Why Australia is facing a ‘devastating insurance crisis’ this summer

Posted on November 16, 2022 by admin

A national property firm has warned that Australia is facing a “devastating insurance crisis” as this summers triple-dip La Nina threatens to financially ruin underinsured homeowners.

MCG Quantity Surveyors, which has offices in Brisbane, Sydney, Melbourne, Newcastle, Adelaide, Perth and Canberra, said that a combination of factors could lead to “one of most financially devastating” summers in recent history.

“What’s occurred with the floods in Victoria looks like an unsettling precursor for the summer ahead,” MCG Quantity Surveyors director Marty Sadlier said.

“I’m incredibly concerned this year’s La Nina will financially devastate a huge number of homeowners and investors who are substantially under insured.

“The last time a triple dip La Nina occurred was more than two decades ago from 1998 until 2001.

“Because we’ve already had two wet summers, dam catchments are up and water tables are high, so flood events this year will be more likely.

“We’re also still recovering financially from the previous two years of flooding which resulted in billions of dollars of damage throughout the nation.

“Along with the loss of life and property, these events have exacerbated other elements that will make things difficult.”

The Bureau of Meteorology officially declared that a third La Nina was underway on September 13, adding that above average rainfall was likely for eastern Australia during spring and summer.

A month later, the bureau’s long range forecast further warned of an increased risk of widespread flooding and an above average number of cyclones, with the potential for an earlier than normal tropical storm.

Since then, a relentless train of weather systems has delivered rain, storms and flooding to huge parts of the east coast, with parts of Victoria still under water.

“Residents and communities living on or near any rivers, creeks and streams or in low lying areas, especially in southern Queensland, much of inland NSW, Victoria and northern Tasmania are advised to stay up to date with the latest forecast and warnings,” a media release warned on Monday as more wild weather was forecast later this week.

To date, the insurance bill from the wild weather that slammed southeast Queensland and NSW in February and early March has hit a staggering $5.45 billion, with just over half of the 234,000 claims now closed, according to the Insurance Council of Australia.

It is the costliest flood in Australia’s history, and the fifth most costly disaster after the Sydney Hailstorm (1999), Cyclone Tracey (1974), Cyclone Dinah (1967) and the Newcastle Earthquake (1989).

But Mr Sadlier warned that a triple whammy of factors could make any widespread natural disaster this summer “financially devastating”, adding that every property owner should be checking their insurance coverage and getting their homes ready now.

RISING CONSTRUCTION COSTS

“Rising construction costs throughout the past two years means any insurance value assessments from 12 months ago could be redundant,” he said.

“Repairs to previously flooded property has seen the demand for labour and materials continue to skyrocket.

“If the heavy rains cause more widespread flooding again this year, expect to see our already strained construction industry put under further stress.”

Mr Sadlier said the fallout of such a scenario would be “dramatic” as construction costs were already at new highs, with timber going up by about 21 per cent and steel around 42 per cent.

UNDERINSURANCE

“Australia’s property owners are already substantially underinsured,” Mr Sadlier said, adding that research in 2020 suggested that a whopping 83 per cent of Australians were underinsured.

“Then in 2021, the Australian Bureau of Statistics noted that 2.44 million Australian households had no house and contents insurance – that’s 23 per cent of all Australian homes.

“In reality, I believe over 90 per cent of properties in Australia are not carrying adequate insurance.”

Mr Sadlier said many owners did not carry out proper assessments of their property’s replacement costs each year, with most just adding a “little extra to last year’s guesstimate”.

“Worse still are those who rely solely on online calculators to help them assess their insurance values,” he said, adding that online calculators failed to take into account consultants’ fees, demolition and forecast building cost inflation, allowances for site works, retaining walls, mature landscaping and additional works.

“These wildly inaccurate tools are causing major headaches for those who thought they were adequately insured.”

A number of flood affected houses across Brisbane have just been gutted and put up for sale

THE RENTAL CRISIS

Australia is in the grips of a rental crisis, with many regions recording vacancy levels below 1 per cent.

On the east coast, Sydney’s vacancy rate in September was 1.3 per cent, Brisbane was 0.7 per cent and Melbourne was 1.4 per cent.

It is even tighter in lifestyle regions that have seen significant interstate migration such as the Gold Coast and Cairns (0.5%) and the Sunshine Coast (0.7%), according to SQM Research.

“Floods will have massive implications on construction programs, add continuous strain to the supply of building materials and increase upward pressure on construction costs,” Mr Sadlier said.

“This means people will be displaced for longer periods of time and will need alternative shelter.

“A big flood would only add more demand to the rental market while also removing a swathe of supply.

“You can see how that equation will cause the currently dire rental situation to become even worse.”

Mr Sadlier said that the only thing Aussies could do was to ensure they were “financially storm ready”.

“Make sure your insurance is up to date and that it delivers comprehensive coverage,” he said.

“Most important of all is to confirm you have an updated insurance value estimate for your home that has been prepared by a qualified professional.

“This is the only way to guarantee you have adequate coverage as a safety net against the weather.”

Originally published as Why Australia is facing a ‘devastating insurance crisis’ this summer By Samantha Healy, The Courier Mail

Reference: https://www.weeklytimesnow.com.au/news/regional/why-australia-is-facing-a-devastating-insurance-crisis-this-summer/news-story/

Deductions & Depreciation for all – Why the kids are doing OK

Posted on June 27, 2019 by admin

Like any good analytical thinker, I love to hypothesise.
Some think it’s a character flaw, whereas I – and those of my quantity surveying ilk – enjoy nothing more than ingesting data, extrapolating the assumptions and producing a conclusion.

I was thinking about the recent federal election and the discussions put forward pre-poll day about who gets what benefits from which particular political party. It got me wondering about how we all make gross generalisations on which particular demographic gains most from depreciation tax breaks in the real estate sector.

Like most pundits, I always assumed those property owners who earn the most money – i.e. aged 45+ and on a high average income – were the mob reeling in the best benefits courtesy of the ATO.
It seems logical, doesn’t it? If you’re at the higher marginal tax rates, surely any hand back of taxable income you receive via government rules is working in your favour?
Well, like any decent political thriller, it turns out the truth is more complex than it may first appear.

I ran some numbers and here’s what they told me:

Depreciation for all
Firstly, I checked with the ABS to find out the average salary of several age groups as at May 2018 and looked at the tax applied to those incomes as per ATO guidelines.

ALL EMPLOYEES, Average weekly total cash earnings, Number of employees – Age category, May 2018

For the sake of the argument, I’m obviously excluding all those annoying extras that one might apply in deductions for work and other investments. Forget the nuances people, this is pure analytics of the highest order!
As you can see, it’s a reasonable spread of incomes across the age brackets from $19,952 to $80,298.
The next step was to study the average financial advantage to each age bracket of owning an investment, as opposed to not having an investment, based on the first year’s average depreciation.
For the sake of consistency, I chose a brand-new investment unit as the lynchpin investment. Units of this type are a popular and effective option for many buyers who use depreciation to their advantage.

I looked at average annual wage less the depreciation benefit from owning this hypothetical unit in the first year alone, and then calculated the resultant tax payable for each age group.

Finally, I observed the difference in tax payable (or ‘the advantage’) between those with the investment and those without an investment property in the first year across each age group.

Blowing up the beliefs
The outcome was pretty revealing. My figures showed preconceptions around depreciation only benefiting high-income earners are not true. Whether you’re an average 22-year-old or an average 45-year-old, if you buy a brand-new unit, you’re still going to save the same dollar amount in tax each year.

Here’s another golden nugget of positivity for the youngsters:
• Based on these average figures, if you are 20 years old or under, own no investment property and earn an average wage, you will pay tax.
• If you are that same person, but hold one investment property, you will pay no tax.

That’s right – in your early years, an investment property makes you a ‘tax-free’ entity. Not a bad start for the young whippersnappers!
This outcome stems from the interrelationship between Australian tax rates and the nation’s average incomes.
So, as you can see, the idea depreciation only benefits the wealthiest of investors by age is patently untrue.

Now, who among you would have expected me to uncover this sort of egalitarianism when the exercise began? Certainly, among my crew, the expectations were that ATO rules meant wealthy 50-year-olds make a fortune at the expense of the younger cohort. But it turns out, everyone is on a pretty even keel.

So, at the next family barbeque when your anti-investment Uncle Bill raises an eyebrow about “fat cat baby boomer investors” who make fast money from depreciations, consider batting away his wayward generalisations with a little MCGQS science. And while you’re at it, ask your younger cousin Bella why she hasn’t considered getting into the market herself.
Turns out the young do enjoy a raft of advantages – plenty of time, enviable good looks and comparable tax breaks.

The recent regulatory changes and the state of the Property Market

Posted on February 15, 2018 by admin

The January CoreLogic figures have shown that capital city dwelling values have posted their first quarterly fall since April 2016. The peak of the market was called as far back as 2016, but now we’re seeing the evidence some two years later. On a positive note, the combined regionals edged slightly higher over the Dec-17 quarter and there are clearly some strong investor opportunities outside the capital cities.

The quarterly capital city falls were led by Darwin at -2.9 percent and Sydney at -2.1 percent.

It’s interesting to see Melbourne sitting neutral (0.9%) over the December quarter compared with Sydney, especially given Sydney lagged Melbourne’s price growth over the 2017 calendar year by 5.8 percent. However, even with Sydney dwelling values down 2.1% over the final quarter of 2017, they’re still 3.1% higher over the past year.

In good news for investors, the annual rate of rental growth is higher than a year ago across most capital cities, with a bit of weakness shown at the end of 2017. That being said, gross rental yields are starting to trend higher, with rental growth outpacing value growth in many cities.

The regulatory changes have had a huge impact on investors and interest-only loans have fallen off a cliff. It will be interesting to see how long APRA and the banks hold this stance, my guess is the banking royal commission will keep their appetite for investor lending to a minimum in the short term.

Our predictions – Property Market Scorecard for 2017 and 2018

Posted on January 4, 2018 by admin

What a year property has had in 2017. We’ve seen some double-digit growth in major capital city markets and a big move from APRA in the investor lending space. We’ve also written extensively about changes to depreciation. There’s also been plenty of debate about foreign investors and housing affordability. So, what did the numbers show us at the end of 2017?

The winner is… Hobart! Hobart saw a 12.86% change in house prices year on year, and 9.13% for units according to CoreLogic. Louis Christopher of SQM Research also predicts Hobart to be the fastest growing city in 2018.

Across the major capitals, Sydney Melbourne and Brisbane saw 3.09, 8.89 and 2.65 per cent growth respectively across all dwelling types. Sydney is notably down 2.1% in the last quarter ending 361 December 2017.

Nationally, dwelling values were 4.2% higher over the 2017 calendar year which is a slower pace of growth relative to 2016 when national dwelling values rose 5.8% and in 2015 when values nationally were 9.2% higher.

According to SQM Research, Hobart and Melbourne are tipped to be the strongest capitals throughout 2018 with Sydney, with Darwin and Perth slowly coming out of their downturns.

We believe there’s deals to be had across Australia in 2018 with some regional areas showing green shoots and extremely affordable price points.

Here’s a look at the SQM predictions for 2018.

Source: SQM Research

Mike Mortlock

Mike Mortlock is a Quantity Surveyor and Managing Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at www.mcgqs.com.au/

Capital city dwelling values up, with pace of growth slowing.

Posted on November 16, 2016 by admin

Across the combined capital cities, dwelling values have increased by 7.1% over the 12 months to September 2016, a figure much lower than the 11.0% increase in values over the previous 12 months. So, whilst dwelling values certainly aren’t tracking sideways, the pace of growth has slowed markedly, yet is still relatively strong. Rental rates on the other hand, are falling and showing their largest declines in more than 20 years.

October dwelling values speak to this slowing pace, rising by 0.5%, compared with a 1.0% lift in September and 1.1% rise in August. The latest monthly housing market data takes the quarterly change in capital city dwelling values to 2.7% and 7.5% higher over the past twelve months.

Apart from Adelaide, Hobart and Perth, every capital city recorded a rise in dwelling values over the past three months, with the Canberra housing market recording the largest increase in values after a 5.6% quarterly rise. Growth in the Canberra property market largely relates to rising house values, with unit values increasing at less than half the pace of detached housing.

Index results as at October 31, 2016

Sydney continued as the stand out capital based on annual capital gains, recording the largest year-on-year increase; dwelling values are now 10.6% higher over the past 12 months. Houses lead the charge, with the supply side for high density housing taking up a lot of the demand. Units are in demand in so far as they are at a lower price point, but there are concerns around the number of dwellings coming onto the market.

According to CoreLogic economist Tim Lawless, the divergence in performance between houses and units is most clearly evident in Melbourne and Brisbane. The annual rate of capital gains in Melbourne remains strong at 9.1%, however there is a substantial difference in growth rates between houses and units, with house values up 9.6% compared with a 5.2% increase in unit values over the past year. Brisbane’s housing market has shown a larger capital gain spread, with house values up 4.7% compared with a 1.4% fall in unit values over the year.

He said, “The weaker performance of unit values across the Brisbane market may be partially attributed to supply concerns, as unit supply levels across key regions of Brisbane’s inner city show the potential for a significantly larger relative increase in existing stock levels when compared with Melbourne and Sydney.”

CoreLogic dwelling values rise in September, RBA place doubt over previous figures

Posted on October 11, 2016 by admin

The month of September was a good one for capital city dwelling values, with all but Perth and Darwin trudging forward. Capital city values are also up 2.9% over the quarter.

On these figures though, there has been a lot of coverage of the inflated CoreLogic figures for April & May. In RBA governor Glenn Stevens’ statement explaining the most recent rate cut, he observed that “dwelling prices have been rising only moderately over the course of this year”.

That statement was at odds with CoreLogic data on home prices, released just the day before, that showed 6.1 per cent growth in home prices nationally, year-on-year, with much stronger results in Melbourne and Sydney.

The discrepancy was explained in the RBA’s quarterly Statement on Monetary Policy, realised on the 5^th of August, which relied on data from APM (part of Fairfax’s Domain property group) and the Real Estate Institute of Australia.

In the statement, the RBA explained that it has disregarded CoreLogic’s data because it appeared to significantly overstate price growth in April and May.

“While one source of data recorded strong growth in housing prices in April and May, that growth appears to have been overstated and other sources suggest that housing price growth was modest over those and more recent months,” the bank noted.

It appears that a methodology change by CoreLogic, implemented during April, may have contributed to higher index values in those two months than were warranted by actual transactions.

The RBA have noted that “the risks associated with high and rising household sector leverage and rapid gains in housing prices have diminished.” Septembers figures are shown below.

Index results as at September 30, 2016

Sydney leading the charge as dwelling values rise in May

Posted on June 10, 2016 by admin

Whilst month on month figures are a little haphazard, the last quarter has seen Sydney prices grow by 6.6% with Perth and Hobart the only capitals in negative territory.

Our current property growth cycle comes to around 4 years now since May 2012 and values have risen 36.6% to May 2016. Sydney’s growth for this period stands at 57.5% with Melbourne at 37.4% and Brisbane next in line at 18.5%.

The graphic below shows the combined capital city growth rates for the current cycle.

You can clearly see where values (total returns) rebounded from May 2012 and a bit of a problem for the housing bubble evangelists that surfaced around February this year.

Whist 5 year total returns to May 2016 see Sydney and Melbourne at 85.3% and 51.7% respectively, the growth cycle has matured and we’re more likely to see modest growth over the coming years.

In essence, these RP Data/Core Logic figures are an overview, and local factors such as capital city unit oversupply issues represent spectacular opportunities to post negative returns. We’re strong advocates of seeking the right advice to ensure you’re investing in pockets with strong growth drivers and fundamentals.

Budget 16 Property & Tax Changes

Posted on May 9, 2016 by admin

Negative gearing has thankfully been ruled out as an area the coalition will be attacking to provide budget savings. Any policy which creates a disincentive to self-fund your retirement is a ludicrous one in our view. Not to mention the net tax result of a diminishing property market.

So what has changed in the world of tax depreciation? Well there’s some great news for small businesses, with the instant asset write off being extended. The threshold for qualification has also been revised upward. The definition of ‘small business’ as at 1 July 2016 now means businesses with a turnover of less than $10 million.

We’re expecting some new depreciation legislation on effective lives to be introduced within the next 60 days. This will supersede TR 2015/2 and will likely include some new commercial industries and tweak some commercial effective lives. It’s been some time since we’ve seen a change to residential properties, but we’ll be looking at that one closely.

Over and above property and depreciation, here’s a brief overview of the major budget announcements;

Increase to the upper limit of the 37c tax bracket from $80,000 to $87,000
Company tax rate cut to 27.5%
Incentives for employing young people
Investors in Early Stage Innovation Companies for a 20% tax offset for amounts invested up to $200k per annum.
Maximum of $25,000 per year now for super contributions, down from $30,000 limit if you are aged under 50 or $35,000 if aged over 50. This will apply from 1 July 2017.
Any earnings on your super balance over $1.6 million will be taxed at 15%

The questions we’re asked on a daily basis

Posted on March 30, 2016 by admin

Navigating the world of property depreciation can be a daunting task for property investors. Our aim is to simplify the process, eliminate the B.S. and arm investors with the knowledge they need to get the most out of their property. With that in mind, we thought it would be a good time to answer some of the questions that we’re asked on a daily basis. Some of the questions arise from misleading statements in the media, others are decades old myths about depreciation. Let’s take a look at the top 2.

1. Is it worthwhile to have a report completed?

As much as this can be a difficult question to answer, there are a few key things that can answer the question in the affirmative right away. For example, was the property built after September 1987? If the answer is yes, then the report is going to be worthwhile. As a worst case scenario, let’s say the property was built in 1989 and the construction cost at the time was around $65,000 (which was about the national average at the time). Let’s say that $8,000 can be assigned to the plant and equipment items (stove, carpet, blinds, hot water system etc). That leaves us with $57,000 for the building structure itself. The depreciation rate for the building structure is 2.5%, so there will be $1,425 worth of deductions on the building structure alone, each year for 40 years. If the property is newer than that, all the better! With a marginal tax rate of 37%, that’s around $500 in your pocket each year on the building structure. Add the plant items and maybe the odd renovation/touch up, it equates to a worthwhile schedule.
By the same token, if the property was built prior to 1987 but has had renovation expenses of $50,000 or more, then it’s likely to produce the same result. Remember, you don’t have to have completed the renovations yourself, they can be claimed even when completed by the previous owner.

2. How much does the service cost and why is there such a difference in fees?

About 10 years ago, all reports were around the $600 mark. These days you’ll find quotes from $200 odd and upwards to $800 for a residential report. It’s important to note that the $200 to $500 reports are a completely different product. The bargain basement reports often exclude a site inspection, or offer it as an add-on option. In our view, any company offering an inspection as an option is not acting in the best interests of their client. There are certainly circumstances where an inspection may not be required, such as when plans, a total construction cost and a detailed schedule of finishes is supplied. However, for any pre-existing property or property with common areas, an inspection is an absolute must! Trained experts may find renovations or improvements which you wouldn’t otherwise notice and that’s on top of any compliance issues of not having someone inspect the property prior to issuing a report on the construction values. Corners can also be cut with poorly trained staff and lengthy disclaimers that state the report was issued on the basis of information provided by the owner and under the self assessment rule.

In the absence of a recommended fee from our governing body, we believe a report should be around the $650 to $700 mark. Factoring in the cost of organising and undertaking the inspection, something has to give in order for the report to be completed any cheaper than that. Our sole focus is to provide the BEST possible result for our client. You certainly shouldn’t be paying a premium for using a particular company based on flashy marketing, but and a cheap and nasty depreciation report is a little like putting 2nd hand tyres on a Ferrari.

“It’s not worthwhile having a depreciation schedule” – How costly unqualified advice can be

Posted on March 7, 2016 by admin

Recently we were following up on a quote in Newcastle, NSW for a house that had been split into three small units. The owner came back to us with the following:

“Thank you for your email. After sending this email, I spoke to the managing real estate who advised me that the house was too old to obtain depreciation that was worth paying for a report on.”

I replied saying thank you for the response, but suggested that since we provide free advice, it would be worthwhile providing some further evidence, to enable us to assess the viability of the report. As our first step, we’ll always see whether the report is going to be worthwhile or not, and have learnt that advice from a real estate agent, accountant or any other well-meaning individual is only as good as their depreciation knowledge.

As it turned out, the property was no beauty.

However, the property was not in its original condition. From a desktop review, we assumed there had been some expenditure related to the reconfiguration of the property, and it appeared that the cladding and roofing was not original. Additional to this, the client had added some new hot water systems and a kitchen stove.

I suggested that in this instance that there was enough evidence surmise that the report would be worthwhile and that we should inspect the property and see how it stacked. If we couldn’t achieve more than twice the fee for our report, we would cancel the schedule at no cost to the owner.

The inspection was rather interesting itself. Not so much for the property, but the tenant who forgot we were coming through with the keys and left their *cough* recreational tools on display, and the lady who thought the best way to show me the water pipes were staining her clothes, was to show me her underpants. Just another day on site in the life of a Quantity Surveyor!

Apart from those mildly scarring discoveries, we found updated carpet, vinyl as well as curtains and blinds. The property was never going to break any records, but we found over $4,000 worth of deductions within the first full year and just shy of $4,000 per year over the first 5 years.

Based on an average salary, the report was putting over $1,200 back in the clients pocket for each of those 5 years after the cost of the report had been deducted.

The point of the story is that we face this situation too often. Whilst we’ll never pressure a client to have a report completed, we cannot in good faith say we’re looking out for them until they understand what a report could actually do for them, regardless of the advice they received. There are too many older properties where depreciation is not applied, based on the view that the property must be too old. There are certainly properties where there’s nothing left to claim, but investors should always seek qualified advice before electing not to follow up depreciation.

Tag: housing affordability