Tread Warily On Property Market

The Sun Herald

Saturday May 2, 1992

Peter Cochrane

Q I AM considering buying a home unit priced at $110,000 as my principal place of residence. I have $60,000 in cash, good income prospects for the future such that a second home is a likelihood (5-10yrs). Please advise me on financing this unit, giving thought to gearing, term and style of loan and possible tax implications. - K T, Manly

A THE Sydney market for low to medium priced family homes looks strong and likely to be subject to healthy demand in the future. However, the possible withdrawal of Japanese investment, and the growing view that Hong Kong will not be the source of desperate migration before 1997, could prolong the weaknesses affecting the top end of the market.

Furthermore, if we are lucky enough to enjoy low inflation for 10 years, then you should not expect to see in the 90s what we saw in the 70s and 80s, that is a doubling every decade or so. It is therefore important that you borrow at a low rate and lock in that rate with fixed rate loans when it appears that rates have bottomed, which I do not think they have.

Remember that when you borrow for any investment, that investment must achieve total earnings and capital growth at a higher rate than your rate of interest, otherwise you will end up losing money. If you are near or in retirement, then putting all your savings into a single property is too high a risk.

Uncertainty in sharemarkets - as we are experiencing - historically spreads to property markets, so I suggest you hold off for six months.

Q IF the Coalition wins Government in the next election and the 15pc consumption tax goes through, will that have an effect on company share prices on the stock exchange, ie, will they rise or fall? - G T, Dulwich Hill

A BUYING and selling shares on the stock exchange will not be subject to the Goods and Services Tax, even if the GST survives until the next election -and the odds against that are shortening following the Wills by-election. Given that the GST is designed to replace other taxes paid by companies, such as sales and payroll tax, there is a strong argument that the GST will be neutral in its effects on the value of shares.

Q I AM a single woman, 27, and I earn about $38,000 a year through two jobs. I inherited some money from my parents a few years ago and bought a one-bedroom unit without borrowing any money. My firm contributes 7pc to the staff superannuation fund and hence there is no need to have a personal one. I want to invest my money wisely to secure my future. - K W, Bondi Junction

A NOW there is more uncertainty in the world economy than at any time since 1987 and Australia is vulnerable to further external shocks. I suggest you invest in high-interest paying investments backed by Governments, such as NSW Treasury Corp bonds (available from the Reserve Bank in Martin Place) or State Bank Bonds (from any branch). Both are guaranteed by the NSW Government.

Alternatively, buy term deposits from the Commonwealth Bank, which is guaranteed by the Federal Government.

Q WE are a professional couple working for the NSW Public Service, one aged 53, earning $47,700, member of State Super Fund, the other aged 50, earning$63,000, member of State Authorities Super Scheme. We have two adolescent children. We own our home, valued conservatively by the Advance Bank at$430,000 last November. We have other assets worth $130,000. For negative gearing purposes we bought a house worth $288,000 last January, financed 100pc by a 20 year investment loan at 12.5pc variable interest, secured by our home. We pay $3,316 a month; rental income is $280 a week. We have no other debts. We are concerned that general reductions in interest rates have not been fully passed on to us by the Advance Bank and are considering refinancing with either Aussie Home Loans or GIO Asset Accumulator Account. - R R, Killara

A BORROWING to invest is financially a second-best alternative to investment without borrowing. The term, negative gearing, has developed a folklore and attraction that is out of all proportion to its usefulness today. If you borrow to invest rather than invest your own capital, you nearly always end up with lower returns.

The only time this fails is in periods of high inflation if the lender is foolish enough to keep interest rates low and below the rate of inflation. In times like this, of high real interest rates and low inflation, accompanied by likely low growth in property values, borrowing creates a heavy penalty. Thus, if you have capital to invest, you are better off using it to pay off your loan.

That said, yes, it may be worthwhile switching to the GIO Asset Accumulator, provided you understand the product. It is a revolving loan that sets a new interest rate each month. The rate is basically the average 90-day bank bill rate for the month plus a margin of 1.25pc which, the GIO announced last week, will rise to 2.25pc from August 1. Taking the average bill rate now at around 7.25pc, plus the August margin of 2.25pc, the total rate is 9.5pc. A monthly administrative charge of $55 brings the total costs on a $200,000 loan to around 9.83pc.

This fee is to be reviewed next year and is likely to rise. Entry fees comprising the stamp duty plus the GIO's valuation and legal costs, vary with the size of each loan. On a normal $200,000 loan with no major legal complications, the fee would be between $2,500-$3,000. If you withdraw within 10 years the fee is charged fully during the first 20 months and then pro-rata at the rate of 1pc for each month outstanding in the 10 year period.

This should be taken into account if you assume that rates will fall for the next 6-12 months but may then start to rise. Under such a scenario, you may then consider switching to a fixed rate home loan. The GIO offers one, but a switch from the Asset Accumulator would trigger the exit fee.

As a matter of interest, GIO's current fixed rate is 10.5pc for two years, rising to 11.9pc for five-year loans.

Q I OWN my own home and wish to invest in real estate with spare cash. Unfortunately I do not have an expert knowledge of real estate and need to seek advice on matters such as what areas to purchase in and how to best invest, ie, renovate, spec build, etc. I have found that real estate agents usually seem to have their own interests at heart and always tell me to buy in their area. They always seem to have the "ideal investment" for me. Is there an independent body or consultant I can turn to for unbiased advice? - V B, Chatswood

A WHILE I have heard of specialists who assist executives relocating from other cities or countries, I know of no group that generally acts for buyers. Were there any, they also would be likely to show you their idea of "the ideal investment" since they too would be under pressure to pick up the fee or commission on a successful sale.

When buying real estate, no-one knows what you like more than you do. Also no-one is as likely to gain from bargaining shrewdly as you will. What it gets down to is that there is no better alternative than researching your chosen location, getting to know that market well and making a sound purchase when one becomes available.

Q I WOULD like advice on how to invest $220,000 from the sale of my home for 3-6 months safe investment. I am on the age pension and plan to use the money to buy another house. - E T, Umina

A I SUGGEST you go to the nearest three banks and ask each one what interest rate they are prepared to pay you for a six months' deposit of$220,000. Be sure to tell each bank manager that you are getting quotes from another two. Remember that pensioners can sell their home and buy another one within 12 months without their status as "homeowners" under the assets test being changed and the money received on sale is not counted as assets. However, if you plan to buy a less expensive house, then the assets test will only ignore the amount you plan to spend on the new home. Also, the interest you receive from investing the $220,000 will be counted towards the income test. In a nutshell, you will lose pension payments roughly equal to half the interest earned, so you will still be better off, and once the money has gone into the new home, the pension will be fully restored. Be sure to explain to your local DSS what you are planning.

© 1992 The Sun Herald

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