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I was thinking about buying a p...

I was thinking about buying a property in Australia but I am put off by the strong Australian dollar. Is it worth waiting for the dollar to weaken?

When it comes to investment it is easy to find an excuse to delay a decision as there is always one to be found.  Market bubbles, interest rates and indeed currency are popular reasons to delay rather

When it comes to investment it is easy to find an excuse to delay a decision as there is always one to be found.  Market bubbles, interest rates and indeed currency are popular reasons to delay rather than act but many people don’t realize the cost of procrastinating when it comes to Australian property is more than they think.

From a taxation perspective, the many incentives on offer to reduce future tax on your Australian salary when you return to Australia require as much time as possible to accrue in order to achieve the best result so you do weaken your future taxation position, albeit not significantly if your delay is short lived.

From an investment perspective, the Australian property market continues to achieve sound and stable growth, so delaying the entry decision can prove more costly than any potential currency cost.

Many people are not aware of the fact that quality lending can act as a natural currency hedge by allowing you to minimize the deposit required and only be exposed to the high currency cost on the funds required to purchase rather than the full purchase value.

When using sensible lending, your cash outlay would be limited to your 20% deposit plus approximately 5% allowance for costs such as stamp duty and legal fees.

Depending on your point of view where the currency might move to, or how much it may be “overvalued” it is important to find the reality of your delay decision.

This is best explained in an example.  Let’s assume you are looking to purchase a property in Australia for A$500,000 of which you would require 25% for deposit and costs to acquire, the balance coming from an Australian dollar loan.

If you feel the Australian dollar is overvalued by say 10% at the moment and would improve that much in the next 12 months, then the “additional cost” of acting now would be 10% of the cash required of A$125,000, being A$12,500.  So if you waited the year for the currency to improve (assuming it does) then you would be better off by A$12,500.

However, if the property you are looking at grows by the average rate of 7%pa over the next year that can be more expensive.  The reason being is that it is calculated on the total purchase price, so a A$500,000 property would be worth A$35,000 more in 12 months if it achieves this average growth.

Hence the net cost of delay is the potential increase in property value, A$35,000, less the assumed currency cost, A$12,500, being a net A$22,500 which is a cost of delay if you wait, or if you were brave enough to act is a extra profit to you.

Many people don’t factor this cost in when assessing the merit of action or delay and find out too late the real cost of delay is far greater than the potential currency loss.

You can then make the additional reductions of the loan later when you feel the Australian dollar has better value.

If you already have an Australian property that has some available equity, this can provide a full hedge on your next purchase as the deposit can also be borrowed against your current property holdings, hence ensuring that you do not need to convert any currency and experience no potential currency cost due to the high Australian dollar.

DISCLAIMER: All information provided is of a general nature only and does not take into account your personal financial circumstances or objectives. Before making a decision on the basis of this material, you need to consider, with or without the assistance of a financial adviser, whether the material is appropriate in light of your individual needs and circumstances. This information does not constitute a recommendation to invest in or take out any of the products or services provided by SMATS Services (Australia) Pty Ltd or Australasian Taxation Services Pty Ltd.

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