Property Market – Property Holding Costs Plummet As Interest Rates Fall

 

Dec 2008

As many investors are already aware, over the last few months Australia’s interest rates have fallen fairly dramatically (3% since September 08) and the general consensus for 2009 is that we will have further rate reductions.

Whilst chatting with clients over the last few weeks, many have asked what exactly the impact of these rate cuts will be for them as a property investor.  So we worked it out and I thought that it was something that would be of interest to all of our investors, so here are the numbers:

For those like me who are impatient, what’s the projected bottom line you ask?

Based on a property of $415,000 (see below for the assumptions etc):

As a resident Australian investor, borrowing 100% (assuming that you have some existing equity) of the property price, the projected  net cost per week has dropped from $278 to $23.  Wow, that’s significant, a total cost now of around $1,200 per annum rather than $14,450.

As a non resident investor, borrowing 80% of the property price, the projected net cost per week has dropped from $297 to $106.  Again, a significant saving, a total cost now of around $5,512 per annum rather than $15,500.

Please see below for similar projections on some of our other current projects.

Is it worth the cost? 

Let’s now be really conservative and project  that the property will have an average capital growth of just 6% per annum.  According to the Sept 2008 Matusik Report, units have had an annual growth of 12.8%pa over the last 10 years.  But lets just stick with 6%pa.

So after just 5 years, the $415,000 property is worth $555,000, a gain of $140,000
After 10 years it’s a total gain of $321,000.

Not a bad return given your projected per annum holding costs!

So let’s have a look at our assumptions:
We have based the figures on a specific $415,000 2 bedroom Melbourne apartment which we currently have available (due to complete in 2010, see further details below) renting at $390 per week, which is the current rental projection (we have actually negotiated  a 6 month rental guarantee at $400 per week).  We  have looked at the bottom line after taking in to account rent in, costs out (including depreciation) and have compared the costs on an interest only loan, previously at 9% and now at 6%.  

For local investors we have assumed a tax bracket of 41.5% (which is the bracket for those currently earning between $80,000 & $180,000 per annum) and have allowed for the subsequent tax refund in the net cost used.  We have assumed local investors have borrowed 100% of the property price and have paid cash for the purchase costs (ie stamp duty, loan costs, legal costs etc) assume $4,000 in total upfront purchase costs.  Plus if local investors exchange contracts on a deposit bond rather than a 10% cash deposit, there would also be the initial cost of the deposit bond.

For non resident investors we have assumed that the rental income from this property is your only Australian income and therefore have based the figures on the lower tax bracket of 29% (for those earning a net taxable income up to $34,000).  We have assumed non resident  investors have borrowed 80% of the property price and have paid cash for the other 20% ($83,000) plus purchase costs (ie stamp duty, loan costs, legal costs etc assume $4,000) giving total upfront costs of $87,000.  10% of the purchase price ($41,500) is payable at contract exchange, the remainder of the $87,000 is payable at settlement, projected for March 2010 in this example.

If you’re a local investor and you’re in the lower tax bracket (earning between $34,000 & $80,000pa) then on the above figures, your projected net cost to hold the apartment would now be $66 per week, just under $3,500 per annum, still a fairly attractive proposition!

Of course we would expect that rents will continue to rise and at some stage the property will become fully cash flow positive.  Of course, rates could also increase and this would of course add to the cost. 

Is it wise to invest now?
As you can see, the drop in interest rates has made a significant difference to the bottom line for the holding costs of a property.  Remembering that rates are expected to continue to decrease, rents are expected to continue to increase, population growth is at an all time high, we have a housing shortage and  developers are finding it difficult to fund projects, so the shortage will be with us for the foreseeable future.    Taking these fundamentals in to account, is now the right time to invest, we think so and many of our investors are agreeing, given the strong sales over the last few months.

Projected holding costs for some of our current projects (as at Dec 2008):
For those looking to get in to the market now, I would suggest that you may like to have a look particularly at some of our latest Melbourne projects.  Melbourne offers excellent value, is expecting continued high immigration levels, continued property undersupply, plus it offers huge off plan stamp duty savings. 
You may like to consider the following, I have also included the projected holding costs once completed, using the same general assumptions as above:

Oakleigh Off Plan Apartments (which we have based the above projections on) great little project, just 15kms from the CBD, excellent price points, a unique Heritage aspect to the project, completion not until March 2010, priced from $415,000 for a 2 bedroom apartment. 
  
Projected holding costs on a $415,000 apartment (using the above assumptions):

Local investor, borrowing 100%, projected net cost (once completed) on a $415,000 apartment is $23 per week.
Non resident investor, borrowing 80%, projected net cost (once completed) on a $415,000 apartment is $106 per week.

St Kilda Off Plan Apartments  This boutique project of just 11 one and two bedroom apartments is very well positioned, close to shops, transport, just 6kms from the CBD and just 350m from St Kilda beach.  Priced from $399,000, completion expected Aug 2009. 

Projected holding costs on a $599,000 apartment (using the above assumptions):

Local investor, borrowing 100%, projected net cost (once completed) on a $599,000 2 bedroom 2 bathroom apartment is $39 per week.
Non resident investor, borrowing 80%, projected net cost (once completed) on a $599,000 2 bedroom 2 bathroom apartment is $123 per week.

South Yarra Off Plan Apartments Just launched in early November, a good selection of one bedroom & two bedroom two bathroom apartments, priced from $350,000.  Very well located within South Yarra, an inner city suburb that traditionally performs well above the Melbourne average.  Completion not expected until May 2011. 

Projected holding costs on a $375,000 apartment (using the above assumptions):

Local investor, borrowing 100%, projected net cost (once completed) on a $375,000 1 bedroom  apartment is $40 per week.
Non resident investor, borrowing 80%, projected net cost (once completed) on a $375,000 1 bedroom  apartment is $94 per week.

As you can seem, a 3% reduction in interest rates makes a big difference to holding costs. 

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Please let me know if you would like any further details. 

Hope the above is helpful.

Regards

John Faulkner
Managing Director & Licenced Real Estate Agent

(The above article was part of a Priority Investors Update which was emailed to our Investors in Dec 2008)

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