Every few years The Economist magazine writes a story about how property in Australia is overvalued compared to other countries – or something to that effect. Comparing Australia with other countries is like comparing apples and oranges. Australia is just so different. But this difference creates opportunities for investors that play the long game. Let me explain.
Big country and not enough taxpayersI recently spent a few weeks travelling around France. It is so easy to get around. Its roads are in very good condition and the trains are fast, efficient and on-time.
It is easy to overlook that France would fit into Australia 14 times and its population is over 3 times more than Australia (25 million versus 76 million people). On average, there are 122 French people per square kilometre of land. In Australia, it’s a measly 3 people per square kilometre (and in the USA, 33 people).
In Australia, we have too much land and not enough taxpayers to fund the construction and maintenance of adequate infrastructure. Therefore, in order to access good schools and universities, diverse employment opportunities, health facilities, amenities and lifestyle benefits, you must live close to or in a capital city. That’s why 60% of Australia’s population live in either Melbourne, Sydney, Brisbane or Perth. Whereas only just over 3% of France’s population lives in Paris. Living outside of Paris (in say Lyon or Toulouse) isn’t a big disadvantage. (BTW, I haven’t selected France for any particular reason – just using it as an example)
Australian federal and state governments have tried to promote regional centres such as Newcastle and Wollongong in NSW or Geelong and Bendigo in Victoria to take pressure off capital cities. However, they just cannot compete with the large capital cities.
Only solution is a massive infrastructure spendIn my opinion, the only way the Australian government will solve the housing affordability challenge is through embarking on a massive infrastructure spend. Improved public transport, fast trains, better roads are some of the things that Australia needs. Essentially, they need to make it easier to live 30km to 100kms away from the CBD by reducing travel times.
For example, trains in France travel at speeds of up to 300km per hour. That means a train could travel from Melbourne to Geelong in approximately 16 minutes. Houses are a lot cheaper in Geelong compared to Melbourne – you can buy a large family home in a good suburb for under $1 million.
However, as noted above, Australia just doesn’t have enough taxpayers to fund this very costly infrastructure.
Australia has over $150bn invested in the Future Fund. These monies were quarantined to cover unfunded government superannuation liabilities – but the government has indicated that it doesn’t intend on drawing from the Fund for at least another 6 to 7 years. This means it will accumulate even more surplus monies (it currently has $14bn of surplus monies). Arguably, the government could draw on these funds to invest in Australia’s future (i.e. infrastructure projects) – preparing us for the next two to three decades i.e. let’s plan for the long term!
In any case, Australia’s geographical and infrastructural challenges are complex and very costly to solve. Australian governments have a long history of not planning for the long term and building outdated infrastructure (think NBN) So, I’m not optimistic of this challenge being addressed anytime soon.
Nothing beats proximity to CBDI acknowledge tha

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Over the past two years, I have highlighted how tight the credit (mortgage) market has become a couple of times. In the past, borrowing was simple. The bank would always offer you more than you wanted to borrow. You only had to provide a few documents and the money was yours!
Things have changed dramatically. These days, banks spend most of their time trying to look for reasons to decline a loan rather than approve it. It’s as if they don’t want the business! The onus is on the borrower to prove why they should approve the loan – you are guilty until proven innocent.
The other problem is that many bank employees are just too scared to use their discretion. As a result of closer scrutiny from the regulators and the Royal Commission, the banks significantly tightened credit policy. They also tightened their oversight of credit managers to the extent that they are now reluctant to move outside credit policy for fear being disciplined (e.g. loss of bonus or even job)! This creates perverse behaviour such as being highly pedantic, nonsensical and over-analysing due to fear of missing something.
In this new environment, borrowers are beggars, not choosers.
With this in mind I have listed 11 tactics you can employ to make you ‘loan ready’.
1. Start preparing 3 to 6 months outMy first tip is to start preparing for a loan application a minimum of 3 to 6 months in advance. Consider all the tactics I have listed below. If you need to take corrective action, you will have enough time to make any changes. Leaving things to the last minute might reduce the pool of lenders available to you.
2. Reduce discretionary spending three months outThe banks will not distinguish between discretionary and non-discretionary expenditure. They will trawl over your bank statements (3 months) to independently verify how much you spend each month and base the loan assessment on that number. Banks have asked questions about once-off transfers to family members, swimming lesson expenses, small charges by Uber Eats, ATM withdrawals at casinos, a Buck’s Night expense (!?) and so on. You would be flabbergasted by the detail they go into. They must spend hours looking at these things – inventing questions to ask! It is very pedantic and intrusive but unavoidable.
Therefore, to make it easier on yourself, minimise expenditure three months prior to lodging an application. Reduce as many discretionary expenses as possible. There are two benefits of doing this. Firstly, you will make the loan approval process a lot easier for yourself. Secondly, you might find it enlightening – allowing you to reset your spending habits.
If you have a high income, it might not be necessary to do this – consult with your mortgage broker (us) to ascertain how important this tactic is in your situation.
3. Control information flowHaving all your accounts with one bank probably makes things simpler and cleaner. However, it also means that bank knows everything about you. When lodging a mortgage application, banks will typically want to review your last 3 months of bank transaction statements (see item # 2 above). However, if you are an existing customer, it means the bank is able to see whatever history it wants. Keep this in mind.
If you want to control the information flow, then it’s wise to use a separate bank for your day-to-day transactions from the bank that holds your mortgages (or you plan to borrow from). Also refer to tip # 5 below.
4. Consider shifting loans onto different securitiesLenders borrowing capacities can vary a lot. One way to extend your borrowing capacity in this very tight credit market (assuming

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Last week Jarrod McCabe and I recorded a presentation about the ALP's proposed changes to tax laws that impact investors. You can watch it here: https://www.prosolution.com.au/webinar-negative-gearing-replay/
In this week's podcast, I summaries answers to 5 questions we addresses:

1. What is the impact on investors (in dollar terms)?
2. What impact will these changes have on the property market - prior to 1 Jan and after?
3. Is there anything existing property investors should do now?
4. Will these changes get through parliament?
5. Will these changes improve housing affordability?
6. What can investors do to mitigate the impact of these changes?

Here's a link to chart 1.
Here's a link to chart 2.
I'm on leave for 3 weeks so there won't be any new podcasts over this time. Sorry.

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The ALP’s proposed ban on negative gearing has been well publicised and debated. However, its proposed changes to Capital Gains Tax (CGT) have received far less attention. I suspect that this is because investors tend to overestimate short-term consequences and underestimate more significant long-term outcomes. But, since most of us are long-term investors, I’d suggest that we should adopt a more balanced view.
How does capital gain tax currently work?
At the moment, only 50% of the net capital gain is included with your other taxable income (except for companies which are not entitled to the 50% discount) if you have owned the asset for more than 12 months. The net capital gain (or loss) is calculated as follows:
Net sale proceeds – being sale price less any selling costs including agent fees and so on.LessWritten-down acquisition cost – including purchase price, stamp duty, buyers’ agent fees, legal fees, inspection fees and so on; less any depreciation claimed in prior years.EqualsNet gross capital gain (or loss). This amount is discounted by 50%. The discounted amount is then added to your income and taxed according to individual marginal rates.
What has the ALP proposed to change?
The ALP has announced that if it wins the election on 18 May, it will halve the CGT discount from 50% to 25%. This effectively increases that amount of tax you’ll pay by 50%.For example, under current arrangements, only $50 of a $100 capital gain would be added to your taxable income. If you are on the highest marginal tax rate of 47%, you would pay $23.50 in tax. However, under the ALP’s proposed arrangement, $75 would be added to your taxable income and your tax payable would increase to $35.25 – an additional $11.75 or 50%.
These CGT changes apply to investments, including property and shares, purchased on or after 1 January 2020 (for property, this is likely to be based on contract date, not settlement date). All investments made prior to 1 January 2020 will be fully grandfathered and entitled to continue to claim the 50% CGT discount.
High growth assets will be impacted the most
Unlike the changes to negative gearing, these changes to CGT will impact property and share investors to a similar extent.
And investments that provide the majority of their total return in capital growth rather than income will be impacted the most by these changes. The two most popular (common) major asset classes are:
Direct propertyAccording to REIA data, the average compounding capital growth rate of Australia’s five largest capital cities since 1980 is 7.2% p.a. Investment-grade properties should generate a higher growth rate (than the median).
However, property tends to generate only a small amount of income. Whilst gross rental yields can range from 2% and 5% p.a., after an investor pays for expenses such as management fees, maintenance, insurance, water and so on, the net rental yield is a lot lower – probably under 2% p.a. in most circumstances. In summary, property typically provides circa 80% of its total return in capital appreciate and 20% in income.
International sharesInternational equities also provide most of its return in capital growth. The MSCI World Index has appreciated in value by 7.83% between December 1987 when it began and March 2019. The average annual dividend yield of this index is currently only slightly above 2%. So, international investments also provide 80% of total return in growth and 20% in income.
It is interesting to note however that Australian shares generate a lot more income. A

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Different professionals are able to give advice about a specific field – but who’s taking responsibility for looking at the big picture? How do you know if opportunities are slipping between the gaps? What if you have an issue/problem/question that bleeds over a few different fields?
Firstly, it is important to understand the what different professionals can and cannot talk about (by law).
Mortgage adviceTo give advice about a mortgage, borrowing capacity, interest rates, products and so on the professional must hold an Australian Credit License (or be an authorised representative of an ACL holder). You can search ASIC’s register of credit representatives here.
Tax adviceAnyone that provides tax agent services (tax advice, lodge tax returns, etc.) for a fee must be registered with the Tax Practitioners Board. You might find that some well-meaning professionals (such as mortgage brokers or buyer’s agents) offer you tax advice or express an opinion about how an item should be treated for taxation purposes, but you should always confirm this advice with a Registered Tax Agent. You can search the Tax Agents register here.
Financial adviceTo be able to provide financial advice, you must hold an Australia Financial Services License (AFSL) or be an authorised representative of a holder. Financial advice includes cash flow management/budgeting, investing in shares, superannuation, retirement planning, estate planning, risk management and so on. I have written previously about the importance of selecting a truly independent advisor. You can search the AFSL register here.
Property adviceA person cannot recommend and help you purchase a property unless they are a licensed real estate agent. Licensing is State based and this page provides a good summary including links to registers. General property investment advice is completely unregulated and I have written about why this is a problem in The Australian here. Therefore, if you are paying for property advice, be very careful.
Insurance adviceMany financial advisors also provide insurance advice. However, sometimes professionals are insurance advisors only i.e. they have a limited AFSL.
What can and cannot be covered…Therefore, mortgage brokers can only give advice about credit (mortgage) products, not cash flow or taxation matters.
Tax agents can only give you tax advice and cannot comment on cash flow, investments, mortgages, superannuation and so on.
A financial planner can't talk about tax consequences or give you borrowing advice unless they hold the appropriate licenses.
The problem is many financial decisions are interrelatedMany financial decisions cross over multiple fields and require input from various professionals to ensure you arrive at a thoroughly well-considered conclusion. Take the decision to upgrade or downsize your family home for instance. Whether to do this and at what budget would include borrowing considerations (mortgage broker), cash flow and retirement

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An investment property should be selected based on the likelihood of it generating strong capital growth rather than secondary benefits such as rental yield or negative gearing. However, saying that, this doesn’t mean we shouldn’t maximise the gearing benefits of your current or future investment property to save on tax! So, if you’re looking to purchase an investment property or currently have one, these are some commonly missed methods/deductions that will help you get the most from your investment property:
1. Depreciation schedulesClaiming depreciation and the associated capital works deductions is a significant taxation benefit, and one which many property investors are unaware of. Depreciation is a non-cash deduction meaning you do not need to spend any money to claim it.
As your property ages and items within it wear, they depreciate in value. The ATO allows deductions for this wear and tear. Deductions can be claimed on the building's structure and items considered permanently fixed to the property. Further deductions can also be claimed on the plant and equipment assets contained within it.To claim depreciation deductions, property investors need to engage a specialist Quantity Surveyor to complete a capital allowances and tax depreciation report. When completed, the report outlines the deductions available for both capital works and plant and equipment items on an income producing property and is used each financial year when preparing tax returns. The cost of obtaining this report is also tax deductible.
Click here for an update to the depreciation laws since this blog was published.
2. Prepay interestIf you anticipate your income to substantially decrease in the next financial year due to factors such as maternity leave or redundancy, prepaying your interest in the current financial year will allow you to reduce your current higher taxable income – maximising your tax savings.
3. Statement of adjustmentsThe purpose of the Statement of Adjustments is to calculate the exact amount the Purchaser will need to reimburse the Vendor on the day of settlement for the property’s annual costs already paid by the vendor for the remainder of the year. These expenses can include, but are not limited to council rates, water rates and body corporate fees. Many property investors are unaware of these expenses paid upon settlement and are usually missed as a rental expense within the first year when the property is acquired.
4. Borrowing expensesThe cost of establishing a loan can sometimes be quite substantial with some loan establishment fees costing in excess of $2,000. These costs are more often than not missed as it forms part of the loan proceeds and let’s face it - we’re always more interested with the interest expense rather than the menial bank charges!
5. Waiting until tax time to get a refundMany employees don’t realise that they are entitled to vary the tax subtracted from their salary to ease the cash flow burden of investing in property (called PAYG withholding variation). This means you can enjoy the cash flow savings sooner – rather than waiting until the end of the financial year.
Of course, there are more…
The above is not an exhaustive list of investment property deductions – just a handful of the deductions I have found are commonly missed. Of course, there are many more expenses that can be claimed to help reduce the tax you pay. The ATO produce a guide each year to help investors bu

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Understanding how property growth behaves is critical when making buy, hold or sell investment decisions. Unfortunately, I have seen lots of people make terrible decisions based on misinformation or misunderstanding. Therefore, if you are a property investor, you must understand this concept. And if you are an investor with a low asset base, you can use this knowledge to your advantage.
History always leaves clues
I’m a big proponent of evidence-based investing because it removes a lot of risk. Evidenced-based investing involves only adopting methodologies, approaches or investing in assets where there is overwhelming evidence that demonstrates it works. No throwing darts. Only invest in sure-things.
Below I have set out a few examples of property growth both for individual properties and markets.
Individual examples of property growth
The chart below (click to enlarge) sets out the sales of an apartment in Richmond, Victoria between 1985 and 2019. As you can see, there was very little growth between 1985 and 1997 and very strong growth between 1997 and 2010. The average growth over the whole 25 years period averages out at over 8.8% p.a. – which is pretty respectable. This is a very good example of how property behaves i.e. it grows in cycles lasting 5 to 10 years followed by a flat cycle. Click here for an example of a house in Carlton that I cited in another blog that also illustrated this concept.
<< Chart - click here >>
I appreciate that this data isn’t statistically significant, because it’s only a couple of properties. However, after 17 years of looking at property growth on almost a daily basis, I can assure you that this growth is indicative of how the vast majority of investment-grade property behaves over long period of time.
Example of state-based growth
The chart below (click to enlarge) sets out the distribution of median house price growth since 1980. You will notice that a growth cycle typically lasts 7 to 10 years. And a growth phase is typically followed by a period of (7-10 years) of little growth. The average growth rate over the past 38 years of each capital city ranges between 7.30% and 7.96% p.a. That is, in the long-run, there is not a large variation.
<< Chart - click here >>
Understanding the market and its performance
When assessing an investment property’s historical performance, it is important to ascertain whether it is due to asset-specific or market-wide influences. For example, I know that investment-grade apartments in Melbourne have not performed well over the past 7 to 10 years – as perfectly depicted by the Leslie Street chart above. Therefore, investors must consider this when assessing the performance of their assets. For example, if you purchased a quality apartment in Melbourne 5 years ago and haven’t enjoyed much capital growth, it is possible that you have a perfect (investment-grade) asset, but you just haven’t held it long enough yet. That is, no growth is a market-wide phenomenon, not asset-specific.
But you can’t have blind faith in the headline numbers. You must understand what has driven performance. Using investment-grade apartments in Melbourne as an example, these are some of the things I would consider when looking at recent

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“First rule of business is never get emotional about stock, clouds the judgment.” Gordon Gekko, from the movie Wall Street
The quote above is from the fictional character, Gordon Gekko from the legendary 1987 movie, Wall Street. The challenge he was alluding to is the fact that it’s impossible to have a completely impartial lens when making financial decisions. There are many reasons for this.
Firstly, it’s our money, we worked hard for it and we don’t want to make a mistake and lose it. I have observed marriages dissolve because of financial losses. It’s a big deal and a lot is at stake.
Secondly, we tell ourselves stories about money. These stories have been shaped over many years by our upbringing, culture and personal experiences. Stories like money is evil, money is a measure of success, it’s hard to make money from investing, money changes people, money will solve all my problems, money makes me feel safe and so on.
The sun is smaller than it looks
Have you ever taken a photo of a sunset or landmark and been surprised how small it looks in the photo compared to the naked eye? The reason is because our brains play a trick on us… it’s an optical illusion. Our brain makes us see something that’s not real. Here are some explanations why this happens – although it’s not important for this blog – I’m merely making the point that sometimes we see what we want to see. Our impression of “reality” is shaped by our beliefs.
My observations over the past 17 years
I agree with Gordon Gekko that emotions are rarely a useful human behaviour when it comes to making financial decisions. They distort our views and can cause us to make expensive mistakes. In my experience, emotions can cause a few common errors including:
§ Overthinking – it might sound a bit perverse, but you can overthink financial decisions. The problem with overthinking is that you start to explore every possible outcome and add too much weight to outcomes that are very unlikely to occur – almost so remote that they do not really warrant any attention or consideration. This can cause people to jump at shadows.§ Blind to risk – sometimes we want something to be true so much that we irrationally ignore any evidence to the contrary. This often happens when people decide to invest in a certain asset. At that time, they almost have rose coloured glasses and can’t see any risks or flaws. This is a very risky mindset.§ Paralysed by the fear of making a mistake – this is particularly common for people closer to retirement. They know they need to have an investment strategy and they also know that they don’t have any room (time) for error. As a result, they feel so anxious about making a mistake that they find it very hard to see what might be in front of their eyes. Similarly, people that have lost a lot of money on past investments can also be unduly influenced by fear. They become overcautious – not recognising that their past mistakes were caused by breaching investment fundamentals. They have a high level of nervousness even when a prospective investment is fundamentally sound.§ Overconfidence – how can you expect to be an expert at something without acquiring many hours, weeks, months and years of experience? When it comes to finance, it is important to be consciously incompetent i.e. don’t think you know everything. Because you only have to be a little wrong to completely ruin an investment. And often, mistakes are not obvious (to non-professionals) at the outset. Arrogance is

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The ALP announced on Friday (29/3/19) that it will ban negative gearing from 1 January 2020 if it wins the election next month. I wrote an article for The Australian newspaper over the weekend which addresses the steps property investors can take to fortify their investments (which I list below). A number of people have asked me whether they should invest in property prior to 1 January 2020. I discuss this too.
We still have a long way to go
Of course, the ALP has to win the election before it can ban negative gearing. I acknowledge that virtually every poll predicts an ALP victory. But John Howard didn’t poll very well leading up to his 1996 election win. And who would have thought Mr Trump would become President of the USA! So, anything can happen.
Secondly, it will depend on how strong their win is and whether they have a large majority or not. If it’s a tight win, they may have to negotiate with minor parties to get its law enacted and, as a result, water down its change to negative gearing e.g. limit it rather than an outright ban.
And finally, we have not seen the draft legislation yet. All the ALP has said is they will be negative gearing if people invest in established property or shares after 1 January 2020. Back in 1985 when the Hawke government banned negative gearing, people used unit trusts to invest in property. They borrowed to buy the units and as such were able to continue to negatively gear the property. So, there could be workarounds.
What should (existing) property investors consider doing?
There is a risk that the ban on negative gearing will put further downward pressure on property values in 2020. Owning an investment property in a falling market can be a double-whammy. Not only is your asset value falling, but you have to put your hand in your pocket each month to contribute towards the holding costs (if the net rental income isn’t enough to meet the loan repayments). Here are some of the steps you can consider taking:
1. Reduce holding costs – fix your interest rateMany lenders are offering 3 years fixed rates at levels below variable interest rates, particularly if your loan repayments are structured as interest only. This may help reduce the monthly holding costs and you could still be better off on a fixed rate because, even if the RBA does cut rates this year, there’s no guarantees the banks will pass it on. See more from my blog a few week’s ago.
2. Make any changes to mortgages prior to 2020If values do fall further as predicted, now might be a good time to lock in access to available equity. This involves increasing your loan’s credit limit to up to 80 percent of the current value of your investment property. This will give you access to additional credit for emergencies (i.e. a financial buffer) or future investment purposes. This equity may not be available in the future if bank valuations fall after 1 January 2020.
3. Divest of underperforming properties in 2019I expect that some property types and locations will be more exposed to changes in negative gearing. For example, locations or buildings that are dominated by investor-owners could be at greater risk compared to locations with a more normalised number of owner-occupiers. In addition, the types of properties that have historically been marketed to investors primarily because of the tax benefits they generate (such as depreciation and negative gearing) will almost certainly be negatively impacted.If

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I’m a huge fan of Seth Godin’s work. He’s a presenter, author and entrepreneur and if you have any interest in marketing or business, you must subscribe to his daily blog. Anyway, his recent blog about the difference between an amateur and professional got me thinking. I think many of us could benefit from approaching our finances more professionally.
The different between a professional and amateur
Often, a professional investor such as a fund manager approaches investing a lot differently than an amateur investor. I have listed some of these differences below to highlight this point.
Professional– Understands that making investment decisions requires experience, education and understanding the market– Seeks out experts in their field and is willing to pay a fair fee for their advice– Will have a methodology for hiring and firing advice professionals – a clear list of things they want and want to avoid, thorough methodology, etc.– Will hold their advisors accountable for producing results– Won’t try and take on a task that is outside their sphere of experience– They make investment decisions on a daily basis– Will take almost any steps to ensure the risk of losing capital is low or non-existent.
Amateur– Has no metric or methodology for measuring the value of advice– Asks friends or colleagues for advice– Is prepared to have a go at trying to do it themselves before asking for help– Considers it a saving if he works it all out himself and therefore don’t need to pay anyone for advice– To some extent, is guided by emotions e.g. it feels right, falls in love with the potential returns, etc.– Gets seduced by investment returns and doesn’t adequately consider (and mitigate) investment risks– Doesn’t realise the danger of their lack of experience– Makes a handful (or less) of investment decisions over their lifetime.– Its prepared to make a mistake i.e. learn through trial and error.
But we don’t compromise on some things…
Imagine how you would react if your friend told you that he did his spouses dentistry work. Or wrote their own will. Almost all of us understand the perils (stupidity) of this and wouldn’t even consider trying. Instead, we find a professional than we respect and trust because we have what phycologists refer to as conscious incompetence. That is, we know that we have a deficit of knowledge and experience to do it ourselves.
Your responsibility is to manage the people that manage the money
Just because you can do your own financial planning, taxation, loan structuring – it doesn’t mean you should. More importantly, maybe you have misunderstood your role. Your role is to not figure it all out yourself. That is potentially way too costly in the long run. Instead, your role is to hire the best people you can afford to help you make the smartest possible decisions. It’s what we all do in other areas of our life. It’s what successful professional investors do too.Use a professional lends when selecting the right people to have on your team
In order to do this successfully, you have to have a robust methodology for selecting the right professionals. Here are some of the things I consider when selecting other professionals that help my clients.
1. How do they make money?It’s important

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This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.