Update on Residential Property

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					    NOVEMBER
      2003                                   Update on Residential Property
   in this issue                             Early last year we highlighted the potential overheating of the residential property
                                             market. Since that time, prices have continued to climb. This trend simply reinforces
  • UPDATE ON RESIDENTIAL                    our view that an unsustainable bubble in the property market has developed.
    PROPERTY                                 Respected journal, the Economist (“Hot Property: the higher they climb the further
                                             they fall”, 11th September 2003) believes the Australian Property market is 30%
  • AGED CARE AND
                                             overvalued. Even the International Monetary Fund (the IMF) has warned of risks in
    ACCOMMODATION BONDS
                                             Australia’s property market.
    – Traps to be aware of.
                                             With investors now accounting for 45% of all new lending, first time buyers are
  • SHARES: IS IT TIME TO GET
                                             being crowded out. Not only are rents shrinking in proportion to house prices, but
    BACK INTO THE MARKET?
                                             also vacancy rates are rising.
  • HOW TO INSURE A                          So what are the likely scenarios? Continued Property Boom? Property Crash?
    CROCODILE HUNTER…                        Prolonged Property Market flattening?
  • WHAT’S HAPPENING AT                      Any of the above scenarios could eventuate. It is all in the timing. Eventually, the
    LIFESTYLE                                property market will come back to fair value. Fair value equates to getting a reason-
Gareth Hall                                  able gross rent return of around 5% of property value. For example, a reasonable
Irene Kay                                    rent return (based on historic averages) on a $400,000 investment property would
David Kissane                                be rent of around $400 per week.
Charles Pillay
Brent Hopping                                The chart below shows historical Price to Earnings (P.E.) Ratios for the last 30
Trading as                                   years in the Australian residential property market. The message here is that
                                             current property prices compared to rent returns are very high. It also shows that
                                             property (like shares) goes through cycles of boom/bust.
Authorised                                   It has been around 10 years since the last big property bust. For most people the
Representatives of
                                             last property correction has faded from memory to the point where we constantly
                                             hear the mantra… “You will never lose money buying quality property”. Our
                                             advice? Like any investment decision, do your research and know the risks. If you
                                             are looking for good investment returns there will “always” be risk involved.
Level 10 Suite 9,
809 Pacific Highway, Chatswood
PO BOX 5245                                           37                   Inflation Adjusted House PE ratio
West Chatswood NSW 1515                               35
Tel: (02) 9410-6000                                   33
Fax: (02) 9410-6010                                   31
Email: invest@lifestyle.au.com                        29
Website: www.lifestyle.au.com                         27
                                                      25
The information in this newsletter is
provided for your personal information                23
only and whilst believed to be accurate
and reliable, no liability is accepted for
                                                      21
the loss incurred by any person in
reliance on such information.
                                                      19
Garvan Financial Planning is a division
of GWM Adviser Services Limited,
                                                      17
ABN 96 002 071 749,
Licensed Dealer in Securities,
                                                      15
has its registered office at:
105-153 Miller Street, North                               73   75   77    79   81   83   85   87   89   91   93   95   97   99   01   03
Sydney, NSW 2060.
Telephone (02) 9957 8000                             Source: UBS Warburg
                                           Aged Care and Accommodation
                                            Bonds –Traps to be aware of.
   Alex Madgwick                                                                   Have you ever considered the possibility that
     - Portfolio Manager -
                                                                                   you (or your parents) may require aged care at
                                                                                   some stage in the future? How much will it cost?
                                                                                   How will you pay for it? How will you maintain
                                                                                   your desired income level?
                                                                                   There are some traps to be aware of when
   Anne Kennedy                                                                    entering into an aged care agreement, and it is
      - Finance Manager -
                                                                                   critical to receive the right advice well before
                                                                                   entering such an agreement.
                                                                                   There are two types of aged care: a low-level
                                                                                   (hostel) care and nursing home care. Your
                                                                                   assets are treated differently in each case. In
   Brent Hopping                                                                   this
  - Client Relationship Manager -
                                                                                   article, we look at hostel care only because
                                                                                   usually there is a lead-time before moving in so
                                                                                   that finances can be arranged to avoid a
                                                                                   potentially very costly mistake.
                                                                                   Firstly, you will be asked to pay an
Clarissa Der Stepanian                                                             accommodation bond. An accommodation bond
- Reception / Client Communication -
                                                                                   is a contribution towards the cost of
                                       accommodation in hostel care.
                                       If you were required to pay an accommodation bond, it may be the case that most of your
                                       assets would be paid into the bond, including assets being used to provide you with an
                                       income stream. If you loose these assets how will you maintain your desired income level
  Sean McGowan
     - Portfolio Manager -
                                       whilst paying a daily care fee?
                                       Consider the following example:
                                       Nola is a widow and has been receiving an aged pension. She is suffering from dementia
                                       and decided to move into a hostel care facility. To pay for the bond, she sold her home for
                                       $500,000, paid an accommodation bond of $450,000, leaving her with $50,000 in available
                                       assets. She is no longer eligible for an age pension as the bond is now assessed under
  Tabatha Redreau
     - Practice Manager -              Centrelink’s Assets Test, and this exceeds the non-homeowners threshold.
                                       How will Nola maintain her desired income level whilst paying a daily care fee with the
                                       remaining $50,000?
                                       Although this is an extreme example, many people in aged care find themselves in a similar
                                       situation when this does not have to be the case. With the right advice and restructuring of
      Daniel Irwin                     your assets before entering an aged care facility, this may be avoided.
     - Portfolio Manager -
                                       One way of possibly reducing the impact of accommodation bonds on your income level, and
                                       maintaining the Age Pension, is by investing some funds into a complying annuity before
                                       entering aged care because the annuity is not assessed for calculation of the
                                       accommodation bond.
                                       As with other life changes, you should always speak to your financial planner before taking
      Denise Kay
     - Portfolio Manager -
                                       action... it could save you making a costly mistake.
   Shares: Is it time to get back into
               the market?
                      This is one of the most common questions we get these days from new                Gareth Hall
                                                                                                      - CFP Financial Planner -
                      clients or from those who may have been out of the market over the last
                      6 months. There is a good rule of thumb: if people are asking this ques-
                      tion, it probably means the time to get back in was some time ago.
                      Sharemarkets around the world have rebounded strongly since the early
                      March lows. The US market is up over 25%, the German market is up
                      over 50% and the Australian market is up over 15%.                                   Irene Kay
                                                                                                      - CFP Financial Planner -

According to Chris Caton, Chief Economist of the BT Financial Group, it is probably too
much to hope for another 25% increase in global sharemarkets, but a 10 to 15% increase
over the next year is quite possible.
Having said all that, Caton says that it is unlikely we will return to the glory days where diver-
sified funds were yielding 15% annual returns. His view is that 8% returns on balanced funds
                                                                                                     Michael Webber
over the next decade would be a good result.                                                            - Portfolio Manager -




 How to insure a crocodile hunter…
(as recounted by Tony Prentice - a financial planner practicing in Darwin)                                 Sim Tong
                                                                                                           - Plan Manager -
                                               “A superannuation client of mine just happened to
                                               be a crocodile catcher and crocodile farmer.On his
                                               review, I recommended that we apply for life
                                               assurance for family needs. This we set out to do.
                                               He was born in South Africa and spent a part of his
                                               life as a game warden in Rhodesia. He eventually        Charles Pillay
                                                                                                         - Financial Planner -
                                               moved to Darwin where, along with another South
                                               African, he ran a safari camp near the mouth of the
                                               Daly River.
                                              One day he decided to take the airboat out across
                                              the wetlands in search of a pig which was to go on
                                              the spit for his birthday celebrations that night.      Denise Chambers
                                                                                                     - IT Manager / Corporate Super -
Accidentally, he beached the airboat on a bank. Within a split second of jumping overboard to
free the boat, a large crocodile had grabbed him. Miraculously, he broke free, but sustained seri-
ous injuries.
Legal and General agreed to look at the application for life cover subject to a medical and an
obvious exclusion for his job as a crocodile catcher/farmer. On completion of the underwriting
process, the application was declined, not because of his past occupation but because, according          Tim Egger
                                                                                                        - Portfolio Manager -
to his medical, if he did not change his lifestyle he would be dead inside two years.
He has since shifted south and modified his lifestyle on the advice of his doctor.
While he did not get cover, the underwriting process forced him to review his lifestyle…and
change it. As a result, he is still alive today, and able to look after his family.”
*This story was reproduced with the kind permission of “Financial Planning” magazine.                  David Kissane
                                                                                                      - CFP Financial Planner -
          What’s Happening at
               Lifestyle
CFP and FPA Conferences
The Financial Planning Association of Australia (FPA) organises an annual conference for
financial planners. This year it was held in Adelaide and was attended by more than 2000
delegates, some of whom were from the US, Singapore, Hong Kong, Malaysia, and New
Zealand. Three LifeStyle planners attended.


Four (out of about 60) of the more interesting presentations included:


✔   Professor Richard Thaler (USA), one of the pioneers in behavioural finance.
✔   Dr. Michio Kaku (USA), one of the world’s leading theoretical thinkers.
✔   Jack Brennen (USA), Chairman and CEO of the Vanguard Group.
✔   Bernard Salt (KPMG Australia) discussing demographic change in Australia.


Prior to the FPA conference, we attended an intensive 1-day CFP conference for Certified
Financial Planners only. This included more in-depth technical and practice management
sessions. It was a jam-packed 3-day marathon!


Our Star Event Organiser
Tabatha Redreau, our Practice Manager and valuable member of our Super “Star” team, has
scored some fantastic results, with five distinctions and three credits in her first year of her
Advanced Diploma of Events Management. Tabatha aims to complete this course by
December 2004. We wish her luck for more great results.


Empty Nests
The Kay and McGowan households are a little quieter these days…with Denise Kay, our
newest Portfolio Manager, moving to Cammeray with some friends and Portfolio Manager
Sean McGowan taking the big step and setting up house in Sutherland.


LifeStyle Biker Gang
Watch out all motorists! Anne Kennedy from out Accounts Department and our IT Manager
Denise Chambers have graduated to the big time. No more “L” plates on their Vespa’s…just
wait till they want their own Harley. Anne’s waiting for Gareth to approve the sidecar in the
next budget…and she will make sure that she swings past the train station to pick you up for
your next appointment!!

				
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Description: Update on Residential Property