Highlights from this week:
- Something that many buyers don’t bother to do that can cost thousands of dollars
- Why sellers should do a building inspection
- How to sort your finances up front
- Negative talk and speculation has a negative impact on the market
- Queensland benefits from overpriced Sydney and Melbourne markets
- Is there one growth driver that benefits all property markets?
- What an agent must tell you about a property before you buy
- Avoiding dutch auctions and getting gazumped when buying
Getting your finances sorted – Andrew Crossley
Kevin: One of the key things you have to do when you’re looking at investing in property is certainly securing your finances. A book I want to tell you about now that’s well worth picking up and reading through before you go down that path. It’s called Property Finance Made Simple, and when you read the book, you’ll see well that’s exactly what it does. It’s written by Andrew Crossley, who is my guest.
Andrew, thank you very much for your time.
Andrew: Thank you for having me.
Kevin: Andrew, why did you write this? And tell me about your qualifications to speak on this.
Andrew: I wrote it because I wanted to help as many people as possible who needed finance to understand how better to get a loan. My first book was more for property investors, and so this time round, I wanted to help upsizers and downsizers and really first-home buyers as well as investors understand how better to improve their chances to get a loan.
Kevin: One of the things I love about the book, in reading through it quickly, was that you did focus right upfront on housing affordability, which is probably one of the most spoken about terms right now around Australia. Just how affordable is property?
Andrew: If you look at the national level of things, it is affordable. If you look at purely Sydney, one could say it’s not affordable. Often, too many people are loosely saying there’s an affordability crisis, but using Sydney as a benchmark for the country, which I do think is incorrect. There are many suburbs around Melbourne within 20K… In fact, there are probably 16 suburbs within 20K of Melbourne that are under $600,000.
Kevin: Just talking about affordability for a moment, there are some alarming reports out in recent times about how many people are probably going to default because interest rates might increase. How do the financiers go about assessing someone’s risk in this area, and what should consumers be doing to make sure that they don’t fall foul of this?
Andrew: It’s a really good question. Every lender when they take on new debt or give someone a loan, they assess it at a qualifying rate. Normally it is about 7.2% to 8%. So if current rates are 4%, 4.5%, they’ve already determined the borrower can afford the loan if the rates went up to 7.2%.
Of course, the reality could be quite different in a household where someone perhaps could have been a bit liberal with disclosing their living expenses and they may find it tough if rates rise, but lenders have certainly tried to do their job with being compliant in ensuring that if rates do go up at least to 7%, that the person can still afford that debt.
Kevin: I think there’s a great need here for a lot more education for consumers too to understand that the banks believe it’s important to build the buffer in. While they might do that, they need to explain, I think, to consumers that “Hang on, we have built a buffer in here. We want to make sure that you can afford it at the current rate.” But a lot of consumers go away and think “Oh, this is pretty easy,” then they may over-commit and get up to that level, and then of course, once interest rates do go up, they’re going to be in a lot of strife.
Andrew: In fact, I’m concerned that over the coming year, there would be a considerable number of people who have over-invested or are over-exposed to the future cost of debt, and when rates do rise, and let’s say their loans do convert from interest-only if that’s what they’ve done to principal and interest, that will, in fact, potentially lead to a large correction in prices if there are a lot of forced sales.
I don’t necessarily think there’s a bubble from property itself, but one could conceive that a bubble effect could occur if there are a lot of repossessions or forced sales.
Kevin: Yes. What should someone do if they’re in a position where they find that they are headed down that path, Andrew? What would be your advice for them?
Andrew: I think it’s very important to understand their outgoing expenses. A lot of people hate the word “budget” and they don’t really have one. Some do, and the more who do, the better. Personal loan debt, that’s costing a lot more than a mortgage would – 6% to 9%, up to 20% for credit cards, versus 4.5% or 5%. So if they are able to, perhaps look to engage the services of a mortgage broker to determine which lender would suit their circumstances best and look to try to consolidate their exposure to other debts other than their mortgages.
Kevin: In chapter seven of your book, you deal with structuring your finance, and I like in particular the part where you deal with how to improve the chances of borrowing money. What can someone do to improve how they look to the bank or the lender?
Andrew: Avoid shopping around. If you keep going into the big four banks’ branches to inquire about what you can borrow, you could risk incurring more and more credit hits on your credit file. The more hits you have, it starts to look like you’re a debt shopper, and lenders don’t like that, and then you’ll be relegated to a much higher rate through a second or third tier lender, perhaps. So it is much better to engage the services of a mortgage broker to find the better borrowing capacity calculators out there and the most suitable loans for your circumstances.
You asked earlier my qualifications. Besides the three masters degrees I have and being in the industry for 20 yeas, I specialize in helping brokers structure finance for their clients to better suit their clients’ needs.
Kevin: Can I just ask you, you mentioned there about budgeting and how we don’t like to budget. I don’t know whether that’s an Australian thing or whether it’s just people in general. As Australians, how are we as savers?
Andrew: I think people are pretty good at saving money overall. I think the problem is not so much widespread to the greater community, this risk of being over-exposed to debt. It’s more the case that the people who have over-invested in the last four or five years by buying perhaps too many properties too quickly, thinking that time is running out, prices are going up, they had better act fast. Rates are very low and they forget that over the last 20 years, rates have averaged to 7%.
So the majority of people, if they’re managing their credit card debt, they’re not getting too carried away with buying too many properties too quickly, they should be okay. The problem is if people keep spending as if rates are low and they don’t have a budget to really understand what their outgoings are as a household. This is where things start running away from them.
Kevin: Andrew, we’re out of time, unfortunately, but thank you very much. Congratulations on the book. It’s called Property Finance Made Simple. The website to get it is PropertyFinanceMadeSimple.net.au. My guest has been the author Andrew Crossley.
Andrew, thank you for your time.
Andrew: Thank you for having me.
Negative talk has impact on the market – Dr Andrew Wilson
Kevin: Joining us with an update on the Australian property market, the chief economist at The Domain Group, Dr. Andrew Wilson.
Andrew: Morning, Kevin. How are you today?
Kevin: Mate, I’m fantastic, thank you. A lot happening in the market we should talk about, Andrew. I guess any conversation about property would have to center around interest rates, but gee, there’s a lot of talk about negative gearing, and there’s just a lot happening, a lot of conversation about the property rate right now. Is it unprecedented?
Andrew: It’s certainly been getting a lot of attention, hasn’t it, Kevin? I can’t really remember a period where we have had so much focus particularly on property markets and interest rates. Of course, the banks have raised interest rates over the past few weeks and are likely to continue to increase them – only marginally – but certainly I think it’s playing into the mindset, perhaps, of buyers and sellers.
We had some quite sobering retail data come out February from the ABS. I do think that given that unemployment is at a year high at the moment and a number of capitals have unemployment levels significantly higher than the way they were a year ago, I still think that there is a likelihood that we’ll get an official cut in interest rates sooner rather than later. I think even if the banks continue to increase rates, I think that will facilitate a cut from the Reserve Bank even more significantly.
I think that even though we had rates on hold, unless the economy improves, we’re likely to get a cut sooner rather than later. We do have the Budget coming up next month, of course, Kevin, and sometimes the Reserve Bank does act in May just before the budget to preempt any issues that might occur there, so we might even get a surprise cut next month.
Kevin: All this talk about a bubble too, it just goes on and on and on. It’s obviously doing a lot to impact consumer confidence, and it just makes me wonder why they’re doing this. Then we’re going to have to turn around and the possibility you just raised there of lowering interest rates again. It just seems like they’re all over the place.
Andrew: And they paint themselves in a corner, Kevin, of course. If they are talking of housing bubbles and the need to cool housing markets and at the same time, the economy is going back, that’s what the Reserve Bank is there for – to use monetary policy to maintain economic balance and particularly where we have a slow-growing economy to actually encourage growth.
We still have interest rates higher than basically anywhere else anyway, and I do think that as you said, they’re painting themselves into a corner. It becomes a conundrum for them. And it’s a very mixed economic basket, really, around the country.
Kevin: It’s probably going to get more challenging for them too, because I would have thought that a lot of people are going to start exiting that over-priced Sydney and Melbourne market and start to move into South East Queensland. South East Queensland, to me, seems to be one of the only markets in Australia that’s not in this high inflated price range.
Andrew: You’re spot on, Kevin. We’re seeing early signs of that now. The latest migration data has shown a turnaround into South East Queensland. Of course, migration fell away quite sharply with the end of the resources boom and the end of the fly-in, fly-outs, but that’s now starting to turn around. I think you’re spot on the money.
A lot of that is affordability perception, and of course, the Brisbane median house price is half that of Sydney. It’s not just the prices that are so much lower; it’s also the bang for your buck in terms of what you do get when you pay, because Brisbane is still quite a livable low-rise environment. The economy in Brisbane is actually doing as well in terms of unemployment as Melbourne is. I think we will see a turnaround in that and, as you said, driven by affordability as well as the usual lifestyle attractions that South East Queensland offers.
Kevin: Thanks, Andrew. See you, mate.
Andrew: Okay, thank you, Kevin.
Is one growth driver more important than others? – Michael Yardney
Kevin: A great question that we’re asked quite often on the show is “What is likely to drive future property price growth?” Clearly, there are many different growth drivers, but is there one that stands out, one that’s probably more important than the rest?
Michael: Hello, Kevin.
Kevin: Can you answer that question, mate? Can you actually get it down to one?
Michael: There is definitely one that’s more important than the rest, because in my opinion, economic growth is what’s going – in the medium to long term – to drive property price growth. Because economic growth leads to jobs, jobs lead to wages growth, people come in and move because of jobs, and when people move to an area, that creates initially rental demand, moving on to eventually house-buying demand.
So of all the factors, economic growth is an important one. Now, of course, all those other things are important as well – consumer confidence, interest rates, business confidence, political certainty, the banking system – but all that creates economic growth, so they very much lead to that.
Kevin: Are there some key employment statistics we should consider, Michael?
Michael: It’s important to understand how we now create economic growth, because our capital cities are now attracting 81% of job creation. Go back a decade; that was only 60%. In other words, we are building things, making things, creating things differently, and the forecast is for more jobs to be created in our capital cities than elsewhere in the future. That’s because we’re no longer manufacturing things, we’re no longer living off the land.
If you look at some statistics, last year, Melbourne created 72,786 jobs, Sydney created 54,000 jobs, and that made up a huge bulk of all the job creation in Australia. But more importantly, Kevin, they were full-time jobs. In other areas, if you look at hospitality, if you look at retail, a lot of those are part-time jobs – not the same.
Kevin: When you look at the graph that you’ve shown me here, that is just so obvious, isn’t it? 54,000 in Sydney, 72,000 in Melbourne, 18,000-odd in Brisbane – it’s lightyears. It really is between Sydney and Melbourne. They’re quite staggering figures.
Would it be right then that investing outside of the major economic centers is fraught with risk?
Michael: In my opinion, job creation is increasingly important for future property performance. Those areas with limited employment opportunities are likely to struggle with regard to figure capital growth – and rental returns, even. The opposite trend is, of course, going to occur – that those areas where the jobs are being created, there are going to be more people wanting to go there, and it’s a snowballing effect.
More highly skilled jobs, Kevin, are the ones that pay more, and they’re the people who have higher disposable incomes and who can afford to buy new houses or investment properties or new cars, and that creates more business in the local economy and it snowballs.
Kevin: Correct me if I’m wrong, though, it wasn’t always that way, was it – economic growth not always concentrated in our major capital cities?
Michael: No, it wasn’t, Kevin. Just back a century ago, and we were really dependent on the bush. About four million Australians lived in rural properties or small towns of fewer than 3000 people. Most were market towns. We were served in an agricultural community, so we lived on the land. A century ago, only a third of Australians lived in cities even the size of Toowoomba, over 100,000 people.
It was mainly primary production. Mining also had a bit of a say in it. Then post World War II, we became a manufacturing country and things changed. We started to industrialize, and there was a big shift to urban living and into suburban homes. Then go back to the mid-1960s, three out of five Australians lived in a major city and manufacturing was creating most of the jobs.
But that’s no longer what drives us now, Kevin, so when we think about Australia’s economy and our exports, we tend to think about wool or sheep or iron ore or minerals, but in fact, interestingly a large part of our economy and exports today is services with health and education and tourism. We are now a service-based economy, Kevin.
Kevin: It’s fascinating when you look at it that way, Michael. What is the bottom line?
Michael: It appears safe to assume that service industries are really going to be our biggest source of employment and increasingly, the muscle behind economic growth in the future. And most service-related jobs are going to be in our capital cities, but more than that, Kevin, they’re going to be in the central areas of our capital cities, and that’s what’s going to create the ongoing jobs growth, the ongoing wages growth, the ongoing population growth.
So to invest outside the three or four big capital cities of Australia in my mind is foolish. It doesn’t mean there aren’t opportunities elsewhere, but it’s just too hard to swim against that very strong tide of economic growth, Kevin.
Kevin: Great talking to you, Michael. Michael Yardney from Metropole Property Strategists. By the way, before I let you go, congratulations on taking out that award for your blog site, Property Update – one of the most popular, most read blogs in the world, I believe.
Michael: Kevin, I was amazed when Property Update got ranked by Feedspot as the world’s number one property website and blog. That was against some very tough international competition. It wasn’t even something I entered into; they emailed me and said, “Hey, you won.”
Kevin: Fantastic. Well, congratulations, Michael. Once again, Michael Yardney’s blog site is Property Update, and he’s a regular guest on our show, as well. Thanks for your time, Michael. We’ll catch you again next week.
Michael: Thanks, Kevin.
What an agent must tell you about a property before you buy – Tim O’Dwyer
Kevin: I want to talk about agents withholding facts – facts like someone dying in a property or material facts that may affect the property, being in a flood zone and so on. What are the requirements for agents? What do they have to tell buyers?
Tim: They have to tell the truth, and what they must not do is they must not mislead or deceive actively and they must not mislead or deceive by silence, and that’s the gray area for real estate agents.
Kevin: It’s very gray.
Tim: And for their clients, the sellers.
Kevin: You have to prove that the agent knew the fact and was silent about it, Tim, which would be pretty hard to prove I would have thought.
Tim: Yes, but often you can show that the seller knew about it. If you’re a buyer and you’re looking at suing someone because you’ve been misled or deceived, or you’re looking at getting out of a contract on that basis, it’s either the agent or the seller who may have misled or deceived.
Kevin: But isn’t it buyer beware?
Tim: Time was, but that’s increasingly changing, and there’s an awful lot of law now protecting buyers.
Kevin: In your book, you deal with this in some detail. Page 50, “Two tales of real estate’s willful silence.” Let’s talk about that. Not mentioning termites I guess is a classic one, because that’s front and center in your book.
Tim: Yes. There are a couple of stories in there. Sellers find termites in their house, do repairs, and then don’t disclose to their prospective buyers that there had been termite damage.
Kevin: But why would they have to do that? If they’ve found a problem and they’ve sorted it out and fixed it, why would they have to disclose that?
Tim: The law is concerned about material facts. Essentially, it says if you’re a seller or an agent, you should disclose material facts. And the lovely question is what is a material fact?
Kevin: I was going to ask you that question.
Tim: This is something that your average buyer would want to know and may dissuade them from proceeding with the purchase if they were told that.
Kevin: Hang on just a minute here. This is where you and I are probably going to start crossing swords. Surely, if a buyer is going to get a building and pest inspection done, shouldn’t that be disclosed in that building and pest inspection? How far does it have to go?
Tim: I think it has to go almost as far as possible, Kevin. I’m a big fan of what the law is in America, and there’s a little bit of this law…
Kevin: Goodness, I hope to hell we don’t go that far, Tim.
Tim: Well, the law of real estate, where full disclosure is the name of the game. You tell the truth, the whole truth, and nothing but the truth – attractively, if you can.
Kevin: Peter is on the line too. G’day, Peter.
Pete: Good morning, Kevin. I want to know, is the law saying disclose everything. If your hold home had a little bit of asbestos and you say, “Well, I’m not going to rip it out because it’ll disturb it, and I’ll resheet over it.” Now you have to declare everything like that?
Kevin: No. We’re not saying you have to do it now. What Tim is saying that that’s the way it should be.
Tim: Exactly. I’m talking about the ideal, which will make sales more secure, which will make buyers more informed, and which will make real estate agents happier.
Kevin: You see, Peter, this is where Tim and I disagree. I don’t believe that that should be the case.
Pete: I disagree with him too.
Kevin: Good on you. I’m with you, Pete. Okay, thanks for your call.
Tim, I want to move the focus just for a moment, because there is another thing, and that’s competing offers. The scenario is that a buyer may be interested in buying a property. As an agent, I’ve seen this many times.
Buyer is interested in buying a property, puts an offer in, the offer is being negotiated, and in the meantime, another offer comes in, a competing offer. Then you have to go back to the original purchaser and say, “Look, there is another offer in.”
Sure, this is just agent hype. How does a consumer protect themselves against that? What should be the discloser responsibilities, and how do you avoid gazumping?
Tim: When you make your offer, probably make your best offer on the basis of sensible thinking and reasonable information. Don’t make ridiculous offers, because you’ll be out of the game entirely. If your offer has to be subject to a prior sale or subject to finance or building and pest, then that should be made very clear right from the start.
But usually, the main question is how much? The real estate agent has a duty to get the best price for their seller, and they do that by asking prospective buyers, “Give us your best offer.” Now and again, this is true. A seller will not necessarily accept the highest offer. Sometimes, they like the sound of a lower priced offer.
Kevin: It’s not always about price. Sometimes, it’s about conditions, it’s about finding out when the seller wants to move out. It may suit them to have a longer settlement because they may have to look for another property. So it’s more than just price on competition.
We’ll have to leave it there, Tim. Thank you very much for joining us in the show. That book is called Real Estate Escapes. You can get it at all good book stores. It’s written by Tim O’Dwyer, or you can go to the website RealEstateEscapes.com.au.
Building inspections should be part of the listing process – Andrew Mackie Smith
Kevin: More on building inspections, this time with a professional building inspector. Andrew Mackie-Smith has written a book called Building Success, largely on the back of the fact that he’s seen a lot of people go wrong with their building inspections. It’s a pleasure to have him in the show.
Good morning, Andrew. Thanks for giving us your time today.
Andrew: Thanks, Kevin.
Kevin: Over the years that I’ve been doing this show – 10 or 11 years – it’s probably one of the areas I get most questions about – not so much about real estate agents or how to sell a house, but what goes wrong with building inspections, what should a buyer be looking for in a building? Hence, I guess, the reason why you’ve written this book, Building Success.
What’s behind that, Andrew? Is this a compilation of your experiences over the years?
Andrew: Exactly, Kevin. I’ve been an inspector for over 30 years, and in that time, I’ve just developed a lot of insights. Just seeing people making the same mistakes and asking the same questions prompted me to write a book to just put that information out there and make it easier for people.
Kevin: The book is called Building Success: Why Property Investors Need Building Inspections. And that’s a fairly obvious thing, but I’m still amazed at how many people either don’t get one or don’t take any notice of it and find the problems emerging years down the track.
Andrew: I’m flabbergasted as to why someone could buy a property, invest so much money, and not bother with an inspection. And then a lot of people will get an inspection and not read it or heed the advice.
Yes, I’m a big advocate for having an inspection, and I’d like to see it become a national requirement.
Kevin: There is a debate at present about building inspections – a lot of grief for some buyers down south, particularly in the Sydney and Melbourne markets where they need to get a building inspection done before they go to an auction. You’d be crazy to go and bid at an auction if you didn’t have a building inspection done.
But then on top of that, the layer of agents beating down prices, lowballing to get buyers in, they then go and get a building inspection done and then find out that the bidding goes way past them and they’ve actually wasted their investment in getting that building inspection done.
In the ACT, building inspections are part of the listing process. It’s supplied by the seller. That surely would be a good move eventually for that to be around Australia.
Andrew: Yes. I’d love to see that happen – that ACT legislation of the seller disclosure, where the seller provides the building, pest report, energy report, asbestos report, and compliance report. It costs the seller about $1000. They pay for it up front. They’re reimbursed at settlement by the eventual purchaser.
Buyers can look at that suite of reports at no cost to them. So as a first-home buyer, it’s a big saving. They can go and look at a number of properties and compare them reasonably and formulate their offers based on an informed decision knowing the condition of the property
I think it’s a much fairer system. I’d love to see it come in.
Kevin: It’s a system that I think government should be pushing, especially if they’re out for consumer protection because it does actually protect the buyer. I guess in a sense, too, it also helps the seller make sure they don’t actually come up with a contract that’s going to crash eventually. It’s a win-win all around in my view.
Andrew: I couldn’t agree more. Sellers do have that option at the moment now – they call it a pre-sale inspection – and a lot of sellers are getting building and pest reports done and providing them to potential purchasers, especially as part of an auction campaign. I’m seeing that more.
Kevin: Another good reason why a seller would want to do that is to make sure that they do understand if there are any problems that are going to emerge if they do get a contract, that gives them the chance to sort them out or adjust their price accordingly.
Andrew: Exactly. Many times, I’ve done inspections for sellers and uncovered issues they were unaware of, and it does give them the opportunity if there’s time, they can get some tradesmen in, repair some termite damage, treat it, and then they can disclose that to buyers and get a better price and a quicker sale.
Kevin: Are there already agents working in that area, in other words, getting sellers to get an inspection done? Are you noticing that?
Andrew: It’s been a growing trend. There are agents I’ve been working with for 12 years or more who have been doing that with every property.
I would suggest on an older property or an auction property. it’s a very good idea.
Kevin: Andrew, how would you feel if every seller actually had a building inspection done at the time of listing, which is probably going to do you out of business because there’s a possibility that you may end up doing two or three inspections on one property, or a number of building inspectors might?
Andrew: That’s a good question. I did an inspection only yesterday and there had been about four inspections on that property. It was a popular auction property. However, Kevin, there are many properties that don’t get inspected. If you consider all the apartments, units, townhouses, and the like across, say, Queensland, a lot of those just simply aren’t inspected. And so all those, under that ACT legislation, would all need an inspection. So there would be a greater number of inspections.
Kevin: When you do that report, who owns it? In other words, can the person who pays for the report then give it to whoever they would choose? Hypothetically, could a real estate agent pay for you to do an inspection and then give it to every buyer?
Andrew: Yes, they can. When we do a report for a seller or for an agent to provide it to a prospective purchaser, we do allow the transfer of that report, and we will put that report into the eventual purchaser’s name at no cost to them, provided they accept our terms and conditions. But generally in the industry, you’ll see a big, bold disclaimer on the report saying “This report is not for the use of third parties.”
Kevin: Why would they do that? Is it something to do with litigation or potential litigation?
Andrew: I think they’re trying to limit their liability, and also it’s a requirement of their insurer that third parties can’t rely on the report. So if you’re looking at a report prepared by a seller and it does have that disclaimer, be aware that you still may have a claim but you’re going to have to go through a few more legal hurdles and hoops to be able to prove your right to rely on that report.
My advice is to always have the report in your name if you’re purchasing a property. And if you think you can’t afford the $500, $1000, whatever it is, for the building and pest report, you certainly won’t be able to afford the $50,000 or $100,000 repair bill that you get later on. So you really should get a report.
Even though the seller is providing you with the report, I would suggest read it, use it as a heads up, talk to the inspector if you’re able to, but I would still advise you to get your own report in your name.
Kevin: Okay. So you’ve done a report. Your insurance company obviously allows you to send that out to multiple players.
Andrew: They will. You can do it, it is legal, it’s allowed to send it out, but those disclaimers muddy the waters. I would just suggest if you’re going to get a report provided by a seller, do ensure that you can have it transferred to your name.
Kevin: Thanks, Andrew. We’ll have to leave it there.
That book is called Building Success – Andrew Mackie-Smith. Look for it in all good bookstores.
Thanks for your time, Andrew.