter of time before interest rates rise again, with board minutes from the Reserve Bank of Australia (RBA) revealing that it "could not wait indefinitely" due to rising inflationary pressures.

Minutes from the latest RBA monetary policy board meeting, taken on October 5 and released on Tuesday, say that while the overall global outlook was broadly unchanged since the RBA board’s previous meeting, interest rates would need to rise "at some point".

A gradual tightening in resource utilisation meant that inflationary pressures would strengthen, the minutes say.

The minutes reveal that the decision to keep the cash rate on hold at 4.5 per cent, taken at the October 5 meeting, was finely balanced.

"While the board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion," the minutes said.

Based on the medium-term inflation outlook, a case could be made to increase the cash rate at the October meeting as developments had been broadly consistent with central forecasts, the minutes said.

But members decided to leave the cash rate unchanged after accepting that the economy was expected to continue growing at trend in the near term, credit growth had softened and the rise in the exchange rate would effectively be "tightening financial conditions at the margin".

Board members also said it was "still possible" that downside risks to global growth could materialise.

"Members felt these arguments were finely balanced," the minutes said.

Overall, they concluded that it would be "appropriate to hold the cash rate steady for the time being," until evaluating further information at the next meeting, on Melbourne Cup Day, November 2.

The board noted that, despite the release of unemployment figures showing a 5.1 per cent unemployment rate in August, there had been a relatively limited amount of economic data released over the past month.

After rising to around record high levels in the June quarter, Australia’s terms of trade were estimated to have increased further in the September quarter but were then expected to decline gradually.

The minutes also noted that a slowdown in the pace of household borrowing had been accompanied by a cooling in the established housing market, and that the borrowing slowdown was a "welcome development".

There had been little new information on price and wage inflation, with consumer price index figures due out later in the month.

Good rainfall had led to conditions in the farm sector improving significantly.

In Europe, Ireland had been a focus of concern in financial markets and members noted that periods of "acute stress" in Europe were "likely to recur".

Meanwhile, business investment was expected to strengthen over the next few years and offset a scaling back in public investment.

Prospects for growth in Asia remained "solid" despite slowing from earlier in the year as the prices of many of Australia’s export commodities remained at high levels, board members said.

"Domestically, members noted that the economy appeared to be evolving broadly in line with the bank’s expectations," the minutes said.

The outlook remained for public spending to slow but for private demand to pick up, particularly in business spending.

Story by Kim Christian www.thesatellite.com.au

Sydney has been awarded the dubious distinctions of being the city where mortgages account for the highest proportion of income in the world, and with the highest proportion of mortgage arrears in Australia.

Sydneysiders spend an average of three-quarters of their monthly income on property repayments, according to a survey by realestate.com.au, with the average house price at $626,444 and the average monthly repayment around $4,123. In contrast, the average repayment in London is less than two-thirds of monthly income, and less than half in New York.

A separate survey by Moody’s has also revealed that Sydney also has Australia’s highest level of mortgage delinquencies, with the Fairfield-Liverpool region recording a delinquency rate of 2.77%, and accounts for 4.24% of all arrears in Australia. Even so, Moody’s Arthur Karabatsos highlighted that, overall, Australia has a low level of arrears compared to similar economies.

India’s richest man, Mukesh Ambani, has moved into his new home — a 27-storey mansion worth $1 billion.

The enormous Mumbai palace has three helipads, a dance studio, a ball room, a 50-seat theatre and an underground car park for 160 cars, according to media reports.

The 37,000 square metre home is believed to be the world’s most expensive and took seven years to build.

Mr Ambani, 53, is a major shareholder at Reliance Industries — an oil, retail and biotechnology conglomerate.

Forbes magazine has ranked Mr Ambani the fourth-richest man in the world and values his net worth at $29 billion.

The tycoon’s mother, wife and three children will live with him inside the 173m tall monolith, alongside 600 staff members.

The building has been named Antila, after a mythical island, and has views over Mumbai and the Arabian Sea.

Shiny Varghese, an Indian design magazine editor, said Antilia was "obscenely lavish".

"But we are heading into the sort of culture where money is not a question when setting up a home," Mr Varghese told The Guardian.

But an associate of Mr Ambani told the newspaper there was nothing obscene about Antilia, and that the businessman had simply "built a house to his requirements".

"He can’t just walk into a cinema and watch a film like you or me," the unnamed associate said.

"So he has built a house to his requirements like anyone else would. It’s a question of convenience and requirements. It’s only a family home, just a big one.

"It’s just another home that someone is living in. It’s no big event."

Story from ninemsn staff reporters

THERE are plenty of pitfalls the first-time real estate investor needs to avoid, writes Anthony Keane. Here’s a list of the most common errors and how to avoid them.

Getting your foot in the door of property investment can be a scary proposition.

It’s not every day you sign up for hundreds of thousands of dollars of debt for something you are not living in.

History has shown that, for long-term investors, the rewards are usually worth the risks, but there are plenty of traps the first-timers need to avoid.

Tax, interest rates, tenants, property agents, renovations and insurance are among the key areas where mistakes can cost investors big money, or at least deny them some of the profits they seek.

Today, Your Money examines some of the traps for first-time property investors.

Seminars that bite

University lecturer, author and investor Peter Koulizos warns about so-called "property education" seminars that are really just sales seminars designed to flog overpriced property to pumped-up investors.

"But I would encourage people to try to see lots of seminars just leave your chequebook at home," he says.

"You get different perspectives and you can get good information, but just go with your eyes wide open."

Where’s the research?

"Some people spend more time researching the plasma TV they are going to buy, rather than the property they are going to buy," says Koulizos, who wrote The Property Professor’s Top Australian Suburbs.

These days we are spoilt for choice, with a wealth of information about property prices, trends, hot and cold suburbs, tips, traps and warnings in the print media and online.
Buying for tax purposes

Koulizos says many people look at property investing as a way to get a bigger tax refund.

"But you are only getting a refund because you made a loss," he says.

This practice is known as negative gearing, but seasoned investors know that a positively-geared investment where the property pays you a profit is the ultimate aim.

First-time investors are usually negatively geared in their approach, so they may as well get their tax refund back sooner.

Louise Carr, a property strategist with investment group Ironfish, says completing an income tax variation form can help smooth out your cashflow rather than get a lump sum refund.

"This way you can organise to get your tax back on a weekly or fortnightly basis with your pay," she says.

Depreciation debacles

One of the best tax benefits from property investment is being able to claim a deduction for depreciation of items within the property and the building cost of the property.

You don’t physically pay these costs, so effectively it’s free money coming back through your tax return.

However, many investors don’t understand depreciation, Carr says.

"Deductions for new homes can be up to $15,000 a year.

"We often find that some accountants don’t make people aware of it. We recommend going to an accountant who owns property themselves, so they know the advantages and are aware of tax legislation."

A depreciation schedule will list all your depreciation deductions. They typically cost $500-$600 and are available through a quantity surveyor, are tax-deductible themselves, and are available through a quantity surveyor.

Bad advice

Everyone has an opinion about buying property and these days opinions are deeply divided about the short-term outlook for real estate investment.

There are also different opinions about what to buy, where to buy and tax strategies, and investors should not rely on the advice of friends and family members, who may have completely different financial situations.

Carr says getting good professional advice is crucial to owning the right investment.

"People who get advice from friends and relatives find that their investments are generally not set up properly," she says.

Paying too much

Ian Lloyd, an advisory board member of property and finance group Investa Solutions, says some investors are paying more than they should.

"There are developers out there who, I believe, are offering properties that are overpriced," he says.

Lloyd says some government schemes and incentives are prompting people to create properties and developments that are "a little manufactured" and slug hefty management fees, Lloyd says.

Property management is another area where people can pay too much.

"Don’t pay letting fees or re-letting fees to property managers," Lloyd says.

"For every week of rent you give up, for example for a letting fee, that equals 2 per cent of your rent. So if you pay an 8 per cent management fee but there’s two weeks’ rent for letting, it’s 12 per cent, then if it’s re-let and there’s another fee, you are in effect paying 14 per cent.

"If you can negotiate a flat fee something like 10 per cent you don’t lose rent upfront through letting fees."

No safety net

Investors can lose everything if something goes wrong and they don’t have the financial firepower to cover the costs and their loan repayments.

"Have a strategy where you have set up a reserve," Lloyd says.

"A good finance broker or adviser can help you set up a buffer that would mean if you lost your job you could still keep the property."

Carr says it doesn’t have to be cash an available line of credit could be enough protection.

"Have a kitty of $20,000. Then if you run into trouble or tenants don’t pay on time, you can still sleep at night."

Interest rate panic

Fixed-rate loans have lost popularity in recent years, but fresh talk about rising rates can prompt many beginners to fix.

Koulizos says some people can get trapped in a long-term fixed rate loan say five years because they panic when rates are relatively high.

"Then in about three, six or 12 months the rates start to come down again but you have locked yourself in for years paying a higher rate," he says.

"Generally people fix at the wrong time, but fixing rates can be good especially if you are risk-averse."

Easily scared off

Some investors decide to sell up after just one bad tenant, Koulizos says.

"You can easily get rid of a tenant who’s doing the wrong thing, but as soon as you sell, your asset will not be going up in value," he says.

The vast majority of tenants are not bad people, and if you treat them well most of them will respond in kind.

Renovating? Use your head

Koulizos says many people renovate an investment property with their heart, not their head.

"They renovate a property like they want to live in it, and can over-capitalise," he says.

Save the crazy colour schemes and top-of-the-range fittings for your own home. Rental properties with neutral colours are likely to attract a broader range of tenants.

Ignoring insurance

Landlord insurance is vital for property investors. It’s tax-deductible and not as expensive as you might think.

For example, Carr says a policy that covers things such as malicious damage, accidental damage, rental default and legal liability would cost you $255 a year through major landlord insurer Terri Scheer.

"Some investors think ‘I have a property manager – I don’t need landlord insurance’, but they do," she says.

Lack of patience

"Property is get rich slow," Carr says. "Some people don’t believe that property prices will double again, but historically they have doubled every seven to 10 years."

"The more times you go through the cycles, the more money you are going to make."

The Perth real estate market has experienced a winter of discontent, with property prices dropping 4.8 per cent in the three months to August, according to RP Data-Rismark.

The real estate consultancy said the Perth market was the worst performing of all capital cities last winter, with the homes around the nation averaging a 1.2 per cent drop.

Perth’s median price – once the highest in the nation at $500,000 – is now $460,000 following a 3.3 per cent reduction in the value of dwellings in the past year.

This is barely above the $457,000 Australian average, following a 3.9 per cent increase across the nation in the year to date.

RP Data’s research director Tim Lawless said no further capital gains were expected this year as the market battled increasing interest rates.

"Just 12 months ago mortgage rates were 160 basis points lower and the market was still benefiting from the first home buyers boost," he said.

"Since the RBA has normalised rates with six hikes, combined with additional bank top-ups, capital growth has halted."

Christopher Joye, the managing director of Rismark International, predicted further interest rate increases, with the headline rate expected to peak at seven to eight per cent before any discounts.

Mr Lawless said rental yields across capital cities are showing signs of improvement, and creating big investment opportunities.

The rental yield in Perth was 3.9 per cent in August, up from 3.8 per cent a month earlier. Units rents were steady in both months at 4.3 per cent.

"This has resulted in an overall improvement in rental yields. The outlook is likely to be positive for investors but not so great for renters as vacancy rates remain exceptionally tight and rents are now rising," Mr Lawless said.

Kim MacDonald, The West Australian

IT’S no secret overseas investors have identified Australia as a growth region when it comes to buying property.

The funds are coming in not only to buy direct assets but also via investing in Australian real estate investment trusts, which are now more focused on the local property market than at any time in the past three years.

Jones Lang LaSalle research on global capital flows confirms Australia’s attraction to investors led it to be ranked seventh in the world as a destination for cross-border investment for the first half of 2010.

The report says cross-border investment in Australia increased more than five-fold, at $US1.8 billion, compared with $US319 million at the same time last year. The research reveals Britain has been the most popular destination for cross-border investment so far in 2010, with $US7 billion invested, while Germany replaces the US as the second most popular destination.

The US was in third place (from second in the first half of 2009), despite a doubling in transactions in the American market from $US2.2 billion to $US4.3 billion.

The director of international investments at Jones Lang LaSalle in Australia, Simon Storry, said the country’s ranking confirmed the view that Australia remained a destination of choice for foreign investment.

”We expect Australia to continue to be on the radar of foreign investors for the remainder of this year,” Mr Storry said.

”Commercial real estate in Australia has offered solid and stable returns and an attractive environment for investors seeking stability in their globally diverse portfolios.”

The Jones Lang LaSalle research reveals a near-doubling of global commercial real estate transactions in the first half of 2010, compared with the same period a year ago.

According to the report, total global commercial real estate investment was $US132 billion for the first half of 2010, compared with $US76 billion in the previous corresponding period and, after reaching a low of 31 per cent of total volumes in the first half of 2009, cross-border activity was back above 40 per cent, a trend set to continue.

Mr Storry said this reflected a general market pick-up, a return to the globalisation of real estate investment and a search for value by investors.

Carolyn Cummins Sydney Morning Herald