Author:

This is part of a series of sessions of Finance for Pensioners and solutions to the Housing and Rental Crisis

The ABC asked for contribution of the public to solve the Housing and Rental Crisis

I sent them  the email below with full details of the Housing Affordability Trust (redacted)

No acknowledgement or response . Like the government, the ABC does not seem to be interested to solve the problem-

Dear ABC

1.Co-operation State and Federal Government

There is no co-operation between State and Federal governments. Prior to the last election there was not even a Federal Minister for Housing in the Labor government.  I suggested to Jim Chalmers that they create one and whether it was my suggestion or not ( I do not know because I never got a response) , there is now a Federal Minister for Housing in Julie Collins.

Housing is essentially the responsibility of State Government and whenever there is a problem, State and Federal Government blame each other

I have written to Housing Tasmania and State and Federal Governments and State and Federal treasuries with strategies to solve the Affordable Housing Crisis in Tasmania and Australia. Apart from Peter White , Head of Housing Tasmania ,we  have had no support from any of the organisations.

Government , in the last budget, has now promised to build $10,000 houses and set aside $350M . That is $35,000 per dwelling which will disappear like snow in the sun to feed consultants, lawyers and administration. ( Remember NDIS). The government paid Price Waterhouse Cooper 575M over the last 2 years.

In 1991  I put a proposal to solve the Housing Crisis to Tom Burns, then deputy premier of Queensland and Housing Minister. The proposal required a government guarantee and was improved in principle by Queensland Treasury. However, State Government could not provide guarantees, only the Federal Government could. I walked away from the proposal when fights between State and Federal Government and “Yes  Minister “ bureaucratic nonsense and some personal problems became too much.

2. Superannuation Funds and Banks

The government in it’s National Housing Accord now relies on the support of the Superannuation Funds. It is virtually impossible to build Affordable Rental Accommodation with affordable rent and still make a profit. But Superannuation must make a profit under their articles. Do you think that the Superannuation Funds would be interested without relying on giant subsidies. The end result will be that government will subsidise superannuation funds to make a profit  like they are subsidising the banks to make a profit.  I estimate that discussions will take 5 years. Banks are also not the solution. In recent discussions with Westpac their response was and I quote “We do not do Affordable Housing”

So what is the solution?

Let us find a solution that is not dependant on the   government, banks and tax payers.

3. Where should the money come from.

Approximately 16% of Australian or 4.2 million people are over age 65 and this will increase to 10 million in 50years time. 64% of these people are on a full or part pension. Assets of this group of people are $2000,000,000,000 ( 2 thousand Billion). If 1% of these people are interested in providing affordable accommodation  it would provide $20 Billion or at $250,000 per dwelling 80,000 dwellings.

4. Local scale

We  have 2 demographics in mind: Pensioners and First Home Buyers

The objective is to provide a safe and secure investment for retirees and an opportunity for first homebuyers to acquire a home under a 5 years “Lease and Option to Buy” strategy. During the 5 years the strategy will provide affordable long term rental accommodation for first home buyers and other retirees.

Retirees , specifically on a single pension are taxed at 73% if they earn more than $212 per fortnight ( 50% in pension, SAPTO 12.5%,LIR 1.5%,tax 30%, medicare 2%). . You are losing 73% in the dollar if you have more than $301,000 in your super. Even less ($187,000) when inflation and deeming rates increase by 1%

If you get an extra 1% on  bank deposit it is eaten up by inflation and if the government increases the deeming rate by the same amount  you lose an extra $77FN in your pension because of the deeming rate. Inflation is bad for retirees but good for the government

There is some hope as Centrelink does not assess capital gains and section 40 depreciation allowances as income.

For every dollar earned above $212FN you retain 27cts but 85cts for $1 of Capital gain.

$1 capital gain = $3.15 normal income which gives the strategy;

Retiree buys home at 80% of valuation and leases to First Home Buyer  and sells again to the developer at the same price + 3%/year capital Gain in 5 years time.

The developer sells to the first home buyer at original valuation + 3%/year. The retiree gets the capital gain and has a return which is 1600% better than putting money in the bank.

Australian Scale :

THE HOUSING AFFORDABILITY TRUST

Redacted because of fear that superannuation funds and the Price Waterhouses of the world use the exclusive and inventive ideas to make profits for themselves and destroy the purpose of the plan to solve the Housing and Rental Crisis as a not-for-profit organisation.

This is part of a number of sessions of Finance for Pensioners and solutions to the Housing and Rental Crisis

 

We have already seen in session 16,21 and 22 how to solve the crisis but in sessions 26,27 , 28 , 30 and 31 we will explore other strategies to increase the  number of houses.

This session is part of a series of sessions of Finance for Pensioners and solutions to the Housing and Rental Crisis

See also session 10, 27 and 30

You own the land and  you are considering building a granny flat to give you some extra income. But is it a good investment and is it safe?

Weekly rent should be 1/1000^th of the value of the property. For instance a $300,000 property should have a rent of $300 per week and a $500,000 property a rent of $500 per week.

On a $180,000 property , which is probably the maximum you can spend on an ancillary dwelling, the rent would be $180 per week

This is a gross return of 5.2% (52 weeks in the year divided by 10). If you   borrow the full amount of the property this would also be the interest you had to pay to the bank to break even ( interest only).

Depreciation allowances will give you extra income. Often not understood , the biggest advantage of investing in property is depreciation allowances

Division 40,  is short term depreciation of carpets, air conditioning blinds etc.

 These items are normally depreciated over a 10 year period but if you use the diminishing value method  of valuation you half that period and full depreciation is over 5 Year. We assume that this applies to 10% of the cost of the building or 2% for the first 5 years

Division 43 which is depreciation of the remaining 90% of the building over 40years or 2 ½ % per year . Because it only applies to 90% of the building this depreciation amounts to 2.25% of the building

Add the two and for the first 5 years depreciation is 4.25%.

This and interest on a loan is a tax deduction and is different for the different tax brackets

In Sessions 10 you can see the effect in the varying tax bracket. Pensioners affected under the income test benefit most from depreciation allowances as effectively they are saving 74.25 cents for every dollar in tax deductions.

In the first instance we assume that rent @ 5.2% equals interest payments @ 5.2%.

These cancel out, but you will still have the depreciation allowance.

Yes, as long as the return is in excess of the interest on borrowings, the investment is profitable and safe.

The above figures are independent of the cost of the building.

As we said before, rents per week should  be set at 5.2% of the value of the property

Which is $180 per week for the building. But that does not take into account the land that you already own

If the granny flat costs you $180,000 , the interest on the loan is paid by your tenant and you are just making yourself an extra income of  $2,486.25 per year or $47.81 per week..

Note that we have not taken into account the land component as you already own the land. But if we take into account the cost of the land at say $100,000 which @ 5.2% means  another $100 per week, the total return to you will now be $147.81 per week.

So the rent should be $280 per week ( 5.2% of $180,000 + $100,000 land) .

Your net income return after paying interest on the loan will be $147.81

If you live in a capital city your return will be higher as rents may be in excess of $280 per week.

And now I will let you into a secret

The only condition of an Ancillary dwelling is that it is less than 60m2.

We assumed the cost of the building to be $180,000 or $3,000 m2.

The actual cost of the building is irrelevant as long as you charge rent in $ per week equal to the value of the property in thousands.

The secret is that you can build 2 x 1 Bedroom units on top and independent of each other. If you were to build on strata title then that would be regarded as 2 buildings and you must have a minimum land size of 975m2.

As an ancillary dwelling, as long as it is less than 60m2 (2 x30m2), it is regarded as a single dwelling.

And you can build on any size of land as long as you can fit it in. Also a highset building only has a footprint of 30m2 whereas a single dwelling has probably a footprint of 60m2.

You can rent out the second unit @ $280 per week, so your total return is $7,686.12 + 14,560 = $22,246

See Session 10

Rate rises, management and rates are all tax deductable.

WE have assumed that you are in the 32.5% tax bracket

1% rise would be                             $1800

After tax deductions                         $1215

Management 10% of $560/week     $2912

After tax   rebate                              $1965

Rates and Insurance                       $3,000

After tax                                           $2025

Total after tax costs                         $5205

So your net income has been reduced from $22,246  to $17,041 8,238 or $327.71 per week.

Our aim was to solve the Housing crisis so the fact that you always can build a highset, being 2 buildings instead of one will increase the supply of housing.

60% of all rental demand is for 1-Bedroom houses

I should not have told you all of this because we are in the business of providing Affordable Rental Accommodation and you will become a competitor. However, our overall objective is increasing the supply of housing , so we are quite happy with competition.

But do me a favour that if you have enough equity in your residence, borrow the lot. The only way to become rich (see sessions 3 and 6) is if you borrow as much as you can.

Also remember borrowing for investments is good

Borrowing for a roof over your head is bad

Building on leasehold land

We see a nice House, bus stop at the front, shopping centre around the corner, close to schools, sea views in an expensive green suburb.

We could approach the owners to see if they are interested in doing a joint venture. It would be easy to build an ancillary dwelling on the property.

The footprint is only 30m2 so you should be able to fit it in anywhere on the property at a spot that least interferes with  normal living.

There is no cost to the owner.

The owner  leases the land to us we will pay  $180/week or $9,360 per year.

We will fund and construct the property. The property on the land belongs to the owner  but  the lease will  be recorded on the title and if the owner sells the lease transfers to the new owner.

The purchaser will be delighted , because as well as buying their new residence they will have free income of $180 per week which the bank will take into account if the new owner wants to get a loan to purchase the property.

See also session 30

This is part of a number of sessions of Finance for Pensioners and solutions to the Housing and Rental Crisis

See also Session 28

We are interested in solving the housing crisis in Australia and are in the business of providing Affordable Rental Accommodation.

We will do a Joint venture with anybody that has borrowing capacity. You must have a good income . Any professional with a regular income, engineer, podiatrist, physiotherapist, pilot  will qualify

We have included a spreadsheet (Session 28) showing that somebody in the 37cts tax bracket earning $120,000 per year can retire in a year

On 1 block of land we can build one  3-bedroom @ $300,000 and a $180,000 highset 2 x 1 Bedroom for a total borrowed amount ( 100% borrowings) of $480,000 .

This will give an income of $34,588 for a small block of land (See session 28A)

If you have 4 blocks of land, income will be  $103,764.

You can also borrow more money against the capital gain of the property. If we assume 4% gain and a 60% loan the return will increase by $11,520 per block.

You can therefore easily  double your income or retire  for life.

A person in the top tax bracket will  have $36,220per block

And at 3 blocks of land you will  have $108.660 to retire. You can also borrow 60% of the capital growth of the building  (say 4%) which will give you  an extra $11,520 x 3 = $34,560 or

A total of $143,220. You may have to build on a 4^th block.

In a joint venture we will do all subdivision , DA application and Building permits free of charge

We are looking at blocks of land that can be subdivided into 7 blocks . The subdivided blocks must have a minimum dimension of $450m2 and we can build 1x 3 Bedroom + 1 highset on each of them

The property  must have a house on it and probably  a minimum size would be 1 acre (4000m2).

Preferably the existing house is in bad state of repair which will make the cost of the property less.

The house must be sold in it’s raw form . We are not interested in repairs of houses.

We are also not interested in selling any of the developed blocks of land unless it is to cover any of the development costs which are tax deductable.

We are also looking for joint ventures in AirBnb

For this we are looking at a block of land with an old house that can be subdivided into 3 blocks . We will separate the house and sell it and on the remaining 2 blocks we will 3 buildings each suitable for AirbnB.

One of the buildings will be offered  rent free to a caretaker /cleaner and the joint venturers will receive the income from the remaining 5.

Income from the 5 Airbnb will be greater than rent on the 6 buildings and Division 40 depreciation will be much higher as towels, furniture etc can also be depreciated so that any of the extra items to operate the AirBnb are free of charge. We can explain.

If anybody is interested give me a call on 0412 324 806

The Positive Gearing Plan .How to get rid of your non- tax deductable housing loan and be free of debt

Session 29 See also 29A

This is part of a number of sessions of Finance for Pensioners and solutions to the Housing and Rental Crisis

 

A  housing loan for a residence is not tax deductable

Investing in your residence  is not a good investment

You are investing in a roof over your head but you could have that if you were renting, in which case  in general the rent would be less than the interest on your mortgage.

You do not have to pay capital gain tax on the capital growth of your residence but that is no good to you because if you sell you have to buy another property that has had the same capital growth as yours. So it does not get you anywhere other than having  a secure roof over your head which of course is the Great Australian Dream of owning your own house.

But dreams are not always true.

The only way of making you financially secure is borrowing money for an investment that has a return in excess of your borrowing costs.

You first priority should not be to get rid of debt but to get rid of bad debt.

Debt on your residence is bad

Debt on an investment is good

as long as the return of the investment is higher or equal to the interest you pay

The first priority should be to get rid of your non tax deductible housing loan

The only way to do that is to change bad debt into good debt

The solution is simple

You increase your debt with good debt and buy investments which make a profit in excess or equal to your borrowing costs. You use the return of your investment to reduce your bad debt housing loan and borrow it straight back to invest into your investment.

You have reduced part of your none tax deductable loan by a tax deductable loan

You are still only paying the same loan repayments that you were paying previously.

THIS STRATEGY WILL STILL WORK IF YOU INVEST IN 100% GUARANTEED GOVERNMENT BONDS

We have included a spread sheet (29A) showing that if  you increase your $100,000 housing loan by the same amount of $100,000 for investment in Bank Shares. not only will your housing loan be fully repaid  in 10 years but you can pay out  your investment loan by selling your investments and make a $13,000 profit.

Let us show you the POSITIVE GEARING PLAN that achieves this

 

 

You had an option at age 21.

Invest in a residence by taking out a mortgage loan with the house as security   or

Invest in bank shares and use the shares as security for a loan.

Your mortgage payments are the same

At age 81 , 60 years later, you would have a nice a roof over your head with  a comfortable pension

Or $128 Million in the Bank !

This will get you a very nice rental property along the way ,a possibility of early retirement, or an  extravagant living style.

Of course along the way you may be uncomfortable living in some luxurious rental mansion instead of that comfortable feeling of owning your own home.

Everybody’s situation is different . If anybody is interested give

me a call on 0412 324 806

Our overall aim is to make life easier for Pensioners and solve the Housing and Rental crisis

Giving incentives to First Home Buyers  only increases the demand, increases the prices of properties  and does not build a single new property

Nevertheless it fits in with session 6 , 22,25, 26 and 30 of our objectives and it is very beneficial to the first home buyer

We are offering house and land packages from $440,000 + GST for the basic 3-Bedroom dwelling in beautiful Geeveston . At present the properties are for sale  at $440,000+ GST

The purchase price will increase by 3% per year so your contract price for purchase in 5 years time will be $440,000 +15% = $506,000

The properties are suitable for the First Home Buyers Grant  ( FHOG) of $30,000 and because there is no GST payable after  a 5 year lease agreement we are further offering an option to enter into a 5 year Rent-To-Own contract thereby saving another $5,060 in GST.

Your rent payments would be based on a 30 year P&I Commonwealth Bank loan as if you were buying the land first and  making progress payments when the building is being constructed.

We have split up the house and land package in $140,000 for the land ( real value estimated to be $150,000) and $300,000 for the building.

Our company makes some profit on the land but the buildings are at cost without any profit for us.

Your rent would the following:

Your rent is based on today’s  price of $440,000 fixed for the 5 year period .

On signing the contract rent is  $207.85 per week ( interest rate 6.69%) which is based on a land value of $140,000

Gradually increasing in progress payments to $608.71 per week when the building is completed.

This is based on a purchase price of $410.000 ( $440,000 – $30,000 FHOG)

If you do not qualify for FHOG , rents will be based on $440,000 and will be $42.56 per week higher.

Please note that figures are based on present Commonwealth Bank  interest rates and will vary with changes in interest rates. It is very likely that over the 5 year period interest rates will decrease and therefore your rents will decrease.

We have included details of our delux model at an extra $30,000 which will increase all figures by 12%.

 

Note that these figures , except for CHL, are from the 2022 annual report.

The figures for CHL are also suspect as there is an obvious $10M mistake in the audited accounts for 2023

All Community Housing Providers are using Revaluation of their properties as a tool to make their Balance Sheet look better in order to  borrow more money. This is only paper income and does not affect their real cashflow.

It is clear from the Annual reports that without subsidies the Community Housing providers  struggle to survive. The important conclusion however is that all of the providers are not paying tax  which of course, as not-for profit organisations, they should not.

A Community Housing provider should not build houses . The more tax you pay the more profitable it becomes to invest in houses.

If a person in  the 37cts or 45 cts tax bracket builds a house they will build that house at very little cost to themselves if they borrow 100% of the value of the house.

Even pensioners can invest in housing profitably if they are affected under the income test.

If the pensioner borrows 100% of the property and If the interest on the loan is the same as the income from the rent they will still have a tax deduction of 2% of the value of the property which is $4,800 on a $240,000 property.

The average superannuation balance for males is $330,000 . This is deemed by Centrelink.

A balance of $270,000 will be deemed at $102 per week and now the pensioner is affected under the income test. Such pensioner pays 74.25% in tax ( See session 1). Therefore a $4,800 tax deduction is the equivalent of a $3,564 refund.

The average pensioner therefore could invest in housing. But rental income , after allowing for depreciation allowances and interest paid is not good income. It does not hurt pensioners much if they provide subsidised rents to the Community Housing Providers and help to solve the housing crisis.

Community Housing Providers should not build houses or buy houses whatever subsidies the government will give them . They should lease houses from  high tax paying entities like doctors and pilots or even pensioners. Or lease properties from companies that “Build to Rent”

Do Community Housing Providers use the correct structure?

 

This is part of a series of sessions on Finance for Pensioners and a solution to the Housing and Rental crisis in Australia

It is generally said that the only organisations that can provide

affordable housing are the not-for-profit organisations. Affordable Housing is not very profitable and superannuation  funds and institutional investors must make profits for their members and are therefore not suitable for investment in Affordable Housing.

But is that true?

It ignores the tax structure of these organisations.

I have included a spread sheet ( See session 10) that clearly shows that property investment taking into account tax deductibility of interest paid and depreciation are more profitable the more tax you pay.

In the top tax bracket you are paying less for building a house.

So why has the Government chosen Community Housing Providers to provide the majority of Community and Affordable Housing ?

They are the last organization that should build houses.

They attract subsidies but would it not be better if these subsidies would go to the actual people that are building the houses desperately needed everywhere?

It would be better to give subsidies to private builders and developers who are paying a lot of tax rather than to not-for profit organisations who pay no tax and therefore are not the best organisations to build houses.

Community Housing Providers have a number of other flaws in their structure.

60% of the demand for Affordable  Housing is for 1-bedroom houses.

Divorce is one of the main reasons. All of a sudden at least one of the partners or both is in need of rental accommodation. If a partner of a married pensioner dies, the surviving party may also be in need of a 1-Bedroom unit. Single mothers with one child are quite happy in a 1 Bedroom dwelling. Single people and even young couples are happy in 0ne-bedroom accommodation.

The main reason that there is such demand for 1 Bedroom houses is that Community Housing Providers are not building any 1 Bedroom accommodation.

The argument is that the management and administration is the same for a 1-Bedroom unit as it is for a 2 or 3 bedroom unit. The 2  bedroom unit will give a higher rent and Community Housing Providers who are already struggling to break even need every cent to continue operating. It is therefore more logical to build 2 and 3 bedroom houses.

Town Planning requirements are also relevant as in a strata title development you need 325m2 per building whether it is a 1,2or 2 bedroom

If, however, you can build 2x 1 Bedroom instead of 1 x 2Bedroom dwellings the situation changes.

This cannot be done on land zoned residential because of the limited number of dwelling allowed on a particular size of land.

 It  can be done on several other zonings such as Village, Local Business and Urban Mixed Use .  Another solution is to build on leased council and Crown land  which is often not zoned residential and will allow greater densities.

There is another restriction on building 1 Bedroom units. An ideal way of increasing the number of dwellings is to build more granny flats or ancillary dwellings. The only restriction is the size of the dwelling which cannot be greater than 60m2. You can build 2x 30m2 buildings together as it does not matter what the building is as long as it is less than 60m2. It will still be regarded as a single ancillary dwelling.

This cannot be done In  a strata title development where it will be regarded as 2 dwellings and needs 650m2 of land.

You may also have to provide extra parking spaces.

All Community Housing must be built according to Livable Housing Design, Silver level criteria.

You cannot build a 1 Bedroom 30m2 silver level building. Just a few minor changes like a corridor of 1.2m instead of 1.1m, a bedroom of 10m2 instead of 9.8m2 or a wall 3.0m long instead of 2.9m will increase the size of the dwelling from 30m2 to 42m2 and in a residential zone you also need another parking space.

Would a pensioner rather sleep in a car than in a building with only a 2.9m wall ?

Community Housing Providers are not-for-profit but have high operating costs . There must be a board of 6 members, strict regulations, audits, compliance and managements of rents.

 The average cost of these elements is $7,500 per dwelling. It could be cheaper to use the local real estate agent as management . But that is not allowed.

One solution could be that they sell Management Rights to their complexes. Income under Management Rights  is 10% of the rent plus a salary which may be cheaper than their present costs.

And the Housing Provider gets extra money by selling the Managements Rights . Sale price of Management rights is 4 x income (Salary + 10% management) which will help cashflow of Housing Providers.

 It is worth researching alternative solution to the Community Housing Providers ( See session 31,33  )

 

 

Government subsidies for housing .

The Government at present is subsidising the Community Housing Providers for their operating costs  rental subsidies and building of Affordable Housing. (See Session 31)

A company like Housing Choice gets a $80M per year subsidy which is fair enough because without that they would go broke.

The government is also subsidising First Home Buyers to make life easier to get a roof over their head.

How effective are those subsidies ?

The Housing and Rental Crisis can only be solved if we build more houses and reduce the price of those houses or their rent.

Government is very good in subsidising the medicine but not curing the disease.

Rarely are subsidies solving a long term problem. Politically they are popular.

To analyse property investment it is useful to use a rule that the rent per week in dollars should equal the value of the property in thousands of dollar. A $300,000 property should have a rent of $300/week and a $520,000 property should have a rent of $520/week.

This is a gross return of 5.2%.

If for the time being we assume that interest rates are 5.2% then a property investor would break even ( not taken into account running cost of the building) as the rent  would cover the interest paid.

This is what a not-for-profit organization would do.

It also shows in the latter case that 1% of interest change is $100 per week in rent.

On a $300,000 property it would make a change of $60 per week.

Let us assume that a developer wants to build long term rental accommodation and has to borrow the full amount .

Affordable Rental accommodation is not a profitable business .The developer is in a risky business and a bank, aided and abetted by APRA will charge the developer at least 2% more thereby forcing the  developer to increase rents by $200 per week. Add running cost and the developer has to charge $800/week  just to break even.

 Hardly affordable rent.

The developer is still determined to build long term rental accommodation but the only way that is possible if the government subsidises the interest rate. If the developer could get a long term loan at  the same interest as a Government Bond (4.4%) he could reduce the rent by $300/week.

The developer would have to  go into a 20 year agreement  not to sell the property and that rents will not increase by more than CPI.

Now a developer will at least consider building long term rental accommodation. At present it is impossible unless he is prepared to lose a lot of money.

Subsidising interest rates will solve a large part of the Rental crisis.

Is it not better to subsidise the developer or builder who is prepared to build affordable rental housing than the ineffective subsidies to Community Housing Provers or first home buyer.

Subsidies to a first home buyer will only increase demand and increase prices. It does not build a single house.