Property investment articles

FHOG clears to reveal a simple strategy

Posted on Tuesday, May 19 2009 at 2:52 PM

As reduced grants take the heat out of the first homebuyer's market, investors should stick to solid properties and avoid adventures.

By Monique Wakelin

Wayne Swan's second budget has just delivered Australia a $58 billion deficit and predicts almost a million people will be unemployed by the end of next year. It's quite a sobering picture, which leaves many asking how we got to this stage so quickly. More importantly, what are the implications for investors, particularly property investors?

The changes to superannuation underline how difficult it will be for Australians to trust it as their principal retirement savings strategy. No matter how favourable conditions for super might seem, the spectre of government interference rises with every budget speech. All the more reason for investors to invest widely, including direct property outside of super.

When it comes to property, much of the pre-budget horror speculation proved unfounded. In the end, I wasn't surprised at the timidity shown: governments rarely commit political suicide halfway through their first term! The First Home Owner’s Boost will remain as it is until September 30, after which it will be scaled back to $14,000 (from $21,000) for new homes and $10,500 (from $14,000) for established homes until December 31.

After January 1 next year, it will revert to the "normal" level, $7000 for new and established homes for first-time buyers.

The question of how the government would back-pedal out of its artificially engineered boom has been answered: it has squibbed it. The last of this great sugar hit won't wear off until well into 2010! And my tip is that it will be extended beyond that point again to extend the government revenue base. In the short term, investors can expect some of the recent first homebuyer frenzy to dissipate, and the false comfort zone extend for investors and homebuyers alike.

(The Budget) announcements contain little that will materially change the market or how investors should approach it. That in itself may have been a smart move, if indeed it was intentional. Considering how much government revenue at all levels is a direct result of property transactions, it may not be that surprising that a nervous looking Treasurer approached the property market fundamentals so circumspectly.

If there is one thing Wayne Swan and Kevin Rudd are sure about, it's that they don't want to create a scenario where house prices are falling. This would spell the onset of a considerable economic challenge, political oblivion or, more likely, both.

For property investors, the outlook for 2009 remains a constant. The most compelling prospects are still in the middle price tier in the inner and middle-ring suburbs of our major cities. Historically low interest rates and solid rental returns mean well-positioned houses and apartments in the middle price bracket should perform well, provided the selection is judicious. With an uncertain economic outlook, now is definitely not the time for investors to entertain adventurous strategies in the property market.

In short, the government's housing policy has been too smart by half, luring thousands of young buyers into an affordability and negative equity trap, likely to be sprung by rising interest rates next year. Grants can make governments popular when they’re launched but the false economies they produce are dangerous for politicians and young homebuyers alike.

Rising interest rates and desperate sellers may throw up some cheap properties for bottom-of-the-market type buyers next year, but investors should be extremely wary of basing a strategy around this. Bargain hunting often proves to be an expensive exercise.

As I sat watching the Treasurer's speech, I began wondering whether I had missed a raft of proposals or some important detailed announcements. Conspicuous by its absence was any change in direction from the knee-jerk reaction to increase tax-free grants in October last year.

Why didn't the government opt to means-test First Home Owner's Grants, as it does health insurance rebates? Why didn't the Treasurer extend the boost for new homes beyond the end of 2009 if this budget was really about "Nation Building for Recovery" and helping the housing industry create jobs for Australians?

Where was the incentive for first homebuyers to save and establish solid equity in their homes? Surely ramped-up superannuation-style regulation of the now defunct First Home Saver Accounts would be Nation Building rather than knee-jerk? Apparently not!

In fact, where was all the medicine and structural reform deemed necessary by the so-called global recession? What are the strategies required to underpin a more sustainable investment environment for Australian property investors and homebuyers fired in the forge of the worst crisis in our lifetimes? Borrowing $188 billion on the basis that we'll pay it back years from now, when our GDP growth is running at a remarkable 4.25%, seems like a strange way to fireproof a nation, if you ask me.

So the vital questions were left unanswered. My advice for investors is simple and consistent. Now is the right time to have a rock solid property investment strategy secured by solid returns, possibly funded by fixed rate finance. Our speculative days are over.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

This article first appeared in the Eureka report in May, 2009, and is reproduced with permission.

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