Katrina Parrington

Mortgage & Finance Broker, Elders Home Loans – Northern Territory – P. 8932 8900

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  • Elders Home Loans

  • Katrina Parrington

    I am a long term Centralian resident with more than 18 years experience in the financial services industry. Initially, in Real Estate in Adelaide before pursuing a career with Elders Insurance Alice Springs and lending roles with major banking institutions where I gained extensive experience in Home Loans and Commercial Lending here in the Alice and in Darwin.

    I have a unique set of skills that ensures I understand your lending needs and can provide you with professional advice and personal service.

    Tel: 08 8953 8800
    email: katrina.parrington@eldershomeloans.com.au

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Rental returns offer shelter

Posted by Katrina Parrington on July 31, 2012

Robert Harley | Australian Financial Review | July 14, 2012

Australia’s 1.5 million housing landlords experienced a rent boom through the financial crisis.
Across the nation, rents rose 50 per cent between the 2006 census and that of June 2011. In Perth, Darwin and Canberra, asking rents have grown further in the past year.
The surge has helped housing to become one of the best-performing asset classes of recent years. It is also changing the way investors consider houses and apartments. More weight is being given to income and less to prospective capital growth.
Peter Chittenden, managing director of residential property at Colliers International, an agency that sells around 4500 new apartments a year, has noted a renewed emphasis among prospective buyers on income.
“Buyers are asking what they can rent the property for, what is the return and what is the yield,” he says. “Interest rates are low. Investors are saying, ‘If I can get a good yield I can get some equity in my investment’.”
Chittenden says the old rule of thumb is returning. If a property rents for $500 a week, it will sell for $500,000. In essence the yield is 5 per cent before costs.
In Perth, where rents have grown strongly and house prices have been falling, gross yields are now more than 6 per cent, according to Fairfax Media’s housing information specialist Australian Property Monitors (APM).
At the other end of the scale, in the inner south-east of Melbourne, gross yields are less than 4 per cent, which reflects weakening rentals and the tail of the housing boom.
Of course the vast majority of housing investors are still locked into the old paradigm.
On the latest numbers, from the Australian Taxation Office for 2009-10, more than 1.1 million investors have negative-geared properties.
The strong price growth through the 2000s encouraged negative gearing. In 10 years the proportion of negative-geared investors rose from 50 per cent to 66 per cent.
The past year, however, has been hard on highly geared investors. Equity was lost as prices fell.
But one thing has remained constant – the rent has always been in the account. In tight housing markets such as Perth (which has a vacancy rate under 1 per cent), even a week without rent is unlikely. As old tenants vacate, new tenants move in.
Unlike the stockmarket, there have been no earnings downgrades on rental housing.
And unlike the stockmarket, the downturn in housing prices has been pretty moderate.
Melbourne-based investment adviser Atchison Consultants has compared the performance of asset classes for a decade; managing director Ken Atchison for even longer.
On the Atchison numbers, residential property has delivered a better total return – cash plus capital – than most other asset classes over the past decade.
On most time horizons – one, three, five or 10 years – residential property has outperformed Australian shares.
In the past year, as the more defensive assets have come to the fore, housing has fallen behind fixed interest and listed property.
(To make the comparison, Atchison uses the Real Estate Institute of Australia price series and assumes a net return of 3 per cent.)
John Edwards, the founder of residential property analyst Residex, cuts the numbers a different way. Over a 10-year term (any 10 years in the past 33), says Edwards, housing has delivered a higher return, and less volatility, than equities or bonds.
“For the ordinary person, housing investments are best, provided they are held for 10 years and are not over-geared,” Edwards says.
Of course, all these comparisons come with qualifications.
The numbers do not account for the considerable costs of maintenance or capital expenditure required for housing.
And there is the old caution: the past is no guarantee of the future.
Atchison acknowledges that the strong housing returns reflect the booms throughout the 2000s.
“Some of the historical performance is reflecting prices getting ahead too fast,” he says. “I cannot see doom and gloom but don’t go looking for those excessive returns in the future.
“We are not negative on residential property but at today’s stretched affordability levels, it’s hard to see growth . . . But there will be growth in rents, probably 5 or 6 per cent a year, possibly more.”
Edwards has tracked the dynamics of house price growth, yield and total return back to 1906.
For the first half of the 20th century, when most Australians rented, price growth was low but gross yields were high, above 10 per cent. For those 50 years it was the cash yield that delivered the return.
Then, with the baby boom at the end of World War II, house prices took off. The rent yield, which approached 20 per cent in the first years of the postwar housing shortage, dropped for 60 years.
But what was lost in yield was made up in capital.
In 1948-2008, house prices rose through a series of booms, which at times delivered annual returns of more than 20 per cent.
Edwards says the market is headed back towards the conditions of the early 20th century.
“The market will get back to normal and allow the asset to pay its way – back to lots of income and not much capital growth,” he says.
Edwards predicts that in the future, housing will deliver price growth of 0-1 per cent above inflation. But yields will rise, to the cost of debt or slightly higher.
“Everything will revert to being positively geared,” he says.
“It will become more like commercial property; it has to.”
It’s a rare view. Other analysts expect that a gentle touch on the house price accelerator will bring yields down again.
Andrew Wilson, an economist at Australian Property Monitors, expects yields in Perth to rise in the short term and then fall, as capital growth kicks. (Melbourne is heading the other way in both rents and prices.) Analyst BIS Shrapnel also expects house price growth in Sydney, Perth and Brisbane.
Others are not so sure. Atchison and Edwards are clearly worried about lack of affordability.
National Australia Bank, in its latest poll of about 300 real estate agents, found that most expect prices to fall further.
In such an environment, no investor will buy on the expectation of price growth. The key investment criterion in the post-GFC world is certainty of income.
This is why defensive high-yield stocks like Telstra are trading well. And it is why some buyers are attracted to housing.
Yields are higher than they have been for some time; they can certainly go higher; and in the long term house prices are more likely to rise than fall.
As cash deposit rates retreat, property yields look even better.
Two surveys in the past week, by APM and NAB, point to a pause in rental growth. APM’s Wilson says the underlying demand will lead to further upward pressure.
The ANZ’s lead house price analyst, Paul Braddick, says house prices will probably stop falling in the next six months in Sydney and Perth “if they haven’t already”.
If Braddick sounds a touch cautious in that prediction, he is utterly confident about rents.
Investors in Sydney and Perth can expect rents to soar in the next few years due to low vacancy rates.
“Unless policy authorities start to do something about the under-supply of housing, I can’t see how we can’t have a long-term acceleration in rents,” Braddick says. “As an investor you have very little chance of having a vacant dwelling and enormous upside in terms of existing rents.”
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