mrd Web Seminar Dec 2008

Welcome to the mrd

“What In The World Is
Going On With Property”

helping people to get out of the rat race!
© mrd your propertyinvestmentmentor.com.au

Objectivity VS Subjectivity

IMPORTANT: Objective Research From A Variety Of Reputable
Sources Rather Than Subjective & Emotive Views & Opinions!
Michael Matusik - Matusik Property Insights
BIS Shrapnel
RP Data
NAB Economics
ANZ Property Outlook
Australian Bureau of Statistics
Real Estate Institute of Australia
mrd your property investmentmentor.com.au

Please note, the information provided in this web seminar is not to be taken as financial
advice. Before acting on anything outlined it is recommended that you seek to
independently verify the information and or opinions expressed

Who is Nick Lockhart?

 Born & raised in Sydney

 Married to Katrina for almost 22 years

 4 Children; Rebecca 20, James 17,
Natasha 15 & Brittany 12

 7 Investment properties

 Background in property research

 Have sourced land & put together development
projects on behalf of other developers

 Licensed Real Estate agent

 Diploma of Financial Services

 Extensive business experience

Believe passionately in the essential need to take responsibility for one’s own financial

future

 Desire to see others reach their full potential

Who is mrd?

 Property educators & strategists

 Wealth creation mentors

 Walking the talk

 Customer Care Programme

Our Customer Care Programme works for you… because investing is personal

 Unique “set ‘n’ forget; for busy peoplequot; TM system

 Teaching people how to BUY so they will never be SOLD

 Personal Support before, during and after the purchase

 Strategies for sourcing, structuring & managing cashflow

 QS Report, Rental assistance, Property bookkeeping spreadsheet, etc

 A real (supported) strategy for planning your retirement

 Recognition that each person is an individual with individual goals… because investing is personal

 Striving to keep education FREE!

FOUR KEY FACTORS TO
CONSIDER

1. Record Population Growth
2. Investors Have Fled The Market
3. Home Ownership Unattractive
4. New Construction Has Stalled Badly

Record Population Growth

1. Record POPULATION GROWTH

 Fastest population growth in Australia in 200 years
 Predicted to grow by 350,000 per year; first time in over 200 years
 Almost as many people as are living in Geelong, Cairns & Bunbury
combined, or the whole of Canberra (EACH year)
 Previous Population Explosions:
- 1850s Gold Rush years
- Post World War 1 (1919 onwards)
- Post World War 2 (1946 onwards)
 Today we see a similar pattern
- Rapid and prolonged growth
- Too few workers
- Pro-immigration government policies

Record Population Growth

1. Record POPULATION GROWTH (continued)
 The Australian Bureau of Statistics (ABS) is not forecasting a slowdown in the
population boom
 Australia‟s net annual population growth will hit nearly 400,000 in less than five
years:

- 2009: 350,000 increase - 2012: 384,000 increase
- 2010: 365,000 increase - 2013: 390,000 increase
- 2011: 379,000 increase

The projected housing shortfall by the end of
2009 is expected to reach between 170,000 and
200,000!!!

Investors Have Fled The Market

2. INVESTORS HAVE FLED THE MARKET
 Property investors have left the market in droves

 Record population growth = demand = willing investors?
- Ordinarily, YES… But NO!
- Investor interest in property has never been lower! (See Chart 3)

 Investor lending growth
- 2004 = over 30%
- 2008 = below 10% (8.4% in July)


2. INVESTORS HAVE FLED THE MARKET (continued)

 First time below 10% since records were kept! WHY?
- Interest rates; thus
- Rental yields
- Booming (bull) share market
(averaged over 20% per year 2004 to 2007)

- US sub-prime crisis - global share markets into a bear market
(i.e. prices fell more than 20%)

- US sub-prime crisis = shareholder’s were burnt = switch to
cash rather than property this time
- Horror stories | property prices crashing 30-40% in UK & US
 Only the 'brave' have continued to invest in property

Home Ownership Unattractive

3. HOME OWNERSHIP UNATTRACTIVE
 Affordability barrier
 Interest rates
 US sub-prime crisis
 Lack of consumer confidence
 Negative media reports
 Scared!!! Renters have simply continued to rent

New Construction Has Stalled Badly

4. NEW CONSTRUCTION HAS STALLED BADLY
 Many developers nervous & are not building
 Many developers have gone broke
 Many developers can‟t get funding
See Table 1: Failed property development companies

 Investors make up approximately:
- 50% of the new housing market
-70% of the new apartment market

 Drop off in investor interest
 Developers reduce number of new projects
Chart 4: Annual change in advertised rents, July 2008


4. NEW CONSTRUCTION HAS STALLED BADLY (continued)
 Since 2005 the absolute number of completed residential properties has fallen
 Forecast to continue falling in 2009
(see Chart 1)

 US sub-prime crisis cemented downward trend in new properties
 Borrowing costs skyrocketing for developers
 Liquidity crisis
 High profile bankruptcy of many developers owing investors millions
(see Table 1)

 Massive financial pressures on hundreds of smaller developers
 Developers now understandably very nervous
 Shelved many new developments until there is clear evidence investors are back
in the market

Explaining The Rental Cycle

EXPLAINING THE RENTAL CYCLE

 Market Equilibrium exists where the average advertised rents and average
actual rents are about the same
 Ford Geelong recently announced massive job losses. This can affect rental
markets
 People need to reduce expenditure | look for a cheaper property to rent
 Supply of rentals goes up while demand for rentals (at the same price) falls
- This results in a drop in rental values
 However, while average advertised rental prices fall almost immediately
 Average actual rental prices don‟t! Why?
- Because most tenants are locked into existing leases
 Then… leases begin to progressively expire
 Over 12 to 18 months people move from area OR demand reduced rents to stay


EXPLAINING THE RENTAL CYCLE (continued)
A Balanced Rental Market - 3% to 4% Vacancy
 Rents steadily rise
 Rental prices eventually peak
 People respond by moving “out” to less expensive areas
 Demand reduces
 Average advertised rents fall from their peak
 Average actual rents stay higher than the new advertised prices (as many people
remain locked a lease)

 Rental leases expire over a 12 to 18 month period
 Average actual rents fall
 Market equilibrium is reached



A Stressed Rental Market – 1% to 3% Vacancy
 Population boom
 According to property research firm Residex www.residex.com.au; average
advertised rentals have jumped by about 8% to 17% in capital cities over the last
year (see Chart 4)
- NB: Average advertised rentals usually rise between just 4% & 8% per year
 Outrageous rental increases are forcing a much higher than normal exodus from
areas close to infrastructure and services to the suburbs



A Stressed Rental Market – 1% to 3% Vacancy (continued)
 Normally such an exodus would affect the market equilibrium, resulting in rents
softening for a time
 Now, however, these vacated properties are being snapped up by new
immigrants, who have arrived in town and simply accept the higher rentals (e.g. Sydney
& Melbourne)

 New immigrants: willing & able to work | usually have little savings | will remain
renting for a season
 Even with a deposit, banks loathed to extend credit until they‟ve been permanently
employed for between 6 & 12 months; especially in current climate of tighter credit
 They create demand that fills vacuum left by those moving out
 Those who move to cheaper suburbs find rents spiralling there too (overall supply and
demand)



SOARING RENTS

 $10-20 a week rent rises were common
 In 2008 they were significantly higher, however
 I know someone very well whose rent rose:
- from $450 a week in Sept ’04 to $480 a week in Sept ’07
- That’s 6.6% increase over 3 years
- In Sept ’08 it jumped $80 to $560 a week
- That’s 16.6% increase over previous year… and in one hit
 Vendor not worried about losing a tenant as he would get $580 without a problem
 NB: Between 2004 and 2007, the housing shortage across Australia was
absorbed by a 2.0% fall in the vacancy rate to 1.5%


EXPLAINING THE RENTAL CYCLE

SOARING RENTS (continued)
 As long as vacancy rates are over 1.0% +, rents experience moderate rises
 1.0% vacancy is effectively 0% as the remaining 1.0% represents the few days
between tenants when properties are cleaned and inspected
 Vacancy rates now set to fall past 1.0% & approach the unprecedented 0.5% mark
 A 1.0% vacancy rate | A population boom & | The Great Housing Shortage
- Can mean only one thing for 2009… rents are going to soar!
 One of the following two outcomes will occur next year:
a.Supply must increase; i.e. more housing constructed – This cannot happen
b.Vacancy rates fall... and rents rise – This must happen

Greatest Ever Housing Shortage

GREATEST EVER HOUSING SHORTAGE

 Let there be no confusion…

 The result of this is that Australia now faces its greatest ever housing shortage!!!

Explaining The Property Cycle

EXPLAINING THE PROPERTY CYCLE

 Despite recent pessimism; when the largest population boom in 200 years hits the
greatest housing shortage in 200 years there is only one way property values can
head… and that‟s NORTH!
 I expect that official interest rates will come down to at least 4% by April 2009
- NB: Today, 19th November; Bank West announced a 2 year fixed rate of 5.99%

 That would be a $218.75 per week interest saving on a $350,000 mortgage
(assumes a 3.25% drop in interest in just the 7 months from Sept '08 to April '09)

 Rising rents | Falling interest | Uncertainty surrounding global shares | Increase to
1st home owners scheme =
- Increased demand | Pressure cooker lid comes off | Will trigger another strong
round of residential property price growth
- Investors & owners drawn back into market further compounding price growth


Michael Matusik says:
 The current situation is “Demand with NO Supply”
 Sometimes these laws can be artificially stalled but they will always win through
in the end
 Every market returns to its long term average; that is a mathematical certainty
 The market has bottomed out and he expects it to get back to a more normal
pattern in about 6 months


ABERRATIONS, FLUCTUATIONS & SHORT-TERM BLIMPS

 While there will be exceptions to any rule in the short term; water always finds it‟s
own level
 Regardless of short term market reactions expressed in rentals and/or values;
supply & demand will set the long term direction of prices
 “Set „n‟ Forget; for busy peoplequot; TM OR Property trader & speculator
- “Don’t make long term decisions based on short term focus or information”
(Unknown)

- “Great opportunities arise when excellent investment prospects are surrounded by
unusual circumstances that cause the situation to be mis-appraised”
(Anonymous)

- “Be fearful when others are greedy and greedy when others are fearful”
(Warren Buffett)


CASHFLOW & PROPERTY CYCLES
Let‟s look at 2 examples of how significant the current economic climate is on the
cost of holding property.
EXAMPLE 1 | The Wharf @ Robina | August 2008
Assumptions…
Purchase Price: $459,000
Taxable Incomes: $60,000 and $40,000
Ownership Split: 50 / 50
Rent: $420 / week
Interest Rate: 8.87% (Westpac variable rate, with full professional package
discount, at peak)

Weekly shortfall without using strategy of capitalising expenses $344
Weekly shortfall using strategy of capitalising expenses $212


CASHFLOW & PROPERTY CYCLES (continued)

Let‟s look at 2 examples of how significant the current economic climate is on the
cost of holding property.
EXAMPLE 1 | The Wharf @ Robina | December 2008
Assumptions…
Purchase Price: $459,000
Rent: $460 / week
Interest Rate: 6.0% (Approx rate with full professional package discount)

Weekly GAIN using strategy of capitalising expenses +$20


Summary:

Interest Rate Cuts producing approximately $253 per week holding cost reduction
Rental Increases producing approximately $40 per week holding cost reduction
TOTAL HOLDING COST SAVING OF $258 a week (incl. tax adjustment)

Investors are starting to trickle back to the market now
HOWEVER, within about 6 months; I think they will flood back!


EXAMPLE 2 | City Park @ Cairns | August 2008
Assumptions…
Purchase Price: $310,000 (Unfurnished)
Rent: $320 / week
Interest Rate: 8.87% (Westpac variable rate, with full professional package
discount, at peak)
Value of Furniture Pack: Not Applicable
Cost of Furniture Pack: Not Applicable

Weekly shortfall using strategy of capitalising expenses $94


EXAMPLE 2 | City Park @ Cairns | December 2008
Assumptions…
Purchase Price: $310,000 (Furnished)
Rent: $380 / week
Interest Rate: 6.0% (Approx rate with full professional package discount)
Value of Furniture Pack: $16,700 (Approx)
Cost of Furniture Pack: Nil (Developer’s Incentive)
Weekly GAIN using strategy of capitalising expenses + $93


Summary:
Interest Rate Cuts producing approximately $153 per week holding cost reduction
Rental Increases producing approximately $60 per week holding cost reduction
TOTAL HOLDING COST SAVING OF $187 a week (incl. tax adjustment)

Investors are starting to trickle back to the market now
HOWEVER, within about 6 months; I think they will flood back!

This Is NOT The USA

This Is NOT The USA
Ric Battellino, the Deputy Governor of the Reserve Bank said
on 30th October 2008: quot;The overhang of unsold houses in the
US has created downward pressure on house prices as
builders and developers have been forced to sell. This is
absent in Australia. Rather, a shortage of housing here
means that there are buyers waiting for better circumstances
- e.g. lower interest rates or rising incomes - to facilitate the
market. This latent underlying demand for housing is a factor
that will support the market.quot;

This Is NOT The USA

This Is NOT The USA

 US credit crunch
 „Free money' mentality of US banks
 'NINJA' loans = No Income, No Job or Assets
 Banks were happy | a booming market | could foreclose on
defaulters | then sell property for more
 Built to satisfy GREED, rather than NEED
 Result was a huge housing glut
 Nine months oversupply
 House prices fell last year in Florida & Detroit by 30% - 40%
 Negative equity
 Send back the keys and walk away | Jingle Mail

This Is NOT The USA

This Is NOT The USA (continued)

 Non-recourse loans
- I.E. Bank could not sue a borrower or touch his/her other assets
 Defaults between 2006 & 2008 more than doubled from 6% to 15% of all sub-prime
mortgages (see Chart 6)
 Banks forced to foreclose in greater numbers than anyone expected
- Personally, how they could have been so stupid I will never understand
 Flood of houses foreclosed added to the huge oversupply of properties built by
developers
- Chart 5: US monthly oversupply of housing vs residential lending
- Chart 6: US and Australian sub-prime loans in 90 days arrears

This Is NOT The USA


 Australia is very different | Australian property market well placed
 No US style loans | Faces none of the risks the US market is currently facing
 We have a 200,000 (and growing) shortage of property... not a property glut
 Rents are rising... not falling
 Australian economy underpinned by the 'once-in-a-lifetime' commodities boom
(led by China)

 Australian banks wrote virtually no sub-prime mortgages
(no-doc or non conforming loans)

 Australian no-doc borrowers are not defaulting | Defaults are falling (see Chart 6)
 Only option is for vacancy rates to fall and rents to rise
 BUT... no room for vacancy rates to fall

This Is NOT The USA


 Since 2004, rental vacancy rates have fallen nationally from 3.5% to below 1.5% in
2008 (see Chart 7)
 Councils and State Governments are loathe to approve new housing subdivisions
(which require expensive infrastructure such as roads, water and sewage)
 The long run of increasing interest rate rises scared many renters away from buying
 Rising rents have the opposite effect; especially with interest rates falling
simultaneously
 Rent rises in 2009 will push many renters to buy their own property | Promoting a
broad rise in property prices
 Chart 7: Residential vacancy rates

This Is NOT The USA


 Reserve Bank of Australia dropped interest rates:
- Cash rate of 7.25% was reduced by 0.25% in September
- Cash rate of 7.0% was reduced by 1.0% in October
- Cash rate of 6.0% was reduced by 0.75% in November
- Cash rate of 5.25% was reduced by 1.0% in December
- Cash rate is now 4.25%
 More rate cuts forecast into early 2009 (see Chart 8)
 I have suggested at least down to 4.0% cash rate by April ‟09
- This now looks conservative! NB: Bendigo Bank announces a 2 year fixed rate of 5.99% (LAST Month)
 Interest rate cuts makes ownership 'relatively' more affordable
 3.25% (conservative) interest rate drop (between Sept 08 & April 09) on a $350,000
mortgage would equate to $218.75 a week in interest saving

This Is NOT The USA


 Affordability & security associated with home ownership boosts confidence
 Increased income from property (i.e. rental increases)
 Government‟s increased first home owners incentive
Renters & investors alike are enticed back into the market
 Renters, those living with parents and/or share accommodating will buy their own
properties in 2009
 HOWEVER, all this new rental vacancy will be totally dwarfed by the influx of
immigrants
 Therefore, the demand for rental housing will not materially ease
 The most money is made by those leading, not following the herd
 Investors are fickle | Herd mentality prevails | From cold to hot very quickly

This Is NOT The USA


 Nationally speaking, property investors have been relatively cold since mid 2004
 Annual growth in investor lending plummeted from 30% in 2004 to 10% by the end
of 2005
In early 1997 and 2002, investor lending jumped 10% within a year and then
continued rising another 13-15% the following year
 When investors return to the market; they return en masse
- Soaring rents = Better income
- Falling interest rates = Cheaper holding costs
- Rising property prices = Capital gains
 RESULT?
- Investors WILL BE tempted back into the market… and probably mid-to-late 2009?

This Is NOT The USA


 Continuing uncertainty around the stock market will also encourage
investors to look for the safer investment with better returns offered by
residential property
 Renters should consider buying; probably sooner rather than later
 Anyone can “see” where a market is now! It‟s those who “see” where a
market is headed that make the best gains
 Stay alert in the midst of doom and gloom; so as not to miss an
impending BOOM

What Next?

Don’t Miss This IMPORTANT Step!

 Go To: www.investmentmentor.com.au
 Click: Borrowing Capacity
 Complete our online secure BCA form
 Submit (NB: Encrypted & Secure)
Alternative download NOW, complete & fax

 We will:
- Have your Borrowing Capacity Assessed

- Prepare for you a complimentary sample Cashflow Analysis
- Prepare for you a complimentary sample Retirement Projection
- Print & Post these to you, along with a complimentary copy of my DVD
(should you not have received this previously)
- Complete a complimentary finance structure & cashflow “health check” (if requested)

Questions?

Type your questions into the chat room part of this event now!

We trust this evening has been worthwhile & beneficial

Thanks for listening.

Nick Lockhart

mrd Web Seminar Dec 2008

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