Investing in Canberra

[Lizard King]

Hi Folks

My apologies if there is already a thread on this subject.

I have a problem. Our daughter is moving to Canberra to start a graduate job at one of the Government Departments. We were thinking of buying a unit in Turner in our name and rent it to her at the current market rental.

The reasons we have chosen this option rather than her buy it in her name aree: I believe she will not be able to get a loan until her probation is up. This is usually 3 months. She may decide to return to Perth in a couple of years (she cannot stand a cool 15C here, sometimes). If so, we rent to anyone else.

I believe the rentals in Canberra are for 12 mths - we do not want to see her money going down the rent gurguler for long and rather it worked for us from Day One.

I realise CG in Can is around 5% pa (we have been getting that in less than a Qtr in Perth), but yields are good - upto 6% (though this gets eroded by high strata/body corp levies). We are looking at a $375K Unit; Interest only loan.

I would appreciate some comment from all you wise Eastern Staters (and the rest, of course) as to the best option for us. Rent or purchase in Canberra?

The FHOG is not really a carrot as it is a measely 7K.

I realise you do not have all our stats - but a ballpark advice would be good.

Thanks in anticipation.

Lizard King

 

[geoffw]

Canberra has one of the best real estate websites around- www.allhomes.com.au - spend some time in there looking around. There's price histories by suburb, street, and property; detailed site maps; AUV- all sorts of good stuff.

Do you know where the government offices are located? There's big ones all around- if you're after location, choose something which is convenient for her. Though she will probably need a car- public transport can be frustrating.

A bonus for you- in case you don't know. Because all properties are leasehold, you can claim stamp duty on an investment property purchse against your tax in the year you spent the money.

 

[TheCamel]

yea, geoff has a good point. which govt department ?

for instance, some of us are stuck out at the airport... so nothing is really convenient.

but then you've got big new buildings in belconnen for dimia, and little pockets all over the city, in which instance turner would be a good place.
theres also some in woden, and out at tuggeranong.
of course, from turner, you'd walk into the city, and catch a bus to woden or tuggeranong and its only about half an hour, and probably cheaper than driving and paying for parking.

one thing i've noticed about turner though, I walked down Moore st not too long ago, and there's a couple of lovely redbrick cottages, where the owners just refuse to sell out, and then there's new developments..
in particular, one of those developments seemed to have quite a large number of empty units.

 

[Lizard King]

Thanks Guys for your replies and your tax tip, Geoff.

I was not aware of it.

She is going to work for Department of Finance and Administration
John Gorton Building, King Edward Terrace, Parkes - and is taking her car from Perth.

We are thinking of purchasing a 2BR x 2BTHRM x 2CARPORT unit in Turner.

Why are those units in Moore St empty?

I am waiting in trepidation for the expected interest rate rise this Melbourne Cup Day - but then may make it spin on its head and use as a bargaining alibi when it comes to making an offer.

Again, should we rent or purchase a property?

Thanks.

 

[Simone]

You mentioned that the property is going into your name due to your daughter possibly not being able to get a loan at this stage? does this mean that the unit will be in your name but essentially your daughter will own the property? This just seems like a large mortgage for her first property.

 

[Lizard King]

No Simone

It is true that we are trying to structure the loan in our names. And subsequently our name will be on the title. So we will own it and lease to
our daughter.

Conversely, do you know if we can also have her as an owner and she continues to lease it? I do not think so as this will be a PPOR for her.

I do not know! At the end of the day we would like to minimise costs and avail of possible tax spin-offs if we do decide to sell to her in say, 6 mnths time.

Suggestioins, comments, unsolicited advice, et al appreciated.

Many Thanks

Lizard King

 

[gazza]

Lizard King

Any particular reason why you are looking at a unit in Turner? If your daughter is working in Parkes, my view would be that a unit in Barton/Kingston or Manuka would be more convenient. Walking distance to work,close to restaurants/coffee shops and more importantly pubs and nightlife. Also with the development of the Kingston foreshore, chances of capital growth might be better. There are plenty of units in Turner/Braddon and more being built all the time, the same is true for Kingston so you have to be looking at something to make your unit and area stand out from the crowd. The Kingston foreshore might be the thing that does it. Already they are building apartments there that have the only true waterfront position in Canberra (people have paid prices from 1 mill up to 5 for penthouses I think), there is plenty more building to happen before it is finished but the area should be very trendy once completed.

Gazza

 

[Simone]

I assume you would be able to have your daughter as a joint owner - don't know how this would effect her first home owners grant? but you would not then be able to claim as much tax - In saying that if you did eventually sell to her it would involve all the purchasing costs again, if her name was going on the title??

Turner is a nice location (have just moved back to Perth from Canberra) but I think Gazza could have a point - they are spending money around the kingston area and I think you are still able to get into the older developments for a faily good price? - but not completely sure on this - may be worth looking at - but both nice areas.

 

[Lizard King]

Canberra Properties

Hi All

I have just returned from Canberra after spending 5 days looking for a property. Boy - what a difference, ACT and WA! Without offending anybody, it is quite simply a chalk and cheese situation. Let me clarify - with the quality of building, I mean. (For starters, our internal walls are all brick - not gyp).

We scouted Bradden, Turner, Kingston and Griffith (where we checked out the Bentley Suites that are now converting to residential from serviced apartments)

To cut a long story short, we liked a 2 X2 X 2 property in The Avenue at 77 Northbourne Avenue, Turner ( at the intersection of Barry Drive). The only problem (it suits our budget) is it is on the ground floor facing N'Bourne Ave.

On the market at $389K and my research tells me there has hardly been any capital growth since it floated a year ago and has been on the market for 3-odd months.

Does anyone have an opinion of how this property could be in the future, considering I will have the same hassle when the time comes to sell - the noise and security factor, being on the ground floor.

It currently returns just > 5% @ $400 pw. So cash flow is not a problem ( and will probably keep the bank happy), but my investment strategy has always been CG.

But I need accomodation for my daughter.

Your valued comments are most welcome.

Thanks,

The Lizard King

 

[Jase H]

Lizard King,

I work in law enforecment in Canberra and therefore I know the area along Northbourne pretty well.

You may not be aware but Canberra has quite a problem with both residential burglary rates and car stealing. Not sure how secure a ground floor apartment at the avenue would be? Something to think about though. (not trying to scare you off, just make you turn your mind to the potential risk)

It might be worth trying to get at least 1 floor off the ground.

There are a lot of "less desirable" apartment complexes all up and down northbourne avenue.

Cheers

Jase

 

[Lizard King]

Thanks. Jase

Yes, this is the biggest drop-factor with that particular apt we are looking at.

It is 'secure', but so is the bank and an ATM.

Don't know what to do!

The Lizard King

 

[Lizard King]

Offsetting potential losses booked on a property

We are going ahead with our purchase of a unit at The Avenue, Turner, ACT.

If we do make a loss when it is time to sell, say in a year or two, can we offset this potential loss against profits booked for our Perth properties (when it comes to sell also in 1-3 years)?

Any advice on this or the property in Turner would be appreciated.

LK

 

[geoffw]

LK

I haven't been keeping up with Canberra prices lately, so I can't comment on Turner. Allhones has some info on units in Turner, which you may be aware of.

However, it surprises me that you wish to proceed on the purchase of a property on which which you expect to make a loss in the shorter term.

Yes, you can offset a loss against gains for tax purposes. You can carry forward losses, if they are bigger than gains.

But why? If you expect a loss- and with yields around perhaps 5%- wouldn't it be cheaper to rent something for your daughter?

I'd also wonder if Turner is an expensive option. Yes, it is close to ANU- but Canberra is very much a car town, and it may turn out better to buy a house a little further out- especially if public transport to her job (which I'm assuming is in Civic) is good.

Of course, if you expect a gain, then it's worth while to buy. But then, don't forget the transaction costs- commission, stamp duty, loan charges, legals.

But, with a loss:

.Say you gain $100K from the sale of a Perth property. You've had it for more than a year. You declare $50K taxable income extra, above normal income. You're in the top tax bracket, so you have to pay $25K. You pocket $75K.

.You sell the Canberra property, and make a $50K loss. You can offset that loss against the gain you made in Perth. So now you can declare no net CGT income for the year. You don't have to declare any income. So you pay no CGT. HOWEVER, now your $100K gain is eroded by a $50K loss. So you pocket $50K.

Rental is tight. But it may be worth considering.

 

[Peter Parker]

I've never understood Canberra

The thing I have never understood about the Canberra market is that (apart from bedsitters in Queanbeyan) there seems to be no cheap bottom end. It's like if you were a check out chic in a mining town and you wanted a nice unit to rent - everything's too much and dearer than in 'normal' capital and regional cities.

Adelaide and Melbourne have plenty of cheap suburban brick houses around $200k. Even in Sydney it should be possibly to get something under the mid-200s out west. Whereas Canberra/Queanbeyan only seems to have mid-priced and expensive - no 'cheap', though high rents might compensate somewhat.

The only sub $300k 3br houses I could find in Q were

http://allhomes.com.au/c/ah?a=sp&p=276011
http://allhomes.com.au/c/ah?a=sp&p=275732

The ACT offers more choice, eg a fixer-upper in 'cheap' Charnwood

http://allhomes.com.au/c/ah?a=sp&p=275880

The land value (though a big block) seems lowish for an old house (<50%), and the $859 land tax could be a worry (is it for every rental property owned or only if you have more than a certain amount?).

However it's probably better value than anything in far-out Banks

http://allhomes.com.au/c/ah?a=sl&s=1&t=r

If you could cough up $100k more, you could have got http://allhomes.com.au/c/ah?a=sp&p=273843 which is my pick for best buy at under $430k. It's a modest house in a high-value suburb. Admittedly it isn't in the dearest part of Garran but it's still near all facilities and not far from Red Hill or Griffith.

As an outside who lived in Canberra (and noticed $30-40k units in Queyanbeyan but did nothing about it!), I see little value for the interstate investor unless you found a bargain or did something special (like geoffw did).

But if you were buying a PPOR and were happy with a modest house, it looks like one can enter higher-end Canberra suburbs for a price that's not too much more than downmarket Banks or Charnwood.

Peter

 

[alexlee]

.Say you gain $100K from the sale of a Perth property. You've had it for more than a year. You declare $50K taxable income extra, above normal income. You're in the top tax bracket, so you have to pay $25K. You pocket $75K.

.You sell the Canberra property, and make a $50K loss. You can offset that loss against the gain you made in Perth. So now you can declare no net CGT income for the year. You don't have to declare any income. So you pay no CGT. HOWEVER, now your $100K gain is eroded by a $50K loss. So you pocket $50K.

I don't think it works like that. My understanding is that the 50% exemption is on NET cap gains after first deducting capital losses? i.e. in your example above, Geoff, you would actually have $100 gain less $50k loss = net $50k gain. You would have to declare 50% of that as income ($25k) and pay tax on that (say $7,500 if you're on 30%).
Alex

 

[alexlee]

We are going ahead with our purchase of a unit at The Avenue, Turner, ACT.

If we do make a loss when it is time to sell, say in a year or two, can we offset this potential loss against profits booked for our Perth properties (when it comes to sell also in 1-3 years)?

I agree with Geoff on this one. You have to pay 5% to buy the place and another 2-3% to sell. So you're already 8% down, without including the negative cashflow. If you plan to hold onto the property long term and you expect it to go up, that's not an issue, but if you plan to sell in the short term and you don't expect it to go up...... why not just rent? At 5% a year rent it would work out cheaper and you don't take the risk of the property going down (if that is what you're expecting).
Alex

 

[Jase H]

The thing I have never understood about the Canberra market is that (apart from bedsitters in Queanbeyan) there seems to be no cheap bottom end. It's like if you were a check out chic in a mining town and you wanted a nice unit to rent - everything's too much and dearer than in 'normal' capital and regional cities.

Hi Peter,

I agree that Canberra's property market is a little weird and you make some valid points re. the lack of cheap entry level housing.

However, this needs to be put into some kind of context to understand 'why' it is the way it is. Firstly, Canberra's median yealry salary for a full time worker is in the low 60 k area, some 10k above the national average and around 17 k above adelaide salaries.

Canberras employment is unique to Australia in that about 45% of our work force (myself included) are employed directed as Federal Public servants and many more workers/contractors are in-directly employed by the Federal Government. Such white collar employment is predominantly middle to upper middle class, meaning Canberra has a larger % of middle and upper middle class than cities like Adelaide etc.

Secondly, as any other property market Canberra's market has cycles. Canberra peaked in 91' bottomed around 98' before peaking again around late03 early 04. Our house (3br 1 br, 2 garage, 780m block, 11kms from CBD - 15 min car or 20 min bus commute) is a good example to illustrate cycle swings canberra had. In 91' previous owners purchased for $118,500 (not sure of market rent at time but probably around $110-$120.) In 99' we purchased for $115,000 (market rent $200 per week or 9% yield). In April 06' house valued by bank valuer (probably a little on consersative side) at $310,000 (market rent $290-$310).

The only improvement we ever made at all (apart from maintenance) was 14 K spent on bathroom reno. (tiles falling off etc)

So in '99 when Sydney and Melbourne had started their booms you could still buy an entry level free standing house just over 10 ks from Canberra CBD for 115 k on 9% yield.

In fact in 96' I purchased my first house in canberra for 93 k on about 8.5% yield. I sold it at end of 03' for $248,500 (then on around 5.5% yield).


Food for thought.

My opinion only

Jase

 

[Peter Parker]

The futility of higher pay

However, this needs to be put into some kind of context to understand 'why' it is the way it is. Firstly, Canberra's median yealry salary for a full time worker is in the low 60 k area, some 10k above the national average and around 17 k above adelaide salaries.

It sounds like the mining town story - high pay = higher capacity to pay. So people do and prices rise.

The main difference is that mining towns have more renters so most of the rises are in rents whereas Canberra has a more normal (ie higher) proportion of owner occupiers so this inflation affects house prices as much as rents.

Like a mining town, Canberra seems to operate a two tier labour and rental market - if you're not a miner/well-paid public servant or private consultant then you're priced out. This can only go on so far until there's no one left to wait in restaurants, clean the house, mow the lawn, etc.

Admittedly, the labour structure of the Canberra public service is top-heavy as Canberra are where all the bosses and policy wonks are whereas the lower paid people behind the Centrelink counters, etc are out in Penrith, Dandenong, Elizabeth or Midland. Therefore it is understandable that pay is higher in Canberra than elsewhere (even amonst the public service).

But we seem to have a form of Parkinsons law operating here.

Higher pay is only useful if it increases spending power and thus delivers a higher standard of living.

If house prices rise with pay then the benefits of the higher pay are reduced. And we haven't mentioned tax either (noting that most income tax is raised from upper-middle income PAYE people with no investments or major deductions).

Let's assume Canberra's median pretax income is $60k.
Let's assume Melbourne's is $50k.

From:
http://homepriceguide.com.au/media_release\Home Price Guide Media Release 010806.pdf

Median house Canberra: $424k
Median house Melbourne: $352k

Years annual average income to buy a median house:
Canberra: 7.07
Melbourne: 7.04

(negligible difference)

Unless you can get substantially higher pay than most others, chasing higher pay is a false god. House prices rise in proportion so you're no better off.

But, wait, there's more!

There's income tax, and evil marginal rate tax at that. Affordability based on after tax income is actually worse since house prices have followed pre-tax rather than after-tax income.

Not that public servants should grumble about tax since that would be biting the hand that feeds them (though a surprising number do through immoral though perfectly legal arrangements such as salary packaging).

In summary, if you are working, pay tax and want to buy a house, it's better to be on $50k in Melbourne than $60k in Canberra. Sometimes less is better than more and this is one example.

Then there's dispersion of house prices, which should be high so that people from a wide range of incomes can get a foot in.

Can you buy a house (not a unit) at 2/3 the median? That would be $235k in Melbourne and $284k in Canberra. That is easy in Melbourne (although not in most suburbs) and harder but still possible in Canberra (but only in Charnwood etc). So overall Melbourne's a bit easier at the bottom end.

I'm now going to suggest something heretical, probably impractical, money-saving and with interesting effects on the housing market. It will also cause a brain drain.

It's going to be painful, but goverments have imposed such things on other industries with words like 'structural efficiency', 'competitiveness' or 'micro-economic reform'.

Cut public servants salaries in Canberra sufficient to lower average incomes to $50k!

If this gives Canberra a Melbourne style property market, there will be big affordability gains.

Existing owners will lose equity, but it seems to me that the main effect of higher than average public service wages in Canberra is to hold property prices artificially high.

The poor worker (whether on a low or average income) is no better off, and after tax is worse off under current arrangements. This is despite everyone thinking that higher wages = better living standards, which is not the case when it turns around and bites them through inflated house prices.

No one's going to do the above, and the nearest approximation is when the government decides it's time for public service cuts as in circa 1997. Then investors can make a killing by buying at good prices.

Apart from that, Canberra remains poor value and I still can't understand it!

Peter

 

[Lizard King]

Reasons for investing in Canberra

Hi Geoff, Jase, Alex and Peter

A Happy and Prosperous New Year and thank you for your advice and contributions to my posting amid uncertainties to investing in Canberra.

I know a lot of people advice investors to first have a strategy. My strategy has always been simple: to make a buck for a rainy day. Maybe I have missed the point and the strategy is how one goes about it, but to surmarise my strategy for investing in Canberra:

- To acquire good (not a rag-dag doghouse) accomodation for my daughter;
- It will be long term -at least for another 5 odd years when we hope to retire;
- I do not expect to make a loss with the apt - may break even;
- I think I will be 'protected' if I do make a loss by the Gains minus Loss rule (and yes, I agree with Alex, I think it is net);
- The apt is a year old, so depreciation is looking +ve (have asked a Schedule to be conditional to sale);
- Stamp Duty is tax-deductable because titles not freehold;
- My wife and I will be able to write-off our visits to our daughter in Canberra, as we will be 'going to inspect the property';
- I hope to not incur property man fees, as my daughter will be living as a tenant;
- We want to have greater diversity in our IPs;
- For $380K in Perth I would not get much change for a property (agree whatever property + condition property is, I can expect a 10%+ CG, but we are not into renos);
- The banks are ready to lend us the stosh because the cashflow will be good, so keeps 'em happy (so may have been a hassle if we were to invest in Perth);
- Time will tell if all of the above is true......

On the subject of higher salaries in Canberra - this can be quickly neutralised by the higher cost of living, such as higher rents and bus fares!

Yes, we found it incredibly hard to digest, that one pays the same fare of $3.00 if one travelled one or many bus stops - at least the busses we caught (#80 down NB Ave, for instance).

Thanks once again for your advice and concerns,

Phillip

 

[Peter Parker]

On the subject of higher salaries in Canberra - this can be quickly neutralised by the higher cost of living, such as higher rents and bus fares!

Yes, we found it incredibly hard to digest, that one pays the same fare of $3.00 if one travelled one or many bus stops - at least the busses we caught (#80 down NB Ave, for instance).

I agree about the rents, but disagree strongly on bus fares, where Canberra's are just about the lowest in the country.

Your short trip does seem expensive side, but an equivalent trip in Melbourne (Zone 1) is $3.20 so it's about comparable. And you could have got an off-peak daily ($4.40) or daily ($6.60) which may have offered better value.

Even better, if you were staying a few days you could have got a Faresaver 10 ticket for $22.00 ($2.20 per trip). For cost of living purposes an even fairer comparison would be with a weekly ticket (under $25) or a monthly ticket ($82.00). So for about $1000 a year you get unlimited travel, which is cheaper than before zones were abolished a couple of years ago.

http://www.action.act.gov.au/fares.cfm

In contrast other cities either do not offer annual tickets or they'd be dearer (the equivalent all zone yearly ticket in Melbourne costs nearly $2000).

The main transport issue in Canberra is not fares but service. After 50% service cuts in December 2006 buses are slow and infrequent (every 1-2 hours is the norm). Any visitor who used buses before then will be amazed how much more limited travel is if they were to return now.

Typical weekday timetable: http://www.action.act.gov.au/2006NewRoutes/Route_14-314.cfm

Typical evening/weekend timetable: http://www.action.act.gov.au/2006NewRoutes/Route_914.cfm

Hence Canberra households must budget for one car per adult (or equivalent taxis), whereas this is not mandatory in many parts of other cities due to their better transport. It is this rather than fares that increases living costs the most in Canberra.

Peter