Speaker 1: Hello and welcome to The Australian's Money Puzzle podcast. I'm
Speaker 1: James Kirby, the Worth editor at The Australian. Welcome aboard
Speaker 1: everybody you are interested in property investment in any fashion
Speaker 1: or even the basic challenge of owning your own home,
Speaker 1: you should know that really the outstanding issue in property
Speaker 1: for property investors just now is not a demand or
Speaker 1: setting up property or finding a property, or even price,
Speaker 1: because the prices are coming along very nicely. Thank you.
Speaker 1: Seventeen months are consecutive price growth in Australia. I mean,
Speaker 1: it's absolutely tremendous market. The issue for everyone right now
Speaker 1: is what you might call holding costs. It's costs that
Speaker 1: as an investor. It's the costs that you are facing
Speaker 1: as a homeowner. This week, I just did some work
Speaker 1: already this week on this really interesting dimension of the
Speaker 1: market for people are extending their mortgages. Something like one
Speaker 1: in ten people are now pushing out their mortgages. Right,
Speaker 1: so you are strapped basically with the price of the mortgage.
Speaker 1: How do they make against me? Where this extra money
Speaker 1: comes from? It it's signed away. It's an old fashioned way.
Speaker 1: You add five years to your mortgage certainly you cut
Speaker 1: your mortgage bill, buy one hundred and eighty dollars a
Speaker 1: month or so, but guess what your mortgage costs about
Speaker 1: one hundred and forty thousand more. You literally pay one
Speaker 1: hundred and forty thousand at more to the bank over
Speaker 1: the ford period of time. That's the average mortgage on
Speaker 1: the average home in Australia. Very interesting development this week. Similarly,
Speaker 1: on the investment side, the colding costs. My guest today
Speaker 1: has done some work on this. I'm going to talk
Speaker 1: about it and in essence, but here is the governed
Speaker 1: is that the holding costs of property, of managing property
Speaker 1: have really risen quite substantially in recent times, largely on
Speaker 1: the back of higher interest rates, to which is of
Speaker 1: course the defining feature of our market.
Speaker 2: At the moment.
Speaker 1: My guest is a regular on the Show's Stuart Wems.
Speaker 1: He's an advisor of course, it's a mortgage broker, it's
Speaker 1: a property yet but author and indeed podcast to host
Speaker 1: himself of the invest of Belief podcast or Warrior Stuart.
Speaker 3: I'm really well, James, always enjoy our chance. I'm particularly
Speaker 3: excited to talk about holding costs.
Speaker 2: Well.
Speaker 1: I noticed you are because you've just been writing about them,
Speaker 1: and you know, and I know, if you write a
Speaker 1: piece that's something, then you really know it for a
Speaker 1: while at least. Yeah, that's right, and I wanted to
Speaker 1: just talk to you about that. Were you aware that
Speaker 1: people are doing this, extending their mortgages as I's say,
Speaker 1: one in ten doing it at the moment that that
Speaker 1: number is going to rise and rise. We were you
Speaker 1: aware that was happening, you know.
Speaker 3: James thinking about it more, I reckon it would be
Speaker 3: a lot more than ten percent, because every time you refinance,
Speaker 3: almost always your mortgage term is reset back to thirty years.
Speaker 3: So if we think about it, a lot of people,
Speaker 3: in fact, everyone that refinances, and the average life of
Speaker 3: the loan I haven't seen the most recent data, but
Speaker 3: it's three to five years. You know, typically people refinance
Speaker 3: every three to five years, so people are resetting their
Speaker 3: loan term. Everyone that refinances is resetting their loan term.
Speaker 3: Whether they realize they're doing it or not is another question,
Speaker 3: but it happens as a matter of course when you
Speaker 3: do refinance. Of course, we've experienced a lot of rate
Speaker 3: increases over the last couple of years. So one solution
Speaker 3: to managing the higher cost of repayment is to reset
Speaker 3: the loan term. Now, it's not going to make a
Speaker 3: big difference if the loan is relatively new, so it
Speaker 3: was only set up a couple of years ago. But
Speaker 3: if your loan was set up ten years ago and
Speaker 3: so the remaining term is twenty years, well resetting it
Speaker 3: back to thirty years is going to reduce your repayments
Speaker 3: at a cost. As you've alluded to James, you know,
Speaker 3: the longer you take to your home loan. But I
Speaker 3: guess there's another element here as well. Is one is
Speaker 3: trying to set your repayments at the minimum, just to
Speaker 3: give you yourself a bit of headroom, a bit of safety,
Speaker 3: whilst you still might intend to make extra repayments. So
Speaker 3: it's still possible to keep the repayment amount the same,
Speaker 3: but just try and reduce to the minimum repayment to
Speaker 3: give yourself some flexibility maybe in the months where you
Speaker 3: know incomes a little bit lower, expenses are a little
Speaker 3: bit higher.
Speaker 1: Well, then I came in to you and I said,
Speaker 1: and this is even I'm just on the whole room.
Speaker 1: If I said to you, we are absolutely caught. The
Speaker 1: reate rises have really caught us. My mortgage is very large.
Speaker 1: I've got to find some extra cash somewhere. Someone said
Speaker 1: to me, I can cut one hundred needy up after
Speaker 1: my mortgage a month cash. I'd probably have to make
Speaker 1: two hundred and fifty a month to be able to
Speaker 1: find the one hundred needy to pay, if you know
Speaker 1: what I mean? What would you say to them? Would
Speaker 1: you sa say, look, on balance, it's a good idea.
Speaker 1: Would you said, never do that? What would your instinctive
Speaker 1: advice be?
Speaker 3: First question that jumps into my mind, James, is have
Speaker 3: they overborrowed? Is this just a band aid solution? Are
Speaker 3: we just kicking the can down the road, or do
Speaker 3: we have a bigger problem here. That's the first thing
Speaker 3: that I would want to ascertain. It might be that
Speaker 3: it could be a temporary change in their situation. So
Speaker 3: one of the spouses is on maternity or paternity leave
Speaker 3: or something like that, and they just need to get
Speaker 3: through this sort of very difficult period of time. And
Speaker 3: if we feel like it's temporary, it could be a
Speaker 3: great solution. But if we look at the numbers and
Speaker 3: we decide, well, look, you probably over extended yourself, then
Speaker 3: we probably need to have a deeper conversation. Now, we
Speaker 3: could extend the loan term as an initial step, but
Speaker 3: we really need to have another solution, which probably is
Speaker 3: going to be one that means sort of changing their
Speaker 3: home and changing their mortgage at some point.
Speaker 1: Right, I'm actually keep you a very little to do.
Speaker 1: That's good. Imagine given the choice, it's always easy to
Speaker 1: kick the can down the world, isn't it the.
Speaker 2: Office of the need gratification. As we said, it's always
Speaker 2: easy to do that.
Speaker 3: Yeah, and I think you know it goes to a
Speaker 3: wider investment strategy question is do they need to have
Speaker 3: zero home loan by the time they get into retirement
Speaker 3: or is a downsizing strategy in their situation. Okay, so
Speaker 3: if people can make friends with that, if they say, look,
Speaker 3: we understand extending the mortgage is going to mean that
Speaker 3: we're going to pay more interest, and by the time
Speaker 3: we get to age sixty or sixty five, whatever their
Speaker 3: retirement age target is, we're going to have a home
Speaker 3: loan and that means we're going to have to downsize
Speaker 3: in order to extinguish that home loan. If they can
Speaker 3: make friends with that, chances are the capital growth will
Speaker 3: more than offset the interest cost, you know, if they've
Speaker 3: and particularly from an after attack spasis, so they're probably
Speaker 3: better off to do that as a general observation, but
Speaker 3: they just need to make friends with That is our strategy.
Speaker 3: That's the consequence of doing this, is that we know
Speaker 3: we need to Dawn's eye at some point in the future.
Speaker 1: That's really good, that's a really good answer, and it
Speaker 1: really cuts to this. Let's just before we talk about investors,
Speaker 1: just to finish on that. So then the present says, okay,
Speaker 1: let's listen. I know, I know I'm up for another
Speaker 1: one hundred and forty thousand that I have to pay
Speaker 1: the bank, or the bank must be paid in the
Speaker 1: fullness of time.
Speaker 2: And I know I'm.
Speaker 1: Pushing tomorrow's problems away from today, but I must do it.
Speaker 1: And you say, okay, well you must do it on
Speaker 1: the basis that when the time comes, it's a family
Speaker 1: home you've got, you must sell it. It's not like
Speaker 1: you could decide to sell it and move somewhere smaller.
Speaker 1: Even I have to move somewhere smaller to pay off
Speaker 1: the mortgage. If you want a mortgage, be retirement, which
Speaker 1: which on the show has regularly come up as a
Speaker 1: sort of a basically a rock bottle. If you want
Speaker 1: to build wealth, you absolutely got to get rid of
Speaker 1: that mortgage. So here's a million dollar question. In your
Speaker 1: experience with people downsides, do they really save that much
Speaker 1: if they're just buying a townhouse around the corner from
Speaker 1: the from the family home. It seems to me that
Speaker 1: they cost more or less the same as those colsors
Speaker 1: and money stow ups to people set they don't say.
Speaker 2: So, is there a proper way to do it?
Speaker 3: In my experience, the answer is yes. They downsize to
Speaker 3: achieve their goal, which is to repay the home loan. Essentially,
Speaker 3: if that's your strategy, you've got to work out, you know,
Speaker 3: how much cash and I'm going to walk away with
Speaker 3: after repaying that mortgage. That's my budget. So you have
Speaker 3: to make it work. And in the situations that I've
Speaker 3: helped clients with, we have made it work and it's
Speaker 3: been fine. It hasn't created any problems. The thing that
Speaker 3: I would counsel and encourage people to do is just
Speaker 3: make friends with maybe the worst case scenario, which is
Speaker 3: I'm going to have to make some compromises in terms
Speaker 3: of accommodation size, and if you can make friends with that. Now,
Speaker 3: it might not necessarily in that way. You know, maybe
Speaker 3: you're in your cash flows a lot different. Your income
Speaker 3: might end up being different, interest rates might end up
Speaker 3: being lower, maybe the property growth is better. There's a
Speaker 3: lot that can change over a period of time, you know.
Speaker 3: But if we can make friends with what is the
Speaker 3: worst case scenario, well, and then if it turns out better,
Speaker 3: that's all icing on the cake.
Speaker 1: So people can they down size of the same horse
Speaker 1: could and save money.
Speaker 3: Well, they can only if they can make friends with
Speaker 3: smaller accommodation eyes. So we're going from a family home
Speaker 3: to a two bedroom townhouse for example, you know, that's
Speaker 3: what you need, that's what you need to do. And look,
Speaker 3: most people at that age and stage of life actually
Speaker 3: want that. Kids and moved out of home. They don't
Speaker 3: need a four bedroom home. They're sick of doing the
Speaker 3: garden on weekends, you know those they don't need a
Speaker 3: forwarding bar because that's right. Yeah, yeah, So that typically
Speaker 3: sort of suits their lifestyle decisions or situation as well.
Speaker 3: But they just have to make friends with that.
Speaker 2: Very interesting.
Speaker 1: Now let's just flick on to the investor. Quite a
Speaker 1: different story here, But you tell us first of all,
Speaker 1: that essential conclusion you came to when you did the
Speaker 1: deep dive on the figures about holding caston and to
Speaker 1: the extent of which they're resent for the average investor.
Speaker 3: So the idea came out a lot of conversations I've
Speaker 3: been having with investors and obviously been invested myself. I've
Speaker 3: noticed over the last four years, so let's say, really,
Speaker 3: since the beginning of the pandemic, we're all being conditioned
Speaker 3: to understand that, you know, costs have increased substantially, and
Speaker 3: sometimes these things creep up on us. Right, we have
Speaker 3: one year of very high inflation, and then inflation started
Speaker 3: to come down a little bit. We might fool ourselves
Speaker 3: into thinking, oh, well, actually things are normalizing. Not really,
Speaker 3: prices are never going to go backwards, that the new
Speaker 3: cost is the new cost. And so I had a
Speaker 3: look at some of these things across some clients and
Speaker 3: my own properties. Council rates over the last four years
Speaker 3: up about thirty percent, Insurance up about twenty percent, general
Speaker 3: cpis up about seventeen percent over that time. Land tax
Speaker 3: so since the start of twenty twenty, interest rates are
Speaker 3: sort of doubled over that time. You know, variable rates
Speaker 3: might have been circued three three and a half percent,
Speaker 3: then our so six six and a half.
Speaker 1: Percent, seven percent, that's the big one.
Speaker 3: Now that's the big one. Yeah, So so naturally it's natural,
Speaker 3: I think for property investors, think all these costs, arising,
Speaker 3: compliance costs. You got to pay your property manager a
Speaker 3: little bit more because they're doing a lot more work
Speaker 3: today for their money than they were ten years ago.
Speaker 3: And so it's natural think, you know, how does that
Speaker 3: impact my investment returns? Is it worth hanging on to
Speaker 3: these properties? You know, if I haven't seen the growth,
Speaker 3: particularly in Melbourne and Sydney, they're underperforming the other cities,
Speaker 3: I should say, it's naturally ask, you know, is it
Speaker 3: worthwhile to hang on to this? And so I thought,
Speaker 3: let's do an analysis on this financial analysis and my
Speaker 3: gut feeling was that the holding costs would have a
Speaker 3: material impact on investing in property. That was that was
Speaker 3: my initial feeling going in before I did the numbers.
Speaker 3: The answer is it doesn't. It doesn't really have much
Speaker 3: of an impact at all. And that the two factors,
Speaker 3: the two most important factors. The first one is capital growth.
Speaker 3: You know, how much will your property grow over long term.
Speaker 3: Second one is interest rates. They're the only two that
Speaker 3: are quite sensitive to investment returns. Everything else isn't very
Speaker 3: sensitive to your investment returns. And the approach that I
Speaker 3: looked at James was looking at it what's called an
Speaker 3: internal rate of return. And so just to explain it
Speaker 3: quite simply obviously, is when we invest in property, typically
Speaker 3: most investors go and borrow to do that. So there's
Speaker 3: not an initial capital outlay because we're borrowing that the
Speaker 3: purchase price plus the costs and so forth. But what
Speaker 3: we do have to contribute from our own pocket is
Speaker 3: the are the holding costs, you know, the shortfall between
Speaker 3: the rent after expenses and the loan repayments.
Speaker 2: The monthly costs would be like or they're on in costs.
Speaker 3: Yeah, exactly right. So that's our contribution towards the investment.
Speaker 3: That's our cash contribution. Let's say that costs us after
Speaker 3: tax twenty thousand dollars a year. So if we hold
Speaker 3: that property for ten years, we're put in two hundred thousand,
Speaker 3: or twenty years four hundred thousand dollars. So if I've
Speaker 3: contributed four hundred thousand dollars over twenty years, what is
Speaker 3: my return. And so what we can then work out is,
Speaker 3: if we sold the property in twenty years time, we
Speaker 3: paid capital gains, tax, selling costs, repaid the loan, et cetera.
Speaker 3: What percentage return did I achieve by investing and when
Speaker 3: expenses were they used to be but pre pandemic about
Speaker 3: twenty five percent of gross rental income. So if your
Speaker 3: property was generating thirty thousand dollars or let's say forty
Speaker 3: thousand dollars to make the math simple, your expenses are
Speaker 3: going to be about ten thousand dollars a year. These
Speaker 3: are the things like maintenance, managing, cost insurance, you know,
Speaker 3: these sorts of things. So when they were twenty five percent,
Speaker 3: my internal rate of return. If I held the property
Speaker 3: for twenty years achieved seven percent growth and the average
Speaker 3: interest rate was six and a half percent, my internal
Speaker 3: rate of return is thirteen and a half percent. So
Speaker 3: that means that because I've been putting in twenty thousand
Speaker 3: dollars a year, I've essentially earned on that twenty thousand
Speaker 3: dollars thirty and a half percent, which I think everyone
Speaker 3: would agree is really good and compares favorably against other
Speaker 3: alternatives such as making additional super contributions or investing in
Speaker 3: the share market, you're probably not going to achieve thirteen
Speaker 3: and a half percent. Now, it's going to be clear,
Speaker 3: it's not about property. It's about gearing. That's why we've
Speaker 3: got the thirteen half percent. It's not because property is
Speaker 3: so fantastic. It's because we borrowed the entire capital contribution
Speaker 3: at the beginning. So if I change those numbers and
Speaker 3: instead of assuming twenty five percent for costs, I assume
Speaker 3: thirty five percent for costs. So that's what it is now.
Speaker 3: About thirty five percent of grocery engel income should cover
Speaker 3: your costs excluding land tax and excluding interest. Well, the
Speaker 3: internal rate of return drops from thirteen half percent to
Speaker 3: twelve point eight percent, so it's point eight of a percent,
Speaker 3: which isn't I mean, it's reasonable, I think, but it's
Speaker 3: still worthwhile. Right, borrowing to invest in property is still
Speaker 3: worthwhile despite the higher costs. And this analysis just proved
Speaker 3: to me yet again that it's all about capital growth.
Speaker 3: It's our assumption. So I've made assumption seven percent over
Speaker 3: the long term, which is really the meeting house price
Speaker 3: return over the last four decades in Australia. So it's
Speaker 3: not I think it's a reasonable assumption. That's the key
Speaker 3: number here is buy a property that over many decades,
Speaker 3: not the next twelve months or the next five years,
Speaker 3: over many decades is going to generate a really good
Speaker 3: quality return.
Speaker 1: And part of your messaging is that this fed all
Speaker 1: of our obsessions with costs and taxes, et cetera, and
Speaker 1: they have increased. It's the interest rates that really is
Speaker 1: the variable. It's the key variable, and so a drop
Speaker 1: an interest rates from here would be very very useful,
Speaker 1: obvious said for on that basis in terms of everything,
Speaker 1: in terms of all your numbers, including your entirement method return,
Speaker 1: it's the key number to watch. Okay, that's very very interesting.
Speaker 1: And also you mentioned a couple of things there above
Speaker 1: the sheer scale of inflationary costs on the invent and
Speaker 1: how much things had how much things had lifted over
Speaker 1: the period. Did you say that the curis of CPI
Speaker 1: was seventeen percent over four years.
Speaker 3: Yep, And that's just general CPI and we know things
Speaker 3: have increased a lot more than that. James.
Speaker 1: Yeah, yeah, But that's why the other thing that you
Speaker 1: a partially capital or the other key feature, I'm sure
Speaker 1: our listeners think about is rent and off set into
Speaker 1: some degree there was higher costs that you mentioned. What
Speaker 1: was the rent increase, what was the rental income increase
Speaker 1: over that same four years.
Speaker 3: Thirty two percent. But insurance is up twenty counsel rates
Speaker 3: up thirty again, interest which will be you know, probably
Speaker 3: ninety percent of your holding costs has doubled over that time.
Speaker 3: So investors are still worse off. They haven't passed on
Speaker 3: the full cost increases onto renters. But I think the
Speaker 3: other thing I would say is the starting point four
Speaker 3: years ago, pre pandemic. The starting point in strates were
Speaker 3: relatively low, like they were below long long term average.
Speaker 1: There were the lowest said bind for a generation or whatever.
Speaker 1: So fork, it's clear obviously inflection and costs are a
Speaker 1: RIF factor for investors. It is clear that they have
Speaker 1: gone up, and you're holding costs as an investor have
Speaker 1: gone up. The key message from Stewart's for it was
Speaker 1: that to vary, but it really matters this interest rates.
Speaker 1: It's more than all virtually all the others put together,
Speaker 1: doesn't it.
Speaker 3: Capital growth is the number one. Capital growth and then
Speaker 3: interest rates. Now we can't alter interest rates. We have
Speaker 3: to wear price takers there, we can't impact that. We
Speaker 3: can try and impact capital growth by you know, first
Speaker 3: making sure we buy a high quality property at the
Speaker 3: beginning and then potentially, you know, looking ways to improve
Speaker 3: its value over time. So that's the one that I
Speaker 3: would be focusing on as an investor, and if I'm
Speaker 3: a new investor, that's probably the best lesson I can
Speaker 3: learn today before I actually buy the properties to realize
Speaker 3: I need to buy something today. So in thirty is time,
Speaker 3: the average growth rate is being above a seven or
Speaker 3: above seven per.
Speaker 1: And as you say, they're doing comfortably above that or
Speaker 1: as my old friend the property developer always used to say,
Speaker 1: you make your profit when you buy. Okay, we take
Speaker 1: your break and we'd be back at the moment. Hello
Speaker 1: and welcome back to The Australian's Money Puzzle podcast James
Speaker 1: Kirby with Stuart Williams on the show today, Regular guest,
Speaker 1: there was one other thing I wanted to talk to
Speaker 1: you about before we.
Speaker 2: Go to questions, Stuart.
Speaker 1: When we stand back from it over a long period
Speaker 1: of time, three things really matter. What was the property
Speaker 1: you bought, what was the interest rate you paid, and
Speaker 1: what was the capital growth you got? And we just
Speaker 1: said at the start of the show, seventeen months in
Speaker 1: a row now of consecutive price increases eight or nine
Speaker 1: percent last twelve months and be forecasters, which is never
Speaker 1: an easy task. But the core caster see two to
Speaker 1: five percent growth bist calendar year. That's hot off the
Speaker 1: press from prop Track this week. Two to five percent
Speaker 1: growth this calendar year. That seems a little bit on
Speaker 1: the low side to me.
Speaker 3: What do you think, Well, that's that's national right, two
Speaker 3: to five per.
Speaker 2: National dwelling value.
Speaker 1: I mean it's all averages, okay, but we know that
Speaker 1: inflation's four, right, inflation's four, and they're saying property is
Speaker 1: two to five. Well, if it's on the wrong side
Speaker 1: of four, no one's making any money.
Speaker 2: Yeah.
Speaker 3: Well, they're probably been pulled back by Sydney and Melbourne
Speaker 3: because if you look at CBA's forecasts, they forecast this
Speaker 3: calendy year and next for Brisbane, Adelaide and Perth to
Speaker 3: be the standout capital cities and Melbourne and Sydney to underperform.
Speaker 3: And if it's a weighted average, which it probably is
Speaker 3: given the meeting house price is in Melbourne and Sydney, well,
Speaker 3: certainly Sydney are much higher. Then the relative underperformance pulls
Speaker 3: those figures back. I would say, I would say fore casters.
Speaker 3: Would Buffett say, forecasters will fill your ears, but never
Speaker 3: your pockets. And I would say, look, as someone that's
Speaker 3: been in this space for a couple of decades, I
Speaker 3: would say that the banks and most economists have been
Speaker 3: absolutely terrible at forecasting property price movements, to the point where, really,
Speaker 3: when I read a forecast, I think to myself, Okay, well,
Speaker 3: I know it's not going to be that. They're probably
Speaker 3: good at forecasting what's not going to happen. So and
Speaker 3: the other thing I would say is who cares?
Speaker 1: Well, you said a few minutes ago you're assuming seven percent?
Speaker 2: Great long time?
Speaker 3: Yeah, yeah, And I don't care. I know it's not
Speaker 3: going to happen uniformly. Of course, I know we're going
Speaker 3: to go through periods. Of My research highlights that every
Speaker 3: market moves through a flat period and then a growth period,
Speaker 3: and then another flat period and other growth period, so
Speaker 3: it's two distinct cycles. I know what's going to happen.
Speaker 3: I don't really care. I just want to buy something
Speaker 3: that's above average, better than average, and something that has
Speaker 3: the attributes that are going to continue to push that
Speaker 3: price along over many decades. If I get zero percent
Speaker 3: this year or ten percent, whatever doesn't worry.
Speaker 1: Me, doesn't worry you as long as you can manage
Speaker 1: the volding costs, which is what we were talking about earlier.
Speaker 2: And the key variable on that is rice.
Speaker 1: No one knows, as you say, forecasts, no one knows.
Speaker 1: And it's isn't that amazing that when we started the year,
Speaker 1: those kate to do forecasts were saying that rice would
Speaker 1: drop this year.
Speaker 2: Some people were saying rich would drop several times this year.
Speaker 1: You can't find someone who says rates would drop this
Speaker 1: year anymore. Either're pushing it out to next year. The
Speaker 1: truth is a no one knows. B The nearest thing
Speaker 1: to somebody knowing is how much people are putting on
Speaker 1: the line besting in the money markets. Money markets are
Speaker 1: banging on fifty to fifty. Yeah, So really we're at
Speaker 1: a point where it's it's wide open. Isn't it really
Speaker 1: been aunced about us go in any direction? Possibly do nothing?
Speaker 3: I think the money markets, the money markets have been right.
Speaker 3: The money markets were totally right during COVID, you know,
Speaker 3: even when even when the RBA was saying no we're
Speaker 3: not hiking till twenty twenty four. The money market's still
Speaker 3: baked in these hikes, and it was kind of I
Speaker 3: was puzzled at the time, thinking, well, what does the
Speaker 3: money market now because the person in control is saying
Speaker 3: distinctly we're not hiking. But you know they were right,
Speaker 3: and if you look at them today that they're baking
Speaker 3: another rate increase this year.
Speaker 1: So so so folks followed the money we were to
Speaker 1: the extent that anyone knows anything the few pop who
Speaker 1: are actually putting their money on the line.
Speaker 2: So that could be a really infused this year.
Speaker 1: Who knows except to see that we have now got
Speaker 1: a sort.
Speaker 2: Of not a stable brief output.
Speaker 1: But the prospects are that rece won't move as often
Speaker 1: as they have been moving in obviously they had no
Speaker 1: prety call but up in the last six years and
Speaker 1: hopefully still what we have really is this period quess
Speaker 1: normalized in that REX would be flaked with an advance
Speaker 1: and if we haven't we know the direction. It's going
Speaker 1: to be a quarter of a percent. We're not going
Speaker 1: to get any structural change. And how we do our
Speaker 1: numbers looking out.
Speaker 3: And the silver lining James my gut filling, so obviously
Speaker 3: we need a dune quarter CPI that's going to be
Speaker 3: the deciding factor. My gut feeling is we'll get a
Speaker 3: rate hiking in August, and the silver lining might be
Speaker 3: if we do get a rate hike in August, I
Speaker 3: think that'll be probably enough to pop the balloon. And
Speaker 3: if we do, I think the chances of then getting
Speaker 3: a rate cart early next Yurium are much higher, okay,
Speaker 3: because I think I think they will really scare the market.
Speaker 3: I think that will discretionary spinnings already down. You notice
Speaker 3: that at restaurants, and you can get a seat at
Speaker 3: a restaurant a Saturday night now easily couldn't do that
Speaker 3: even three months ago. So it's a narrow indicator.
Speaker 1: But I reco on the volue, Yeah, yeah, on my son,
Speaker 1: I think they won't do anything I want.
Speaker 2: I don't think they'll do anything from first six months
Speaker 2: or so. But photos O, we're on a titled opinion.
Speaker 1: We'll take short break and we have some really good questions,
Speaker 1: specifically own property and property investments.
Speaker 2: In a minute.
Speaker 1: Hello, Welcome back to the Australian's Money Puzzle podcast. James
Speaker 1: Kirby webs editor in Australian talking to Stuart Willims, who
Speaker 1: is of course a property expert, author, podcaster, contributor to
Speaker 1: the web section of The Australian and on the show today,
Speaker 1: answering all sorts of questions. Okay, we might get you
Speaker 1: to read the first one if you like.
Speaker 3: Absolutely so, Phil asks a property tax question for you.
Speaker 3: I recently bought and rented out my first investment property.
Speaker 3: It's a regular brick bungalow built fifty years ago, costing
Speaker 3: me five hundred and thirty thousand dollars. I'm interested to
Speaker 3: know whether it's worthwhile to consider getting the expense of
Speaker 3: a depreciation schedule, which he expects to pay around five
Speaker 3: hundred dollars for. What are the benefits where the property
Speaker 3: is simple and doesn't have many expensive features?
Speaker 1: Great question, Phil, This has never advised. Everybody's on the
Speaker 1: information and I don't know what you're going to assist,
Speaker 1: but I would say, hey, you've never done an debreciation schedule,
Speaker 1: Spend mine these fever, see what you get first time.
Speaker 2: Anyway.
Speaker 3: So there's two types of depreciation that you can claim
Speaker 3: on in investment property, a residential investment property, capital works
Speaker 3: or capital allowance Capital works really relate to the actual dwelling,
Speaker 3: the construction itself, the building. Typically, you can depreciate a
Speaker 3: building over forty years, so two and a half percent
Speaker 3: per year straight line over forty years. So if the
Speaker 3: dwelling is older than forty years, chances are there's noreciation
Speaker 3: left because you can get a quantity surveyor and what
Speaker 3: they have to do is estimate the cost, not the
Speaker 3: replacement cost, but the cost it would have taken to
Speaker 3: build or construct that home save in the eighties or
Speaker 3: seventies whenever it was.
Speaker 1: Is it no depreciation on an ongoing business? You even
Speaker 1: did this for a few years old.
Speaker 3: Well that they would argue that the building is fully depreciated.
Speaker 3: You know, the last forty years we've depreciated. So then
Speaker 3: the question is when was it constructed, Was it less
Speaker 3: than forty years ago, Well there might be some depreciation left,
Speaker 3: or was it renovated, extended anything like that over the
Speaker 3: last forty years. If it was, there could be some
Speaker 3: depreciation left. The second one is capital allowances, and this
Speaker 3: changed back in May seventeen in the federal budget in seventeen.
Speaker 3: The capital allowances really relate to things that won't last
Speaker 3: forever and can be removed from the property. Curtains, flooring,
Speaker 3: kitchen appliances. These sorts of things you can own only
Speaker 3: claim unless you own that property before May seventeen. If
Speaker 3: you bought after May seventeen, the only CAUP allowances you
Speaker 3: can claim is what you spend on the property. So again,
Speaker 3: if you have replaced some of these items since you've
Speaker 3: owned it, and if you purchase after May seventeen, then
Speaker 3: there may be some depreciation there. What I would suggest
Speaker 3: to Phil is probably give one of these depreciation report
Speaker 3: providers a call. You can give them the property address.
Speaker 3: They might ask you a few questions about the property
Speaker 3: and they will give you their best estimate of what
Speaker 3: depreciation might be left in terms of annual depreciation, and
Speaker 3: that'll tell you whether it's going to be worthwhile for you.
Speaker 1: Yes, I have found them to be really okay, and
Speaker 1: I can remember one time, on one property I can't
Speaker 1: remember quent flied, they actually said.
Speaker 2: Look, don't get a report.
Speaker 1: They actually said, you know, no, I think in your
Speaker 1: case it said don't bother doing it. So as a
Speaker 1: general observation to all the films out there, check it out,
Speaker 1: see if they think it's worth it. They will give
Speaker 1: you a sort of off the show rest of.
Speaker 2: It pretty fast.
Speaker 1: And if you've never done it before, certainly it's working
Speaker 1: the exploring because you may well find that you've refuge
Speaker 1: if you granted that you use there's a tax deduction
Speaker 1: there if they if they find anything at all, all right, Andrews,
Speaker 1: said James Gerard. James Gerard, our regular guest on the
Speaker 1: show of Financial Advisor dot com dot you, who often
Speaker 1: hosts the show. He recently mentioned that a lot of
Speaker 1: superannuation farthers will do an in speaks, the transfer when
Speaker 1: moving from accumulation to retirement. Is this the most common
Speaker 1: approach I've heard conflicting advice and have been told that
Speaker 1: many funds will rather sell down positions in rebuy as
Speaker 1: part of a move to the retirement phase. And of
Speaker 1: course the other dimension to this is there is property.
Speaker 1: Uh And in CC chancewer first of all, could we
Speaker 1: explained to everybody what an spec chancefer is, Stuart, And
Speaker 1: could you explain whether there's a difference in dealing with
Speaker 1: property or with shares how they're truced. Sure?
Speaker 3: So, in specie transfer, I mean if you're going to
Speaker 3: transfer between two accounts and so most people with superannuation
Speaker 3: would call that a rollover, you know, moving between funds
Speaker 3: for example, or moving from an accumulation account into a
Speaker 3: pension account with the same fund or a different one.
Speaker 3: You can either do that in two ways. You can
Speaker 3: sell all the investments and just transfer the cash, or
Speaker 3: you can keep the investments and just do an off
Speaker 3: market transfer those investments from one account to the next account.
Speaker 3: We call that an in specie transfer because you're not
Speaker 3: exiting the market, you're not changing the underlying investments. All
Speaker 3: you're really doing is moving it from one account to
Speaker 3: the next account. Now, the critical question here is from
Speaker 3: one account to the next account, does the superannuation trustee change,
Speaker 3: Because if the trustee changes, it's a change of beneficial ownership.
Speaker 3: It will trigger tacks. But if the trustee is the same,
Speaker 3: there's no tax. So that's the key question here and
Speaker 3: so and then the second question is what type of
Speaker 3: superfund do you have? Because if it's a unitized superfund,
Speaker 3: like all the industry super funds are bad luck. Your
Speaker 3: tax is taken out every day like they calculate the
Speaker 3: tax on the unrealized gain and subtract it from your account.
Speaker 3: Subtract it from the uniprice essentially, So if you're a
Speaker 3: if you're in an industry fund, this is not going
Speaker 3: to apply this option. But if you're in a wrap
Speaker 3: platform it could apply. And we use Macquarie and net
Speaker 3: Wealth for example. I know that we can do an
Speaker 3: in specie transfer and not trigger capital gains tax. The
Speaker 3: key question, as I said, if you're on a rap platform,
Speaker 3: is work out who the trustee, or ask who is
Speaker 3: the trustee for the superproduct the pension product, I should say,
Speaker 3: versus the accumulation product, and maybe I'll explain what is
Speaker 3: the benefit. Why would you do this? James? Actually, before
Speaker 3: I get there, let's talk about property, because if you've.
Speaker 1: Got yeah, can I just put in a seat on
Speaker 1: the property front. So let's say I have a property
Speaker 1: like field there and he had his he had his
Speaker 1: property in it, this worth fight forty And I said,
Speaker 1: you know what, really I should have had that in
Speaker 1: my super fund. Can I put it in my super fund?
Speaker 1: And does that work done in that same methodology in specie?
Speaker 3: No, you can't. You can't transfer residential property into super.
Speaker 1: That's about an investment property. And I didn't buy it
Speaker 1: in super I just said, and I decided I wanted
Speaker 1: to swing it into my super Brook. Is that an
Speaker 1: special transfer? And can I do it in any fund?
Speaker 1: Or is the only self managed Super?
Speaker 3: So I should have used another word. You can't transfer
Speaker 3: a residential investment property into SUPER. You can potentially transfer
Speaker 3: a commercial property into SUPER from your personal name or
Speaker 3: from another entity into your Super.
Speaker 1: So your investment investment property of any description, no I
Speaker 1: can no, no, no.
Speaker 3: Not if it's a residential you can't. I can.
Speaker 1: I can trust for a factor, but I can't trus
Speaker 1: for a house.
Speaker 3: Yes, yes, so they call that business real property. That's
Speaker 3: the definition. In that said, there's a specific exemption for
Speaker 3: business real property. I guess it's to help people that
Speaker 3: are self employed that want to go and buy their
Speaker 3: business premises and so forth. Put it in Super makes
Speaker 3: a bit of sense. But if I've got a normal
Speaker 3: residential investment property, I can't put that into SUPER. I
Speaker 3: can buy it into Super initially, of course, but I
Speaker 3: can't put it into SUPER.
Speaker 1: You can't buy it, but you can't chance there it
Speaker 1: in Oh yeah, it is loaded against us. It really
Speaker 1: is count transferading, Okay, I have to have deeper it
Speaker 1: so in specie just across in general, Andrew, So listenes understand,
Speaker 1: it's the transfer within the supersystem of an asset. And
Speaker 1: what happens is that if you said I have my
Speaker 1: comeback shares and they'll worth one hundred grand of my
Speaker 1: super and I want to move to another farm, then
Speaker 1: they do it in special transfer. Is that if they
Speaker 1: don't sell them, they say there worths we can move
Speaker 1: them across a X because we know they're precise value.
Speaker 3: Is that in the simple part, spot on, and let's
Speaker 3: think about what the benefit is here, James, because it's huge.
Speaker 3: If you bought those if you held those CBA shares,
Speaker 3: Let's assume you bought it at IPO like in the
Speaker 3: in the eighties or something, whether they sold for three
Speaker 3: dollars or five dollars or something like that. With THEE
Speaker 3: hundred yeah, no, there are one hundred, one hundred and thirty.
Speaker 3: If you had a if you moved those assets and
Speaker 3: it was a change of trustee, you're going to be
Speaker 3: taxed in super first on the gain and then that
Speaker 3: money is going to be moved across. Whereas if you don't,
Speaker 3: if you aren't taxed on the in specially transfer, that
Speaker 3: that gain even though you made it many many years ago.
Speaker 3: When you're an accumulation, it disappears right, there's no capital gains.
Speaker 3: So if i'm let's say I'm really I'm thirty years,
Speaker 3: I'd love to be thirty day. If I'm thirty today,
Speaker 3: I'm going to have SUPER for another thirty years. If
Speaker 3: I go and buy an ASEX two hundred index, I
Speaker 3: can potentially buy that index, hold it for the next
Speaker 3: thirty years, not make any changes, which wouldn't be a
Speaker 3: bad idea, by the way, And if I then in
Speaker 3: specie transfer my total gain over that time capital gain.
Speaker 3: Of course, I've been taxed on the income, but the
Speaker 3: capital gain disappears. It's really valuable, particularly if you're if
Speaker 3: you've got a lot of unrealized gains in SUPER, or
Speaker 3: if you're young. But having that flexibility to be able
Speaker 3: to do that in specie transfer and not be taxed
Speaker 3: is very valuable for superannuation investors.
Speaker 1: So keep that in mind, everybody, including Andrews. It is
Speaker 1: a it is a It is a really good methodology.
Speaker 1: On the flip side, make sure that you'll never get
Speaker 1: caught having to pay tax on something you didn't have
Speaker 1: to if it was possible to do in it specy transfer.
Speaker 2: That's the that's the real lesson here.
Speaker 1: Okay, final question from Glenn, who seems to be a
Speaker 1: dad worried about.
Speaker 3: It's son, and he must be a dad from your
Speaker 3: neck of the woods, James. Using the term lad, he
Speaker 3: says my lad and he's.
Speaker 1: Is that the booksell or a Scottish probably.
Speaker 3: My lad and his fiance just managed to reach their
Speaker 3: twenty percent deposit and avoid al ami lender's mortgage insurance.
Speaker 3: Buying first home brilliant since interest rate increases. Like many
Speaker 3: of the generation, they're only just getting buy, my advice
Speaker 3: was to ask for a better interest rate and also
Speaker 3: shop around. But he's saying that existing first home buyers
Speaker 3: with less than twenty percent equity will need to pay
Speaker 3: for lender's mortgage insurance. Essentially, the lender's mortgage insurance government
Speaker 3: guarantee is no longer available to him, and he believes
Speaker 3: it's also not able to transfer if he transfer it
Speaker 3: to another lender.
Speaker 2: Is this true?
Speaker 3: In the meantime, what's the general advice that you have
Speaker 3: for his situation?
Speaker 1: Okay, Well, about the government guarantee scheme, which is what
Speaker 1: it is, so of course you can go in under
Speaker 1: that scheme. You put a deposit down and the government
Speaker 1: will cover up to I think it's fifteen percent of
Speaker 1: your twenty percent, and then you don't have to pay
Speaker 1: under this mortgage insurance, which is something of a well
Speaker 1: it's a debatable the best of times.
Speaker 2: But here's the thing.
Speaker 1: You ask if it's transferable, No, it's not. You ask
Speaker 1: if it's not available to him. Well, how it works
Speaker 1: If they have a batch and I think it's something
Speaker 1: in the order of ten to twenty thousand spots in
Speaker 1: that program, and within that they have limits on regions,
Speaker 1: and they have limits on you know, single moms where
Speaker 1: are given a certain quorum of it, so there's only
Speaker 1: so much, and then they close it off each year
Speaker 1: and then they open it again. That's generally how it works.
Speaker 1: So yes, if your sun did miss it, it doesn't
Speaker 1: mean that they would miss.
Speaker 2: It the next time round. But that's how it works.
Speaker 1: It works in there facts. Yeah, that's the scheme.
Speaker 3: Yeah, So I did a bit of research on this,
Speaker 3: and if the gentleman just googles Housing Australia First Home Guarantee,
Speaker 3: you'll find the web page. There is an information guide,
Speaker 3: a PDF information guide on that web page. Actually says,
Speaker 3: you can refinance the loan if you want to, but
Speaker 3: there has to be another participating lender, and there's plenty
Speaker 3: of majors and all the big four on the participation.
Speaker 3: Actually A and Z's the only one that doesn't. But
Speaker 3: there's a whole bunch of other lenders, certainly enough lenders
Speaker 3: in order to shop around, so you can refinance even
Speaker 3: if you still need that government guarantee if it's another
Speaker 3: participating lender. But the other thing, James, is if you
Speaker 3: go and call the bank and ask to speak to retention.
Speaker 3: So what I would be doing is call the bank.
Speaker 3: So i need to speak to retention because I'm just
Speaker 3: about to sign what's called a discharge authority because I'm
Speaker 3: going to refinance.
Speaker 1: Is it part for words, Glen, remember them. Just say
Speaker 1: it once more, Stuart, because it's so parful this.
Speaker 3: Just tell them I'm about to sign a discharge authority.
Speaker 3: It's important to use the right terminology, discharge authority, because
Speaker 3: my mortgage broker is just going to refinance me to
Speaker 3: a new lender. But I just want to speak to retention.
Speaker 3: Every bank has a retention team. I want to speak
Speaker 3: to retention to see if there's anything you can do
Speaker 3: to help.
Speaker 1: Yeah, that is fantastic. I have used that you taught
Speaker 1: me about the years ago. I did it. Then I
Speaker 1: wrote several articles about it. They went crazy online.
Speaker 2: Never forget it, folks.
Speaker 1: It's so good because the process of the other end
Speaker 1: of the cost center just goes, oh my god, this
Speaker 1: present knows what they're talking about, and Morgan's discharged form
Speaker 1: and put me onto a retention Yeah, okay, sorry's interruption.
Speaker 3: And then and then now here's that's okay. Here's the kicker.
Speaker 3: Whether your LVR is loan to value ratio is ninety
Speaker 3: five percent or five percent, there's very little chance of
Speaker 3: retention ever picking that up. And I would bet that
Speaker 3: their systems aren't even good enough to flag that it
Speaker 3: has a government guarantee against it as well. So chances
Speaker 3: are you don't need to worry about it. Chances are
Speaker 3: you can make the call and you can shop around.
Speaker 3: You can find the lowest interest rate. You can call
Speaker 3: your existing bank back and say, hey, I'm going to
Speaker 3: refinance to this institution. I'm just about to sign the
Speaker 3: paperwork walking you do who knows, I don't know. I mean,
Speaker 3: discounts are based on loan value ran and first time buyers.
Speaker 3: Typically they have relatively low loan, which means they're not
Speaker 3: going to get maybe the best discount, but I'm pretty
Speaker 3: sure you'll be offered something and there'll be some interest
Speaker 3: rate saving there. And it's a good it's a good
Speaker 3: thing for people to understand that even if they feel
Speaker 3: like they wouldn't even qualify to refinance. You know, so
Speaker 3: they borrowed two or three years ago and they just
Speaker 3: wouldn't requalify, maybe because the change the situation or anything
Speaker 3: like that. Don't you don't need to worry about that.
Speaker 3: They're not smart enough to pick up to ask the
Speaker 3: question would we approve the loan or would another lender
Speaker 3: approve the right loan? They just want to retain the business.
Speaker 1: They want to retain to business. They don't want their
Speaker 1: book to shrink. It's very simple. August discharge of for
Speaker 1: is he put me through through attention. Don't forget those
Speaker 1: nine folks. They are very very good and I can
Speaker 1: tell you on perst time that their work they work
Speaker 1: for me. Okay, terrific, Hey, thank you very much. Sure
Speaker 1: that was great, very very interesting. Isn't that amazing how
Speaker 1: the property market moves under our feet? And we think
Speaker 1: we're on top of it and then something happens. I
Speaker 1: think today's show really shows that that will issue about
Speaker 1: the mortgage extensions for the if you are a homeowner,
Speaker 1: it's there if you want to do it. If you're
Speaker 1: going to do would have a plan. Keep in mind
Speaker 1: that an investor that you're holding, costs are higher than
Speaker 1: they were a few years ago. The note to ways
Speaker 1: about that inflation has really pushed things up to keep
Speaker 1: bigger his interest rates. That's the one that's going to
Speaker 1: move for your capital growth and interest rates so important.
Speaker 1: And also on that broader issue well re financing, you
Speaker 1: actually have some have the banks have actually become more competitive.
Speaker 1: Believe it or not, it is true that they will
Speaker 1: give you better times if you know how to play
Speaker 1: the game. And part of that is the language which
Speaker 1: we discussed today.
Speaker 2: Terrific Stewart, thanks very much.
Speaker 3: Thanks James fan as always great to talk to you.
Speaker 1: Will have you on again soon and do keep the
Speaker 1: questions coming folks. The Money Puzzle at the Australian dot
Speaker 1: com dot au Ok you soon