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: firstname.lastname@example.org 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!!