Let's Discuss Mortgage Interest Rates

Everyone’s been very excited about interest rates in Australia and what Reserve Bank action will do to mortgage rates.  And, rightly so since it affects the real estate and property related markets in so many ways (adversely when interest rates increase).

But, that made me think of another issue around mortgage interest … their tax deductibility.

Most countries do not allow taxpayers to reduce their taxable income by the interest paid on a loan which is secured by their principal residence (or, sometimes, a second home).  Australia is one of them.

But some countries do allow it … and they are the Netherlands, Sweden, Switzerland, and the United States.

It’s an interesting proposition with arguments for and against as follows.

Reasons why mortgage interest should be deductible

• Deductibility incentivises home ownership
• In countries that impute tax income on home ownership the deduction is for income-producing purposes
• The increased number of owned properties and the likely higher prices/values of properties will create other taxable income

Reasons why mortgage interest should not be deductible

• Deductibility does not significantly impact home ownership either way
• It allows taxpayers to circumvent the general rule that interest on personal loans is not deductible
• The deduction disproportionately favours high-income earners

Whilst I think that there are social equity issues, in an economy and society where home ownership is a cultural requirement and the key wealth development strategy for most people … I think we should allow home mortgage interest to be deductible.

See you at the ATO refund counter queue.

Francesco …

Investing in Strata

A recent article by Monique Sasson Wakelin in the SMH Domain called Investment: What’s best? A house or an apartment? Makes some interesting comments about the benefits of investing in apartments.


Monique focuses on capital growth, reveals that over the last five years some apartment prices in Sydney and Brisbane have grown faster than house prices.


The median price for Brisbane apartments grew by 42.5 per cent while houses grew by 38.2 per cent.


In Sydney, the median price house growth was 30.1 per cent, which was ahead of the median price apartment growth of just 10.5 per cent. But for when we look at inner Sydney apartments price growth was higher 33.6 per cent.


And, in Melbourne, prices growth for houses and apartments was almost dead even at 55.3 per cent and 54.4 per cent respectively.


She concludes that “With a budget of $800,000 or more for a city property, a house is usually the better option. At $700,000 - $800,000, depending on the location, either option will work. Under $700,000, an apartment is usually a better investment.”


I have to agree and add that from a rental income perspective I think strata investment is also better in most cases since –

• the yield is generally higher compared to similarly priced houses (since you buy less house amenity than apartment amenity for the money)
• the operating costs are lower since you own less building and open space
• the operating costs are shared with the other apartment owners lowering them further and supporting you when things are tight
• more ownership costs are likely to be tax deductible since they are included in administrative fund levies

So, see you at the next apartment auction.

Francesco …

Dogs Breakfast of Property Taxes

A recent article in SMH Domain by Michael McNamara called Property Taxes a Real Dog’s Breakfast says that “the taxation arrangements for purchasing and owning property in this country are an absolute dog's breakfast and governments seemingly aren't prepared to do anything about it”.

 

I agree completely and the article’s focus on the following issues.

• Stamp duty is a regressive tax that has increased to levels that make property transfer a significant cost.  Plus the rates of stamp duty vary in every state making for intra-state complications.
• The federal governments failure to take up the many recommendations in the Henry Review on Taxation as they relate to real estate.
• How poorly the NSW government has used section 94 contributions by developers to manage development.
• The manifest policy vacuum and in-action by the last few federal government.

I’d add a few more too, like …

• The use (and ending) of first home buyer incentives to stimulate parts of the property market.
• How land supply has been strangled forever in NSW.
• The failure to ensure that high and medium density targets are met in urban centres.
• The lengthy delays in uniform electronic land titling and electronic conveyancing initiatives. 

Not sure what to do next apart from complain.  But it’s important to realise these issues are hampering the real estate sector.


And, this dogs' breakfast of property taxes is a bit dry and chewy for me.

Francesco ….

Picking a Good Real Estate Agent

Some say that real estate agent rate close to used car salesman, lawyers and repossession agents in the popularity stakes … but they’re essential if you want to sell or buy real estate.

So, we have to deal with them.

And, getting the best agent makes a huge difference to your experience and result.  But how can you tell good from bad and what should you look for to pick one ?

A recent article by Susan Wellings in the SMH Domain called Picking the Best Agent explains that the key things are -

• The fee structure
• Who has the best sales record
• Which agent knows potential buyers best

And that five key questions to ask potential agents are -

1. What do you think my property is worth and how did you come up with that figure?
2. How does my home present and what can I do to improve it?
3. What's the best method for selling my property — auction or private treaty — and why?
4. What's an approximate time frame?
5. What's it going to cost me and what fee structures can you offer?

This sounds right to me but I’d add that you should also check on the following things.

• Why the agent recommends an auction or private treaty ?
• What reporting on sales interest will you get ?
• How will offers and negotiation be handled by the agent ?
• What the agent recommends to improve the sale speed or price ?

Either way at least applying some of these tests and filters will improve your outcomes.

I’m now spurred on to try to develop a similar list of things to help pick other key suppliers of services in strata (like strata managers, lawyers, accountants, cleaners, etc).  So, I’ll do that in future posts.

What do you think are important criteria for choosing them in strata (and why) so I can add your thoughts to the posts ?

Francesco …

The Future of Conveyancing … in a Webcast

In case you didn’t already know the Australian state governments have been working together for the past decade to develop a co-ordinate electronic titling and land transfer system.

This will fundamentally transform a paper based and procedurally complex system (that is also very slow) into a seamless modern system.  It is also likely to make land transfer faster, safer and cheaper which is great news for everyone involved in the development, sale, management and ownership of real estate.

Up until recently that development was being done by the National Electronic Conveyancing Strategy (NECS) headed by Simon Libbis, but in January 2010 authority for the project has been transferred to the newly established National E-Conveyancing Development Limited (NECD).

A lot of material about the processes and strategies can be found at the NECS website.

But, more excitingly a webcast is on tomorrow, 20 July 2010 at 12.00 noon (AEST) by NECD to provide an update on NECD’s plans and progress to date (including the opportunity to post questions).  It will run for about 30 minutes and is open to everyone.

Find out more at the NECD Webcast site.

I’ll be watching so why don’t you too ?

Francesco …

NSW Stamp Duty Sleight of Hand

I posted about the new transfer tax in NSW commencing on 1 July 2010 a few weeks ago (see Read my Lips ... another tax on NSW real estate).

And, now Sean Nicholls reports in his article New Property Transfer Tax to Net More Homes in the Sydney Morning Herald that –

• it will be called the Torrens Assurance Levy
• the transfer tax will not be indexed so that as property prices rise more sales will be caught by the tax and caught at higher rates
• proceeds from the tax will be funnelled into consolidated revenue
• the tax is estimated to raise $96 million in FY 2011, $105 million in FY 2011, $110 million in FY 2011 and $118 million in FY 2014 (a total of $429 million in 4 years)

But, just as it’s taking more money on sale transaction the NSW government is giving it (and probably more) back in stamp duty exemptions.


From 1 July 2010 purchasers of new buildings and apartments will save from $5,623 to $22,490 in stamp duty.  At the highest exemption levels there is effectively no stamp duty on the purchase.

To qualify under the NSW Home Builders Bonus buyers must –

• buy a new (not previously occupied) or off the plan home or apartment
• the contract must be made between 1 July 2010 and 30 June 2012
• the price must be less than $600,000
• where the home or apartment is completed there is a 25% exemption
• where the home or apartment is off the plan the building, the construction has not commenced and it is completed within 2 years (either by 31 December 2012 or 31 december 2013 depending on which year the contract was made) then a full exemption is available

You can find out more about the Home Builders Bonus scheme here.

Clearly the scheme is designed to stimulate the first home owner buyers market (which has gone a bit flat recently) and the affordable apartment development sector.  And, it will probably work too.

But, like previous buyer incentive programmes most commentators think that the benefits will leak (at least partly) into price rises in that market sector.  Others suggest that two years is too short for major projects to go from laying foundations to completion and settlement.

Either way expect to see a lot of apartments for sale at $599,990 in the next 12 months.

See you at the Saturday display suite opens with your cheque book to get your government benefit.

Francesco …  

Strata Insights ... What to look for in strata records when buying an apartment

Are you buying an apartment ?

There's a lot to know, think about and decide ... and some of the strata scheme issues are the hardest to know about and understand.

So here are some of my Strata Insights about What to look for in strata records when buying an apartment ....


Strata Insights

If I was buying an apartment and wanted to understand more about what was going on in the strata (and how it affected my investment) this is what I would do before I went ahead.


I’d organise to personally inspect the strata records at the manager’s office.  There’s a fee (under the Act and Regulations), make sure that at least 3 to 5 years records will be available, tell them you may want to make copies and allow a few hours.

At the inspection I’d start by looking at the minutes of all meetings (general meetings and executive committee meetings) for the last 24 months.  Pay particular attention to the decisions (and how they differed from what was proposed) on the following things.

• Regular levies raised (administrative and sinking funds) – for trends and consistency (or not)
• Special levies raised – what for, why and how much
• Litigation the strata scheme is involved in – what’s at stake, how long it’s been going, who is acting, what future costs are likely, etc
• Outstanding levies- how many owners, how much for and how long
• Major repairs – that have been done recently, are planned and/or are indentified as necessary
• Engineers and consultants’ reports – who, what for, what advice was given, proposed action, whether reflected in decision (or ignored), direct impacts on the apartment, likely costs, etc

I’d also check the balances in the sinking fund over the last 3 years.  And, I’d look to see if the budgets have changed much in the last 3 years.

Carefully read any consultants’ reports, legal advices and CTTT notices and orders to understand the bigger issues the strata scheme is facing.

I’d also look out for references of clues to these other things as they could be important.

• Loans to the strata scheme
• Defect claims that been identified, notified, claimed, litigated and/or settled
• Roof membrane problems
• Council orders
• Firs safety problems or upgrades
• Retaining wall issues
• Tree (or tree root) issues
• Disputes with retail shops in the building over activities, etc

Get copies of anything you think is important to make further enquiries, to get advice about and/or to use in your negotiations with the seller.

If anything is missing from the records, find out why and how you can get to see if it relates to any of the matters I’ve outlined here or if you think it’s important.

Once you’ve done all that you’re far more likely to enjoy your ownership of the apartment.

Francesco …

Read my lips .... another tax on NSW real estate

NSW property transfers will become liable to another new tax from 1 July 2010.

The new tax, levied on buyers applies on the sale of residential and commercial property worth over $500,000 at 0.2% up to $1 million and 0.25% over $1 million. 

The tax will cost property buyers an estimated $90 million annually.

Buying the median Sydney house at $600,000 means you’ll pay $200.  Buying a Sydney house for $1.2 million (which ain’t hard) means you’ll pay $1500. And, if you are lucky enough to be buying a $2.5 million dollar property then it is $5,750.  And, that’s on top of stamp duty of $22,500, $51,490 or $122,990  on each of those properties.

If you treat the new tax as quasi stamp duty, then it’s about a 4.5% increase in stamp duty affecting at least 40, 000 transfer each year.  According to NSW Department of Lands figures almost 30,000 residential and commercial property sales of between $500,000 and $1 million occured in the last 12 months and more than 10,000 properties sold for more than $1 million).

But, the government seems to suggest it is to fund new security measures for land transfer documents ….   Really ?  At, $90 million per year and going up ?

To me the new tax contradicts the recommendations in the recently published Henry tax review, which criticised transfer duties as unfair, affecting different people harder than others, causing economic distortions and reducing business activity.

It also just continues to make NSW less attractive to property investors.

And, it makes it tougher for operators and consumers in the property development, ownership and management sector.  All just when we need that sector to start taking off again.

Francesco …