Richard – please do disagree if I'm wrong!

But would appreciate to hear some more of your thoughts on this then.

The way my solicitor explained, when we setup an Australian company which buys as trustee of an Australian trust the FIRB will not need to give approval. It does mean that the business needs to have an Australian resident director.

Some more on the AUD (courtesy of CBA):

The AUD often trades as a "barometer of global financial market sentiment". When financial market sentiment turns to panic, the AUD gets oversold.

The reasons why the AUD gets sold are understandable*. What is less understandable is why the AUD gets oversold. The main reason why the AUD gets oversold is because the AUD is a very liquid currency. And due to the make-up of Australia's exports (more than 60% are commodities and exports make up some 22% of the economy), the AUD can often trade as a proxy for commodity prices and as a proxy for global growth estimates. The AUD can also trade as a proxy for Asia, a proxy for current account deficit countries, and as a proxy for Australia's economy. Overwhelming uncertainty in any of these areas can result in large falls in the AUD because participants can usually orchestrate the necessary volume of trade through the AUD currency market, whether they are leveraged or not.

When panic sets in, a circuit-breaker is needed. The larger than expected 100 basis point reduction in the RBA's cash rate, bringing the official rate to 6.0% is a prudent move and has, for now, provided a circuit-breaker. It demonstrates the RBA is able to take leadership when panic sets in and do what is required when growth risks are skewed heavily to the downside because of global financial market movements. But it is important to note that recent gains in the AUD from this morning's Sydney low have also reflected a weaker USD. The RBA's move has sparked the possibility that large and co-ordinated central bank interest cuts could be forthcoming and given non-USD currencies a temporary boost. The fact that the AUD is higher on the cross rates illustrates that participants have, for now, positively endorsed the RBA's leading and prudent move.

It is too early to be sure that global financial market panic has completely subsided. Until we can comfortably come to that conclusion, the risk to the AUD remains to the downside. When panic sets in, it tends to matter little that the AUD has fallen nearly 10% in one day. Or within a whisker of its record low vis-à-vis the EUR** and lower than the levels traded during the 2001 global recession the 1997-98 Asia crisis. Arguably the current credit crisis is much worse and so more downside should be anticipated, whether it comes in panic moves or not. 

*Reasons why the AUD is falling

(1) The AUD is an extremely liquid currency. According to the Bank of International Settlements (BIS), the AUD/USD exchange rate is the 4th most liquid currency in the world. Australia's financial markets are deep and among the most sophisticated in the world. Hence participants can get pricing for large volume trades.

(2) Australia's exports make up approx 22% of the economy and commodities make up the bulk (approx 60%) of Australia's exports. Participants take the view that as global growth estimates get revised down, commodity prices will fall and Australia's exports and economy will slow. Putting large downward pressure on commodity prices, is the high possibility of a technical recession in the US, Eurozone and Japan. Indeed, a global recession is certainly a real possibility. Because the AUD is a very liquid currency, participants can ride the slowing global growth-commodity price cycle by selling the AUD.

(3) In times of risk aversion, the currencies of current account deficit countries tend to get sold and the currencies of current account surplus countries tend to get bought. Rising credit costs raise the costs of funding current account deficits, even if the ability to fund the deficit is not directly under the threat. Nevertheless, rising risk aversion leads participants to avoid the additional risk that current account deficit's bring to the equation, by selling the AUD.

(4) As global growth slows, the RBA reduces interest rates to insulate Australia's economy from the slowing global environment.  Unless the current account deficit falls at the same time, the risk premium on Australia's interest rates is effectively reduced as interest rates fall. Hence, a lower AUD is required to compensate incoming investors willing to fund the current account deficit, for the lower interest rate (risk premium) environment.

(5) The USD is rising because demand for USD has increased exponentially as local US banks and foreign banks with US$ loan exposure scramble to appropriately match US$ denominated funding requirements (matching US$ assets and liabilities) and support US$ denominated capital adequacy ratios. Consequently, US institutions with an offshore presence are repatriating USD and foreign institutions with local exposure in the US are gathering USD to meet US$ funding requirements. The USD is also rising because the US authorities are seen to be addressing the credit crisis. There is a perception that the US economy, first into the downturn is likely to be first out. Certainly the US economy recorded stronger GDP growth than most of the industrialised world in Q2. While Q3 growth is less certain, large interest rate cuts are expected from the ECB and BoE putting downward pressure on those currencies, as their respective authorities grapple to deal with the credit crisis. A stronger USD is putting downward pressure on the AUD.

** Since the introduction of the euro in January 1999, the record low has been 0.5175. If we use a proxy for EUR (pre 1999), the record low is 0.4902, reached in September 1992.

My views:

The 30% drop in AUD had NOTHING to do with interest rates, but everything with the carry trade unwinding, that is institutions borrowing in low interest JPY and investing in high interest AUD/NZD. These trades were unwinding because of risk in the financial markets as a result of the credit crunch. This became a self fullfiling spiral where initial sales forced more sales.

In uncertain times the USD has done well as it is still seen as the prime reserve currency. The AUD has suffered from the carry trade unwinding, the move of funds back into USD and the drop in commodities (AUD is strongly linked to commodities).

The AUD is now oversold and is very likely to bounce back although the current downward trend may well continue for a bit longer. The interest rate cut won't have a dramatic affect as it was priced in the market and all other reserve banks will follow suit (but likely with smaller cuts, Bernanke has already indicated the US is looking at a rate cut).

KW I struggled with this one for quite while myself. We bought our first few IP’s in our own name but have since started using multiple trusts (which in QLD can help you to avoid paying land tax). You need to consider what you want to achieve with your structure: asset protection, tax minimisation or estate planning or some combination of those and if it’s a combination then which one is most important.

Then you need to understand what you investment strategy is, i.e. buy and hold or buy, renovate and sell, positive or negatively geared or whatever.

Then think about what your approach / attitude to risk is.

Once you have that on paper, think through the structure options and then go and speak to some accountants and solicitors. I spoke to a handful and got different answers from each of them! That didn’t help at first and I needed to do a lot of thinking to be clear about our priorities before I could decide on which way to go. Sorry, no clean cut answer…

If you get to the point that you suffer from analysis paralysis and find a good deal just buy the first one in your own name and then sort out your structure later.

Very likely that in the long term property will continue to double every 10 yrs or so.

The question is how long the current bearish period will be…

Michael Keating states in his blog entry of 24th January 2008:
– Australian property prices have averaged 10.4% growth over the last 120 yrs
– UK property prices have been recorded since the year 1088 and over those 920 yrs property prices have gained on average 10.2% per annum

Here is something we all know: savings rates are down and the average citizen in the US, Uk and Australia has more debt than ever and less wealth then before. Right?

Well, maybe not quite, an analysis by the Reserve Bank of Australia burried in the RBA's Statement on Monetary Policy from May 2006 shows that if you take the traditional definition of savings indeed savings rates have been falling in Australia, but in this definition any growth in investments is not included in savings. But that's deceiving as nowadays many people save by putting their money in investments like property or shares rather than just putting the cash in an interest bearing account. If you do include equity growth teh savings rates are actually pretty solid, hovering between 10% to 20%.

As for net wealth this was $32,000 in 1991 per person of working age to $90,000 in 2005. Even taking a 3.5% inflation into account that is a 60% increase in net wealth.

Bit hey doom & gloom sells better …

Regarding investing in property in the Philippines:
– yields tend to be good indeed, i.e. 10% or above, but for holiday lets consider that during the rainy season most (beach) resorts struggle to get many guests
– legal system is ok, you can actually buy more than just the usual condominiums like land, houses etc. but then you need to get a business structure in place which as long as you have a reliable lawyer on your side should be ok (you can only own 40% but there are ways around That)
– Only buy titled land (be careful with tax registered)
– Look carefully into who will manage your property, I have lived in the Philippines for the last 6 years and maintenance of properties is in general pretty poor to say the least.

Capital growth is far from assured, I would probably look at residential estates on the outer side of Manila e.g. Alabang area or consider Subic which is likely to grow strongly in the future with major investments in semiconductors, shipyards and finally some infrastructure improvements (new highway and rumours of a rail line). Alternative could be beach resorts e.g. a new development is being marketed in Cavite and being not too far from Manila this could have good growth prospects.

In summary when you're doing your reserach and making a decision remember that the Philippines is 3rd world country with all the associated risks and that real estate is controlled by a small group of very powerful families. If you do invest, make sure you expect big returns for the risks you take. 

Unmester, thanks I am aware of that, but the statistics come from the ABS and are pretty robust (I checked the ABS website and got the same dataset). I actually made some charts of population growth by state and that shows some interesting trends… I do agree with you that median prices as offered by the various companies are unreliable at best – I don't like the concept of a median price anyway unless it is ona limited popultaion of properties. And indeed companies by RPData, Residex etc. make their money in the property business, so as you say, you have to watch out for the spin – whether it be from the bulls or the bears!

I don't think you can argue about the population growth etc. and what that does to the market fundamentals, but as I highligted their article conveniently forgot to mention affordability as a a major issue …

And scamp:
– of course you include births, baby's don't buy houses, but they do make the population grow and that drives long term trends.
– and deaths don't make houses "dissapear", the left behind family/partner etc. also need to live somewhere
– and I don't know where you do your research, but your comments on immigration are way off the mark. NETT migration has increased from around 60,000 on average during the 70s to over 200,000 on average between 2003-2007 and there has been a very steady trend in that increase. To paraphrase yourself… "it's simple, just do the math, more people in, less people out and the population grows"

imugli – nice one!

I agree with you that you're better off buying when you can then when you can think is the right time, otherwise you'll never buy anything, just make sure that what you buy and how you finance it take account of the current situation… and since you did I'm sure it will work out nicely.

Mackar,

I don't think we'll see a boom anytime soon but I do believe Australia will ride this global downturn out much better than most.

I believe:
– that the US, UK and continental Europe will suffer pretty strong downturns / recessions
– that BRICs and other emerging markets are decoupled enough from the US to continue to grow but at a slower pace
– that commodities will stay high for many years to come due to the growth in emerging markets
– that even though prices will recede from their recent peaks they will stay high (e.g. oil is down from its recent $140+ peak but I believe it will stay in the $70 to $100 range which is much more than most would have believed only a short while ago)
– that robust commodity demand and commodity prices will keep Australia afloat, i.e. not suffer as badly as the US and UK
– that migration will stay high, as recession sets in in the UK there are plenty of people with equity who may well decide that this is now the time to go down under
– that inflation will stay above target so interest rates will only decrease slowly in Australia
– that the census data stating 900,000 houses are empty is misleading and that a very limited amount of this will actually get onto the residential market
– that commodity states like WA and QLD will not suffer a great rise in unemployment but this may well be different in say areas around say Sydney
– that local variations in unemployment, will further increase interstate migration towards QLD
– that some areas may well suffer severe declines in property price, i.e. those areas with higher unemployment where people bought too high and leveraged themselves too far. Some areas like SE QLD and other selected areas may well actually continue to increase slowly.

Oh, and as always, when the inevitable correction in the cycle comes all the media and the public declare property prices lost forever, that prices will drop by 30%, 40%, 50% or more, typically the corections are much smaller and after 7-10 yrs or maybe even 12 yrs we'll have had another cycle… I read an interesting article a few years ago that actually summed up all the popular reasons why people shouldn't invest in property in the 40s, 50s, 60s, 70s, 80s, 90s and so on. If you had followed these common reasons why "now isn't the time to buy" you'd never buy anything …