In this issue:

     ¯Construction Costs set to jump from March 1st 2006

     ¯Buying your first home as an investment???

     ¯Site of the month

     ¯At last – “truth in advertising”!!!

Construction Costs set to jump from March 1st 2006
 

The cost of building a new house (or undertaking a substantial renovation) is set to jump significantly with the combined effect of material costs increases and the planned introduction of the Qld Governments “sustainable housing” initiatives.

Estimates are that the price of a new house will jump between $3,500 and $7,000 when the changes are implemented starting March 1st, 2006.

Higher prices for timber and concrete along with plumbing increases contribute approximately $1,500 of the increase flowing to owners, with legislated changes relating to the sustainable housing initiative contributing the remainder.

The key push behind the legislation relates to housing becoming more water and energy efficient.  Changes include

• banning of electric hot water services,

• greater use of low energy lighting ,

• water saving shower roses coupled with pressure limiting devices, and

• rainwater tanks (still at draft stage)

John Lambe, Construction Manager with In-House Construction explains “The major cost impact relates to the banning of electric hot water systems.  The Government has basically said you must have either gas or solar - and both these options are quite a bit more expensive”

“We’re currently reviewing a number of options to minimise the impact of these changes for clients, but at the end of the day, it’s something we just can’t avoid” added John.

The Queensland Government has committed to the introduction on March 1^st despite substantial opposition during their “public consultation” period which ended February 18^th.   Industry bodies such as the Queensland Master Builders Association, Housing Industry Association, and Building Designers Association questioned the supposed benefits to the environment and criticised the “prescriptive nature” of the changes. 

Aside from questioning the proposed environmental benefits, concerns were raised at the “surface treatment” in some areas of the changes.  It was pointed out that, whilst the builder will have to install energy efficient lighting and water saving appliances, a quick trip to the local hardware would see the owner enjoying full flow shower roses and the gains will be lost.  AAA rated shower roses use a maximum of 9 litres per minute compared with 15 to 25 litres for standard roses.  Will owners pay extra for the lower energy replacement light globes?  Or will they succumb to the more immediate budgetary advantage of cheaper (but more energy hungry) replacement globes?  The outcome is yet to be seen.

Solar systems are attractive from the energy savings perspective, but they’re hardly a fashion statement and must be north facing to be effective.  For houses on the southern side of a street, the unit must be sited on the roof facing the street.  This may detract from the street appeal, particularly in the case of small lot housing and where the house is below the street where the solar panels could dominate.

Unless you can hide it, solar panels can detract from the street appeal of a house

It will be interesting to see if this new requirement will really deliver environmental savings.

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Buying your first home as an investment???

A recent study commissioned by Wizard Home Loans has found an increasing number of Australians are stepping away from the traditional path to home ownership by choosing an investment property before buying their own home.

Almost half of these surveyed said they entertained the strategy because they couldn’t afford a house in the area they wanted to live. So they planned to rent themselves in their preferred area whilst they secured a toehold in the market with an investment. Another significant group of the survey said they had purchased an investment because they planned to travel abroad, and again wanted a toehold in the market for when they returned.

Investment House has undertaken a number investment projects for a growing number of Ex-Pat Australians working abroad. These people are earning great incomes and looking to secure their financial futures by building property portfolios at home.

Most of those surveyed said they still wanted to own their own home. The purchase of an investment was simply a step in the process.

Some years ago Investment House undertook a study comparing the two strategies. On a technical basis the “purchase for investment and rent yourself” strategy proved to be significantly more effective. Plus it gives the opportunity to structure one investment property so that it falls under the capital gains tax free banner - how good is that?

If you’re interested in finding out more about how these ideas can work for you, call Marco Mendes on 07-3369-0111, or you can email him at marco@investmenthouse.com.au

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Dave Alexander Reduced his Tax by 94.3%

When Dave Alexander showed his pay slips to work mates they couldn’t believe it. In fact, Dave himself was struggling to come to terms with what he saw.

“It just seemed like it couldn’t be right - one pay slip says I’m paying $875 in tax per pay and then the next fortnight I’m only paying $50 in tax” says Dave (with a smile about a half mile wide). “That’s an $825 difference every fortnight - that’s a big difference!” he adds.

Dave and his wife Jan had recently engaged Investment House to develop a rental property for them. They’d looked at several options before selecting a 400m2 block in the blue chip suburb of Indooroopilly in Brisbane’s inner west.

“Once we’d chosen the block, Investment House came up with a split level design with lovely big decks at the back to take advantage of the sloping block” says Jan. “It’s huge.., I was amazed at how much house you get on these small lots.”

The design is 320m2 embracing five bedrooms over four levels with living and rumpus areas taking full advantage of the decks and leafy outlook. And the double car garaging with internal access offers excellent security for tenants or future owners.

The Alexanders decided to take advantage of the “pay as you go tax variation” facility (formerly known as a 221D variation). By using this facility, they don’t have to wait until the end of the tax year to get Dave’s tax savings. Now the savings come on a fortnightly basis - which is where our story started. Dave had just had his application approved and was revelling in his new found fortune.

“Having the extra money coming in fortnightly means we don’t have to tighten our belt so much on a week to week basis.” explains Dave.

“Somebody once said, ‘anyone who doesn’t legitimately minimise their taxes needs their head read’. And I couldn’t agree more.” says Dave.

“Everyone I know works hard for their money.., you put in and work some extra shifts and it’s soul destroying to see how much goes in tax. When you look at your pay slip its bad enough, but when you get your group certificate at the end of the year it’s just soul destroying. Sometimes you wonder if it’s really worth all the effort” he adds. “But I tell you, I’m looking forward to getting my group certificate for this year”.

“We worked out that, after rent and tax savings, the house is costing a little under 1% of its value to own per year - so providing we see house prices go up faster than 1% pa, we’re laughing.” grins Dave.

The PAYG Variation needs to be lodged annually. And it’s important you don’t overestimate your claim or the Tax Commissioner may not allow your variation in the following year. The Alexanders plan to do a review in March each year just to make sure they stay within the guidelines. If, when they review it, they find they have over estimated their claims they can still pay some extra tax until June to bring things into line again.

If you’re interested in finding out more about the PAYG Variations system, talk to your accountant or visit the ATO website - you can do your own lodgements online if you wish. And if you’re looking to review an existing variation, you can do that online as well.

Dave Alexander – delighted about his tax savings

Site of the month

February has been a very strange month for the Research Team at Investment House.

In previous months the market place has presented a mixed bag of goodies.  Certainly a lot of properties were overpriced, but there was also a good supply of sellers prepared to negotiate enough for workable deals to be had. 

This month that has simply dried up. 

Sure we’ve found some great sites, but we haven’t been able to make them work so easily.  The asking prices are just too high to be supported by recent re-sales.  In a nutshell, we seem to have run out of motivated vendors.  The sellers that do have good sites are digging their toes in and holding out for higher prices.

What does this mean?  Perhaps this is an early sign that “… the times – they are a changing”. 

We all understand the property market works in cycles.  During the plateau stage (which is what we’ve had) it’s fairly easy to undertake accurate feasibilities because buying prices relate closely to selling prices.  Buying workable sites is then a matter of negotiation and the soft market usually means there are sellers who are prepared to negotiate.  So you can pick and choose good sites - and that’s what we’ve seen for the last six to eight months. 

When the market mood changes and it enters its upswing, life becomes a lot more complex.  The motivated sellers disappear and your ability to negotiate the really good deals goes with them.  Now you have a situation where you’re paying more for your sites.  On the face of it, the profitability of projects goes down, because the end product resale prices haven’t moved (yet).  Of course, in the time it takes to do the development, the resale prices generally move up with the more buoyant market and your project ends up outperforming your initial feasibility analysis. 

It’s possible we’re now seeing evidence of the bottom of the market, and with that, the promise of the upswing phase.  To add weight to our observations, February has seen local agents reporting higher levels of “owner occupiers” in buying mode and the auction clearance rates have been better. 

Out site of the month is a splitter in Brisbane’s inner west suburb of Indooroopilly. This blue chip site comprises two existing 400m2 lots and is not in a demolition control precinct (which means the houses can be built without any requirement for a development approval). It is proposed the existing house be demolished and the site developed into two new contemporary homes.

The feasibility has been undertaken on the basis of selling one home, and retaining the second for rental. On this basis you would have immediate net equity in the second home of $114,000 (using current sale prices) representing a wholesale margin of 19.44%. We have secured a purchase price for the site of $595,000. If you wish to review the feasibility, please contact Marco on marco@investmenthouse.com.au or you can call him on 07-3369-0111.

Clearly, sites are getting thinner on the ground and it’s getting tougher to get great deals through negotiation – to win in this market, you’ll need to be able to assess a site quickly and make a prompt decision.  If you’re not able to do that, you may find yourself missing out on sites.

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At last – “truth in advertising”!!!

On the lighter side of things, our Finance Team thought this quip was too good not to be passed on…  it was seen in a recent newsletter.

The National Australia Bank has recently unveiled their new moniker. They have gone from “The National” which was all very high class and sophisticated to “nab” in lower case, which is more "low rent" and has dubious connotations.

Is it just me or is it a bit odd that a bank wants to be known by the moniker “nab”?  Do the PR guys not realise that to “nab” something is colloquial language for theft?

Why would a bank call itself that? 

It’s not as if they actually steal your money, or profit from the misfortune of their customers, or raise the rates on your credit card so high you can hardly jump over them…  

Ah, now I get it – it’s all about truth in advertising!!!!

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Disclaimer

All information in this report is general information only. Nothing in this report is meant to be specific investment advice, nor should you treat it as such. Everyone's individual circumstances will vary widely and you must seek advice from your own independent licensed investment adviser before investing into any form of investment. Investment House, its employees and representatives take no responsibility for the result of any actions taken by the readers of this report.

Investment House and its related businesses makes no representation and gives no warranty as to the accuracy of the information in this document and accepts no liability for any errors, misprints or omission herein (whether negligent or otherwise).