Well in Gladstone industrial projects are being built and in the next three years, thousands will come.

The question is can the city cope?

Gladstone has been on the rollercoaster of numerous boom-and-bust cycles, and during each one, the city's infrastructure has been found wanting.

Now it's about to be tested again.

However this time steps have been taken to develop a blueprint for the city's social and community infrastructure and identify the gaps.

Gladstone's Economic and Industrial Development Board (GEIDB), in collaboration with the Gladstone Regional Council and the State Government, has commissioned the study where such deficiencies will be identified, prioritised and passed on to the State Government .

But will it be in time to make a difference?

AS Gladstone's industrial horizon becomes more and more crowded by an approaching herd of projects, questions are being asked as to whether on not the city will be able to cope with another burst of rapid expansion.

And as representatives from Gladstone Area Promotion and Development Limited (GAPDL) and Gladstone Economic and Industrial Board (GEIDB) gather for Country Week Expo Week in Brisbane, the emphasis is on attracting not only workers, but also families to take a tree and sea change and move to the Gladstone region.

At this time in the Gladstone region, almost $3 billion worth of projects are under construction, with two of the biggest being Rio Tinto Aluminium Limited's Yarwun Alumina Refinery and the Boyne Smelters Ltd expansion.

Before the year 2012, companies have committed to another $5.7 billion worth of projects to be built and that doesn't include the proposed and rapidly developing liquefied natural gas industry.

Alone those industries will require more than 1000 permanent workers once fully operational.

The construction workforce required is likely to be more than 5000.

There are few who doubt the massive State Development Area and the city's port have the capacity to handle the development.

The headache for local planners is the infrastructure needed to accommodate the population increase.

Gladstone Regional Council is not convinced it will have the necessary social and community infrastructure to cope.

The council's Cale Dendle said it wasn't just about roads and pipes.

"It has been raised recently that there's an absence of legacy projects being carried out by incoming industry.

"Industry that came to town 40 years ago left an infrastructure legacy that is still visible today."

However the GEIDB recently announced the most comprehensive study of community infrastructure needs, ever undertaken.

The study followed agreement between the GEIDB, Gladstone Regional Council and the State Government and will initially benchmark all existing social and infrastructure services and identify any shortfalls.

Local, national and world news for Gladstone, QLD | Thursday 18 September, 2008

HIA Chief Economist, Harley Dale, said that today’s building approvals update, for August 2008, confirmed a continuance of the downward trend which has occurred over the last nine months.

“It is a concerning situation when you have record population growth (from immigration) met by declining building activity.  Falling building activity will put even further pressure on Australia’s private rental market.  Unless building activity increases to meet rising demand get ready for 15 per cent plus growth in private rents and a growth in the number on public housing waiting lists (current at 170,000),” said Harley Dale. 

On a seasonally adjusted basis, total building approvals decreased by 3.7 per cent in August to be down by 8.6 per cent on the same month last year. The number of detached house approvals fell by 1.7 per cent. Approvals for the multi-unit sector fell by 7.8 per cent. 

“Unfortunately this update does nothing to change a weak profile for new home building activity,” said Harley Dale.

“The overall signal from all leading indicators of housing is that new residential construction activity will be weak well into 2009,” said Mr Dale.

On a state by state basis the number of seasonally adjusted building approvals in August fell by 8.5 per cent in New South Wales, 7.9 per cent in Victoria, 1.9 per cent in South Australia and by 28.2 per cent in Tasmania. Building approvals increased by 6.2 per cent in Queensland and by 2.3 per cent in Western Australia. The trend number of building approvals was down by 16.7 per cent in the Northern Territory but rose by 2 per cent in the Australian Capital Territory.

Published by

HIA                                                                                                                                                                                               Current at: 30 September 2008

Property analyst Michael Matusik was quoted as saying returns on residential houses outstripped all other major investment vehicles in those 10 years, and he forecast an 8-10% per annum increase over the next three years.

THE SUNDAY MAIL, FRONT PAGE, BY DARYL PASSMORE, SETPEMBER 7, 2008

With population growth averaging 2.19% a year since 1970, it was now tipped to be 2.2 to 2.3% a year over the next three years.

COURIER MAIL,PG.4, BY MELISSA KETCHELL, SEPTEMBER 3, 2008 

OR….. 'The safety of bricks and mortar'?

There has never been more compelling evidence to consider property as the investment of choice.

The good news is that Australia is well placed to withstand the worst of the flow on effects by virtue of some very important differences between us and the US:

• Our economy is growing, fuelled  by the commodities boom vs the US economy is in decline.
• We have a massive structural undersupply of housing vs the US housing market’s oversupply (The US has a 19 year high in housing oversupply - NAB Economics).
• Australia’s finance markets are regulated and lenders can pursue borrowers into bankruptcy to retrieve monies owed vs the US where banks are unable to retrieve mortgage debt beyond the mortgagee sale price.
• We have strong rental demand and rising rents vs weak demand and falling rents in the US.

It’s been hard to ignore the recent news!   The turmoil has swallowed some of the biggest names on Wall Street. Three of America’s five major investment banks - Bear Stearns, Lehman Brothers and Merrill Lynch - have either gone out of business or been driven into the arms of another bank. The two remaining - Goldman Sachs Group and Morgan Stanley are under siege. 

The sight of companies failing and the American Government having to step in and bail out others before their demise is unprecedented and bound to cause concerns. And as these giants of the finance, investment and insurance world struggle, everybody keeps blaming the sub prime home loans. Companies like Freddie Mac and Fannie Mae, unknown to most until recently, are now squarely in everyone’s sights as being to blame.

So why and how are we in Australia, so far away, really going to be affected by all of this?

The answer to that is to look around the room at your Swedish IKEA furniture, Korean television, toys from China, Italian spaghetti and Toyota in the garage. The globalization of the world and the internet has made the whole world interconnected. Just think how eBay now means you can go online and buy just about anything from anywhere in the world and pay for it with your credit card in what ever the local currency is.

The same thing has been happening in the finance and insurance industries. Just like investors might buy properties in different states to help minimise the risk of property cycles, large Banks and Insurance companies have been lending and borrowing money around the world to minimise their risk. Australian banks are no different.  They have been lending and borrowing money around the world to minimise risk.

So the answer is, while Australia is in some part buffered from what's happening in the US, it's certainly not immune, and yes this is going to affect us.

So what’s happening and why?

The answer to that lies in how it all started.

With a mortgage, in Australia, the UK and many other countries if you don’t pay your loan and the bank will take possession of your property and sell it. And if the sale price doesn’t cover the loan the bank will continue to chase you until you repay the balance. Often the only real option to get away from the debt is bankruptcy, which means you have to sell practically everything you own. As a result most people in Australia are very careful about how much they borrow and when they get into trouble, they tend to find a way to repay their loans.

In the US because home ownership was considered a right, like guns & apple pie, the regulations around “home loans” were set up to protect home buyers. It was taken that the Bank was much smarter than any person could ever be about money and if something went wrong it must be their fault for lending you the money. The result was laws that limit the recourse available to the Banks to recoup their money, effectively limiting the Bank to selling the property.

If the bank suffered a loss it bad luck. They should have been smarter and not lent you the money. The result was that when the borrowers got into trouble they could literally hand the keys back and the debt was considered paid (makes our system seem harsh really). It all worked well in the post World War II period when generally the borrower was known to the Bank and the Bank manager and common sense could prevail.

Then a new style of home loan lending was created. The MBS.

Banks realized they could lend you money for a house and most people would paid the interest on the loan every month and they could get a steady income. Then they realized they could sell those loans to other companies and get their money back straight away and get an immediate profit. The companies who bought these loans could then sell shares in themselves for the income from the interest.

We could all become banks!

Institutions like Banks, Governments, Insurance and Superannuation funds that had spare money would invest in these companies because they liked the idea of a safe investment like a mortgage.  These investments were called Mortgage Backed Security (MBS) because there was a house and mortgage behind it. 

All was going well until the quality of borrowers started to decline. Some mortgage brokers became greedy and liked the commissions they were making, so the quality of the loans kept declining and the lending continued. Finally the wheels fell off when the really poor quality borrowers (who should never have been given loans) stopped paying.

Now there was not enough interest being collected to pay investors. Soon the investors were asking for their money back because they were not being paid every month. As houses were sold to recoup money to pay investors, the houses were soon selling for less than the money owed and more investors started asking for their money back. The only answer to stopping the spiral was to stop paying the investors and try and avoid bankruptcy.

This is exactly what has happened with Freddie Mac and Fannie Mae and only the intervention of the American Government has stopped the spiral. Mac and Mae are now government-backed companies that own or hold about half America’s mortgage debt - or about $5.4 trillion. This rescue was made in a move to help avert a financial system meltdown from the US housing crisis.

Luckily for us, Australian banks did not join the rush into mortgage-backed securities like some US and European banks.

As a result they have less direct exposure to losses like we’ve seen in the US. Additionally, Australian banks can chase borrowers to recoup the money if a property is sold at a loss. Their risk is less and the possibility of large losses is slim.

However, in order to source funding to lend people money to buy houses, our banks have to go into the wholesale money markets. Think of it like a supermarket bulk-buying bananas — they use their buying power to get a lower price than you or I could. They then charge us a higher price for borrowing. Because of the uncertainty caused by the credit crunch, the costs of funding for banks have risen significantly.

If you are an investor in MBS’s though, you are now very nervous and the first thing you would do is stop lending to those who are perceived as the most risky, the No Docs borrowers.   Then, as an investor, you would make it harder for the next most risky borrower, the Low Docs borrower. You would be hoping you could find as many low risk, safe borrowers, the Full Doc’s borrower, as possible.

This is what is happening with investors who are now looking to invest mostly in mortgages with security and safety in mind. The continuing fear of the perceived risk in of Low Doc and No Doc lending has led to an accompanying tightening of credit policies and regulation here in Australia. This is the reason we have seen the almost total demise of the No-Doc loan.

There is a shortage of money to lend.

Keep in mind that many companies are now taking funds out of the lending market to channel back into shoring up failing companies elsewhere.  Local banks like CBA, ANZ and indirectly Westpac have exposures to failing companies like Lehman Brothers, Centro and Alco and AIG insurance will be carrying losses. European based banks are pulling funds back into Europe in a move to consolidate their home base in the face of large and as yet unreported losses.

Expect an increasing scarcity of funds here and restricted lending by some of our big names, Bank West, CBA  and Seiza (backed by Bank of Scotland has already gone) to name a few.

Article by Albert Walrdon and Jenna Ford of the Chan & Naylor finance

On the positive side on the home front

The recent rate cuts by the Reserve Bank of Australia (RBA) led to our lenders (with some grumblings) passing the rate cut on to borrowers - the first official easing since 2001.

Great news and we would hope for more!!

With the RBA revealing that housing credit in the year to July posted the slowest annual growth for 21 years they are acknowledging they will need more rate cuts to get confidence back into the market.  We suspect that the RBA, anticipating increased pressure on rates from the problems in financial markets overseas, is seeking to balance out anticipated rises in wholesale lending costs.

All of this is means that you, I and Australia face a turbulent and choppy time in the year ahead.

Recently we have seen the market re-pricing long term interest rates and dropping fixed rates BUT we have seen signs of rate hikes upward in Low Docs (First Mac raised its Low Doc variable rate last week by 0.75%). It may in the end being a zero sum game as far as rate movements are concerned or more probably an up trend in Low Doc interest rates.

Add to all this, there has been a concerted push by bigger banks to buy up smaller players or push out competition from non bank lenders and get back the control of the lending market. We have seen new regulation introduced seeking to control mortgage brokers like never before and reductions in commissions paid to brokers to force them off the playing field.

Competition and choice is decreasing

As lenders leave the marketplace the product offerings and lending choice for borrowers outside the full doc norm are restricted, and in the foreseeable future are likely to contract further. 

But it does make for some great opportunity rates for full docs borrowers!!

Further changes is Australia have seen QBE purchase the mortgage insurance company PMI, the second largest in our market place. QBE, on acquiring PMI, partially followed the lead of the third largest mortgage insurer MGIC by ceased insuring all Low Doc refinance loans. This essentially limits Low Doc loans through several lenders to property purchases only.

All of this has been done in response to a need for PMI and MGIC to rebalance their exposure towards more full-doc loans and thus improve their Standard and Poor’s’ rating going forward.  This leaves borrowers with Gemico as the remaining mortgage insurer who will lend to Low Doc borrowers wanting to refinance.  But stay posted – Gemico has large exposures to AIG who are currently the subject of emergency prop up measures by the US Government.

Most importantly - what do you do about this?

1.       If you are a Full Docs customer get ready!

You are about to have wonderful opportunities to purchase properties over the next year as other potential purchasers struggle to raise finance. This will be different to our previous experiences as with a smaller pool of people who can qualify for finance look to purchase properties; it is going to offer some great purchasing opportunities. Additionally, the people who just miss out on loans will now be of a higher caliber than over the last few years. There will great tenants who will be looking to rent and pay a higher level for quality properties. What a great time to buy!

2.       Keep an open mind!

New finance options are likely to open up during this time as those who have money in other markets, (China, Middle East, India) look at business opportunities here. We anticipate that there may be some new lenders and funding sources come into the market as others leave. What we could not do yesterday, we may well be able to do tomorrow, so keep an eye open for opportunity.

3.       “Keep your powder dry” as Ed Chan says.

For many of us it is a season to conserve available credit in buffers, offset high interest loans with cash and put attention on improving the value of the existing property portfolio’s assets. It’s time to ensure you don’t over extend and keep good cash buffers as we are looking at 12 to 18 more months of tough times. Try to curb outflows and overheads. Be ready to weather the storm and realize that in the next year or so you may not be able to put more buffers in place easily.

4.       Sell a property is you have to.

There is no shame in making a strategic pruning of a portfolio that you are stretching to hold.   Better to rationalize your position now if that’s what is needed, consolidate and prepare for future opportunity.

5.       If you find yourself over extended….

Take action to correct this as soon as possible.  Speak to a professional who can help you assess your situation and do this objectively, not your mother, aunt or local butcher.  Speak to professionals such as Metropole advisers or Chan & Naylor professionals. 

6.       If you’re a low doc customer don’t panic!

While low doc loans are certainly not in favor at the moment, they are unlikely to completely disappear. Be prepared though for the difference between low doc and full doc interest rates to increase.   The lenders are pricing in the increased cost of that higher risk money.   Possibly even consider fixing an interest rate in the short to medium term (2 years).

7.       Look for Capital growth balanced with cash flow.

With a smaller pool of purchases driving up prices we are going to see some slow down in the capital growth cycle. You should plan for this by ensuring that the properties you select have strong cash flow while be positioned for future capital growth. This is not be the time for 2 % rent returns on the expectation of 50% capital growth.  

8.       Don’t take risks

Assess risks more conservatively. While rates may come down, remember that money supplies will be short for a while.   Whilst some lenders are offering discount petrol or snappy fuel vouchers to encourage borrowers in, what is much more important in tough times is sound, grounded advice from experts who know investing in up cycles and down cycles. 

In summary

You can still put great Finance Strategies in place although they may not be as flexible as those that were available this time last year. We are in a squeeze.

Use professionals who understand your long as well as short term goals and are diligent in helping you assess risk.

In the brave new world of finance there will be an easing of the credit squeeze, so be patient now and prepare for that in 12 months plus.

Remember that the aim is long-term wealth creation and safety for you and your family.

Written by -

Jenna Ford                                                                                                                                                                                             Chan & Naylor Finance

It didn’t happen this week, but the Reserve Bank of Australia has indicated it will consider cutting interest rates in the months ahead. Combine that with the fact that there are plenty of properties on the market to choose from and that rental returns are climbing higher, and you have some great ingredients for investment success.

But who knows how long this window of opportunity will stay open. A report from one economist predicts that interest rate speculation could spark a new housing boom. CommSec chief equities economist Craig James says: “With population growing at the fastest rate in 20 years and the rental market super tight, the risk is that rate cut speculation could spark a new rush into the housing market. The fear of being left behind, or even worse, shut out, was behind previous surges in house prices.”

As James points out, analysts who believe that house prices are set to fall have failed to come up with an explanation about where our growing population is going to live!

So while the rest of the country sits on the sidelines, waiting to see when the RBA will make its move, API is giving investors a head-start with an exclusive report in this month’s issue about the great rental boom and, more importantly, the locations where rental returns are getting hotter.

Published by:

Eynas Brodie
Editor, API magazine