mrd Web Seminar Dec 2008

1. Welcome to the mrd “What In The World Is Going On With Property” helping people to get out of the rat race! © mrd your propertyinvestmentmentor.com.au

2. Objectivity VS Subjectivity IMPORTANT: Objective Research From A Variety Of Reputable Sources Rather Than Subjective & Emotive Views & Opinions! Michael Matusik - Matusik Property Insights BIS Shrapnel RP Data NAB Economics ANZ Property Outlook Australian Bureau of Statistics Real Estate Institute of Australia mrd your property investmentmentor.com.au Please note, the information provided in this web seminar is not to be taken as financial advice. Before acting on anything outlined it is recommended that you seek to independently verify the information and or opinions expressed

3. Who is Nick Lockhart?  Born & raised in Sydney  Married to Katrina for almost 22 years  4 Children; Rebecca 20, James 17, Natasha 15 & Brittany 12  7 Investment properties  Background in property research  Have sourced land & put together development projects on behalf of other developers  Licensed Real Estate agent  Diploma of Financial Services  Extensive business experience Believe passionately in the essential need to take responsibility for one’s own financial  future  Desire to see others reach their full potential

4. Who is mrd?  Property educators & strategists  Wealth creation mentors  Walking the talk  Customer Care Programme Our Customer Care Programme works for you… because investing is personal   Unique “set ‘n’ forget; for busy peoplequot; TM system  Teaching people how to BUY so they will never be SOLD  Personal Support before, during and after the purchase  Strategies for sourcing, structuring & managing cashflow  QS Report, Rental assistance, Property bookkeeping spreadsheet, etc  A real (supported) strategy for planning your retirement  Recognition that each person is an individual with individual goals… because investing is personal  Striving to keep education FREE!

5. FOUR KEY FACTORS TO CONSIDER 1. Record Population Growth 2. Investors Have Fled The Market 3. Home Ownership Unattractive 4. New Construction Has Stalled Badly

6. Record Population Growth 1. Record POPULATION GROWTH  Fastest population growth in Australia in 200 years  Predicted to grow by 350,000 per year; first time in over 200 years  Almost as many people as are living in Geelong, Cairns & Bunbury combined, or the whole of Canberra (EACH year)  Previous Population Explosions: - 1850s Gold Rush years - Post World War 1 (1919 onwards) - Post World War 2 (1946 onwards)  Today we see a similar pattern - Rapid and prolonged growth - Too few workers - Pro-immigration government policies

7. Record Population Growth

8. Record Population Growth

9. Record Population Growth 1. Record POPULATION GROWTH (continued)  The Australian Bureau of Statistics (ABS) is not forecasting a slowdown in the population boom  Australia‟s net annual population growth will hit nearly 400,000 in less than five years: - 2009: 350,000 increase - 2012: 384,000 increase - 2010: 365,000 increase - 2013: 390,000 increase - 2011: 379,000 increase The projected housing shortfall by the end of 2009 is expected to reach between 170,000 and 200,000!!!

10. Investors Have Fled The Market 2. INVESTORS HAVE FLED THE MARKET  Property investors have left the market in droves  Record population growth = demand = willing investors? - Ordinarily, YES… But NO! - Investor interest in property has never been lower! (See Chart 3)  Investor lending growth - 2004 = over 30% - 2008 = below 10% (8.4% in July)

11. Investors Have Fled The Market 2. INVESTORS HAVE FLED THE MARKET (continued)  First time below 10% since records were kept! WHY? - Interest rates; thus - Rental yields - Booming (bull) share market (averaged over 20% per year 2004 to 2007) - US sub-prime crisis - global share markets into a bear market (i.e. prices fell more than 20%) - US sub-prime crisis = shareholder’s were burnt = switch to cash rather than property this time - Horror stories | property prices crashing 30-40% in UK & US  Only the 'brave' have continued to invest in property

12. Investors Have Fled The Market

13. Home Ownership Unattractive 3. HOME OWNERSHIP UNATTRACTIVE  Affordability barrier  Interest rates  US sub-prime crisis  Lack of consumer confidence  Negative media reports  Scared!!! Renters have simply continued to rent

14. New Construction Has Stalled Badly 4. NEW CONSTRUCTION HAS STALLED BADLY  Many developers nervous & are not building  Many developers have gone broke  Many developers can‟t get funding See Table 1: Failed property development companies  Investors make up approximately: - 50% of the new housing market -70% of the new apartment market  Drop off in investor interest  Developers reduce number of new projects Chart 4: Annual change in advertised rents, July 2008

15. New Construction Has Stalled Badly

17. New Construction Has Stalled Badly 4. NEW CONSTRUCTION HAS STALLED BADLY (continued)  Since 2005 the absolute number of completed residential properties has fallen  Forecast to continue falling in 2009 (see Chart 1)  US sub-prime crisis cemented downward trend in new properties  Borrowing costs skyrocketing for developers  Liquidity crisis  High profile bankruptcy of many developers owing investors millions (see Table 1)  Massive financial pressures on hundreds of smaller developers  Developers now understandably very nervous  Shelved many new developments until there is clear evidence investors are back in the market

19. Explaining The Rental Cycle EXPLAINING THE RENTAL CYCLE  Market Equilibrium exists where the average advertised rents and average actual rents are about the same  Ford Geelong recently announced massive job losses. This can affect rental markets  People need to reduce expenditure | look for a cheaper property to rent  Supply of rentals goes up while demand for rentals (at the same price) falls - This results in a drop in rental values  However, while average advertised rental prices fall almost immediately  Average actual rental prices don‟t! Why? - Because most tenants are locked into existing leases  Then… leases begin to progressively expire  Over 12 to 18 months people move from area OR demand reduced rents to stay

20. Explaining The Rental Cycle EXPLAINING THE RENTAL CYCLE (continued) A Balanced Rental Market - 3% to 4% Vacancy  Rents steadily rise  Rental prices eventually peak  People respond by moving “out” to less expensive areas  Demand reduces  Average advertised rents fall from their peak  Average actual rents stay higher than the new advertised prices (as many people remain locked a lease)  Rental leases expire over a 12 to 18 month period  Average actual rents fall  Market equilibrium is reached

21. Explaining The Rental Cycle EXPLAINING THE RENTAL CYCLE (continued) A Stressed Rental Market – 1% to 3% Vacancy  Population boom  According to property research firm Residex www.residex.com.au; average advertised rentals have jumped by about 8% to 17% in capital cities over the last year (see Chart 4) - NB: Average advertised rentals usually rise between just 4% & 8% per year  Outrageous rental increases are forcing a much higher than normal exodus from areas close to infrastructure and services to the suburbs

22. Explaining The Rental Cycle

23. Explaining The Rental Cycle EXPLAINING THE RENTAL CYCLE (continued) A Stressed Rental Market – 1% to 3% Vacancy (continued)  Normally such an exodus would affect the market equilibrium, resulting in rents softening for a time  Now, however, these vacated properties are being snapped up by new immigrants, who have arrived in town and simply accept the higher rentals (e.g. Sydney & Melbourne)  New immigrants: willing & able to work | usually have little savings | will remain renting for a season  Even with a deposit, banks loathed to extend credit until they‟ve been permanently employed for between 6 & 12 months; especially in current climate of tighter credit  They create demand that fills vacuum left by those moving out  Those who move to cheaper suburbs find rents spiralling there too (overall supply and demand)

24. Explaining The Rental Cycle EXPLAINING THE RENTAL CYCLE (continued) SOARING RENTS  $10-20 a week rent rises were common  In 2008 they were significantly higher, however  I know someone very well whose rent rose: - from $450 a week in Sept ’04 to $480 a week in Sept ’07 - That’s 6.6% increase over 3 years - In Sept ’08 it jumped $80 to $560 a week - That’s 16.6% increase over previous year… and in one hit  Vendor not worried about losing a tenant as he would get $580 without a problem  NB: Between 2004 and 2007, the housing shortage across Australia was absorbed by a 2.0% fall in the vacancy rate to 1.5%

25. Explaining The Rental Cycle EXPLAINING THE RENTAL CYCLE SOARING RENTS (continued)  As long as vacancy rates are over 1.0% +, rents experience moderate rises  1.0% vacancy is effectively 0% as the remaining 1.0% represents the few days between tenants when properties are cleaned and inspected  Vacancy rates now set to fall past 1.0% & approach the unprecedented 0.5% mark  A 1.0% vacancy rate | A population boom & | The Great Housing Shortage - Can mean only one thing for 2009… rents are going to soar!  One of the following two outcomes will occur next year: a.Supply must increase; i.e. more housing constructed – This cannot happen b.Vacancy rates fall... and rents rise – This must happen

26. Greatest Ever Housing Shortage GREATEST EVER HOUSING SHORTAGE  Let there be no confusion…  The result of this is that Australia now faces its greatest ever housing shortage!!!

27. Explaining The Property Cycle EXPLAINING THE PROPERTY CYCLE  Despite recent pessimism; when the largest population boom in 200 years hits the greatest housing shortage in 200 years there is only one way property values can head… and that‟s NORTH!  I expect that official interest rates will come down to at least 4% by April 2009 - NB: Today, 19th November; Bank West announced a 2 year fixed rate of 5.99%  That would be a $218.75 per week interest saving on a $350,000 mortgage (assumes a 3.25% drop in interest in just the 7 months from Sept '08 to April '09)  Rising rents | Falling interest | Uncertainty surrounding global shares | Increase to 1st home owners scheme = - Increased demand | Pressure cooker lid comes off | Will trigger another strong round of residential property price growth - Investors & owners drawn back into market further compounding price growth

28. Explaining The Property Cycle

29. Explaining The Property Cycle Michael Matusik says:  The current situation is “Demand with NO Supply”  Sometimes these laws can be artificially stalled but they will always win through in the end  Every market returns to its long term average; that is a mathematical certainty  The market has bottomed out and he expects it to get back to a more normal pattern in about 6 months

30. Explaining The Property Cycle ABERRATIONS, FLUCTUATIONS & SHORT-TERM BLIMPS  While there will be exceptions to any rule in the short term; water always finds it‟s own level  Regardless of short term market reactions expressed in rentals and/or values; supply & demand will set the long term direction of prices  “Set „n‟ Forget; for busy peoplequot; TM OR Property trader & speculator - “Don’t make long term decisions based on short term focus or information” (Unknown) - “Great opportunities arise when excellent investment prospects are surrounded by unusual circumstances that cause the situation to be mis-appraised” (Anonymous) - “Be fearful when others are greedy and greedy when others are fearful” (Warren Buffett)

31. Explaining The Property Cycle CASHFLOW & PROPERTY CYCLES Let‟s look at 2 examples of how significant the current economic climate is on the cost of holding property. EXAMPLE 1 | The Wharf @ Robina | August 2008 Assumptions… Purchase Price: $459,000 Taxable Incomes: $60,000 and $40,000 Ownership Split: 50 / 50 Rent: $420 / week Interest Rate: 8.87% (Westpac variable rate, with full professional package discount, at peak) Weekly shortfall without using strategy of capitalising expenses $344 Weekly shortfall using strategy of capitalising expenses $212

32. Explaining The Property Cycle CASHFLOW & PROPERTY CYCLES (continued) Let‟s look at 2 examples of how significant the current economic climate is on the cost of holding property. EXAMPLE 1 | The Wharf @ Robina | December 2008 Assumptions… Purchase Price: $459,000 Taxable Incomes: $60,000 and $40,000 Ownership Split: 50 / 50 Rent: $460 / week Interest Rate: 6.0% (Approx rate with full professional package discount) Weekly shortfall without using strategy of capitalising expenses $116 Weekly GAIN using strategy of capitalising expenses +$20

33. Explaining The Property Cycle CASHFLOW & PROPERTY CYCLES (continued) Summary: Interest Rate Cuts producing approximately $253 per week holding cost reduction Rental Increases producing approximately $40 per week holding cost reduction TOTAL HOLDING COST SAVING OF $258 a week (incl. tax adjustment) Investors are starting to trickle back to the market now HOWEVER, within about 6 months; I think they will flood back!

34. Explaining The Property Cycle CASHFLOW & PROPERTY CYCLES (continued) EXAMPLE 2 | City Park @ Cairns | August 2008 Assumptions… Purchase Price: $310,000 (Unfurnished) Taxable Incomes: $60,000 and $40,000 Ownership Split: 50 / 50 Rent: $320 / week Interest Rate: 8.87% (Westpac variable rate, with full professional package discount, at peak) Value of Furniture Pack: Not Applicable Cost of Furniture Pack: Not Applicable Weekly shortfall without using strategy of capitalising expenses $198 Weekly shortfall using strategy of capitalising expenses $94

35. Explaining The Property Cycle CASHFLOW & PROPERTY CYCLES (continued) EXAMPLE 2 | City Park @ Cairns | December 2008 Assumptions… Purchase Price: $310,000 (Furnished) Taxable Incomes: $60,000 and $40,000 Ownership Split: 50 / 50 Rent: $380 / week Interest Rate: 6.0% (Approx rate with full professional package discount) Value of Furniture Pack: $16,700 (Approx) Cost of Furniture Pack: Nil (Developer’s Incentive) Weekly shortfall without using strategy of capitalising expenses $18 Weekly GAIN using strategy of capitalising expenses + $93

36. Explaining The Property Cycle CASHFLOW & PROPERTY CYCLES (continued) Summary: Interest Rate Cuts producing approximately $153 per week holding cost reduction Rental Increases producing approximately $60 per week holding cost reduction TOTAL HOLDING COST SAVING OF $187 a week (incl. tax adjustment) Investors are starting to trickle back to the market now HOWEVER, within about 6 months; I think they will flood back!

37. This Is NOT The USA This Is NOT The USA Ric Battellino, the Deputy Governor of the Reserve Bank said on 30th October 2008: quot;The overhang of unsold houses in the US has created downward pressure on house prices as builders and developers have been forced to sell. This is absent in Australia. Rather, a shortage of housing here means that there are buyers waiting for better circumstances - e.g. lower interest rates or rising incomes - to facilitate the market. This latent underlying demand for housing is a factor that will support the market.quot;

38. This Is NOT The USA This Is NOT The USA  US credit crunch  „Free money' mentality of US banks  'NINJA' loans = No Income, No Job or Assets  Banks were happy | a booming market | could foreclose on defaulters | then sell property for more  Built to satisfy GREED, rather than NEED  Result was a huge housing glut  Nine months oversupply  House prices fell last year in Florida & Detroit by 30% - 40%  Negative equity  Send back the keys and walk away | Jingle Mail

39. This Is NOT The USA This Is NOT The USA (continued)  Non-recourse loans - I.E. Bank could not sue a borrower or touch his/her other assets  Defaults between 2006 & 2008 more than doubled from 6% to 15% of all sub-prime mortgages (see Chart 6)  Banks forced to foreclose in greater numbers than anyone expected - Personally, how they could have been so stupid I will never understand  Flood of houses foreclosed added to the huge oversupply of properties built by developers - Chart 5: US monthly oversupply of housing vs residential lending - Chart 6: US and Australian sub-prime loans in 90 days arrears

40. This Is NOT The USA

43. This Is NOT The USA This Is NOT The USA (continued)  Australia is very different | Australian property market well placed  No US style loans | Faces none of the risks the US market is currently facing  We have a 200,000 (and growing) shortage of property... not a property glut  Rents are rising... not falling  Australian economy underpinned by the 'once-in-a-lifetime' commodities boom (led by China)  Australian banks wrote virtually no sub-prime mortgages (no-doc or non conforming loans)  Australian no-doc borrowers are not defaulting | Defaults are falling (see Chart 6)  Only option is for vacancy rates to fall and rents to rise  BUT... no room for vacancy rates to fall

44. This Is NOT The USA This Is NOT The USA (continued)  Since 2004, rental vacancy rates have fallen nationally from 3.5% to below 1.5% in 2008 (see Chart 7)  Councils and State Governments are loathe to approve new housing subdivisions (which require expensive infrastructure such as roads, water and sewage)  The long run of increasing interest rate rises scared many renters away from buying  Rising rents have the opposite effect; especially with interest rates falling simultaneously  Rent rises in 2009 will push many renters to buy their own property | Promoting a broad rise in property prices  Chart 7: Residential vacancy rates

46. This Is NOT The USA This Is NOT The USA (continued)  Reserve Bank of Australia dropped interest rates: - Cash rate of 7.25% was reduced by 0.25% in September - Cash rate of 7.0% was reduced by 1.0% in October - Cash rate of 6.0% was reduced by 0.75% in November - Cash rate of 5.25% was reduced by 1.0% in December - Cash rate is now 4.25%  More rate cuts forecast into early 2009 (see Chart 8)  I have suggested at least down to 4.0% cash rate by April ‟09 - This now looks conservative! NB: Bendigo Bank announces a 2 year fixed rate of 5.99% (LAST Month)  Interest rate cuts makes ownership 'relatively' more affordable  3.25% (conservative) interest rate drop (between Sept 08 & April 09) on a $350,000 mortgage would equate to $218.75 a week in interest saving

47. This Is NOT The USA This Is NOT The USA (continued)  Affordability & security associated with home ownership boosts confidence  Increased income from property (i.e. rental increases)  Government‟s increased first home owners incentive Renters & investors alike are enticed back into the market  Renters, those living with parents and/or share accommodating will buy their own properties in 2009  HOWEVER, all this new rental vacancy will be totally dwarfed by the influx of immigrants  Therefore, the demand for rental housing will not materially ease  The most money is made by those leading, not following the herd  Investors are fickle | Herd mentality prevails | From cold to hot very quickly

48. This Is NOT The USA This Is NOT The USA (continued)  Nationally speaking, property investors have been relatively cold since mid 2004  Annual growth in investor lending plummeted from 30% in 2004 to 10% by the end of 2005 In early 1997 and 2002, investor lending jumped 10% within a year and then continued rising another 13-15% the following year  When investors return to the market; they return en masse - Soaring rents = Better income - Falling interest rates = Cheaper holding costs - Rising property prices = Capital gains  RESULT? - Investors WILL BE tempted back into the market… and probably mid-to-late 2009?

49. This Is NOT The USA This Is NOT The USA (continued)  Continuing uncertainty around the stock market will also encourage investors to look for the safer investment with better returns offered by residential property  Renters should consider buying; probably sooner rather than later  Anyone can “see” where a market is now! It‟s those who “see” where a market is headed that make the best gains  Stay alert in the midst of doom and gloom; so as not to miss an impending BOOM

50. What Next? Don’t Miss This IMPORTANT Step!  Go To: www.investmentmentor.com.au  Click: Borrowing Capacity  Complete our online secure BCA form  Submit (NB: Encrypted & Secure) Alternative download NOW, complete & fax  We will: - Have your Borrowing Capacity Assessed - Prepare for you a complimentary sample Cashflow Analysis - Prepare for you a complimentary sample Retirement Projection - Print & Post these to you, along with a complimentary copy of my DVD (should you not have received this previously) - Complete a complimentary finance structure & cashflow “health check” (if requested)

51. Questions? Type your questions into the chat room part of this event now! We trust this evening has been worthwhile & beneficial Thanks for listening. Nick Lockhart

52. What Next? Don’t Miss This IMPORTANT Step!  Go To: www.investmentmentor.com.au  Click: Borrowing Capacity  Complete our online secure BCA form  Submit (NB: Encrypted & Secure) Alternative download NOW, complete & fax  We will: - Have your Borrowing Capacity Assessed - Prepare for you a complimentary sample Cashflow Analysis - Prepare for you a complimentary sample Retirement Projection - Print & Post these to you, along with a complimentary copy of my DVD (should you not have received this previously) - Complete a complimentary finance structure & cashflow “health check” (if requested)

mrd Web Seminar Dec 2008

mrdwebmaster

mrd Web Seminar Dec 2008