13 Apr “Decline slows” – Lawless + 6 Pillars of Commercial Investment + Cap City price shake-up
Highlights from this week:
- The decline is ‘declining’
- It is hard to say goodbye
- Cash up and move – but where?
- Commercial investment made easy
- More pain for city prices
Cash up and move – but where? – Cate Bakos
Kevin: Well, with an ageing population, more and more Australians are appreciating better lifestyles in locations outside the capital city areas. And of course, affordability is driving a lot of that. That is supported by some comments made by Australia’s leading professional body representing independent buyer’s agents. Real Estate Buyers Agents Association of Australia, vice president, Cate Bakos joins me. Cate, thanks very much for your time.
Cate: It’s always great to have a chat with you Kevin.
Kevin: Yeah, I’m really keen to talk about regional areas. We’ve done that quite a lot with Simon Pressley from Propertyology, who’s always been a strong advocate of people looking into the regional areas, if they’re looking for affordability.
Kevin: But it’s so interesting to see, with our ageing population, so many more senior citizens are looking at downsizing.
Cate: Yes, you’re absolutely right, and we’ve had a recent study and members have contributed with some of their findings. And we can see across the board, particularly in regional centres in our Eastern States, that there certainly is an apparent trend.
Kevin: Okay, well it’s, we’re hearing that it’s costing 8 to 10 times the average income, just to buy a medium priced house in say Melbourne and Sydney, yet it’s so much more affordable. I think too, transportation has helped and the internet has opened up a lot more opportunities for people to keep in touch with family, from regional areas as well.
Cate: You’re right. And, we’ve got cheaper travel and, certainly for those who are still in the work force, working from home arrangements and more flexibility has really aided these tree change and sea change ideals.
Kevin: I know, too, in your study, that you looked at the comparisons between the last two census. What are they called? Censuses? That’s
Cate: I’m not sure.
Kevin: Yeah, whatever. Whatever the plural is for census.
Kevin: A huge number of people have actually relocated away from the capital city locations, Cate?
Cate: That’s right. Despite falling house prices, there’s still very expensive areas for people who have the option to be in a regional area, because the value for money that you can pick up, if you do move out of the capital city, is quite noticeable.
Kevin: Yeah, Simon Pressley’s made the point too, over the years in promoting the regional areas, that it’s … it gives you a lot less stressful environment as well. And, some of those non capital city areas, are really doing quite well, economically.
Cate: They certainly are, we’ve seen job creation and obviously with tree changes and sea changes, and those who are self employed, we’re also seeing private opportunities opening up. And, no doubt, there’s health and education as a result of population increases. And, you know, Simon’s such a wonderful data person. I admire his work, and he’s done extensive work in many regions and it is important to note, he makes this point often, it’s not just a case of looking at one particular driver, you need a combination of growth drivers and they’ll need to align and demonstrate that an area has not only an increasing population, but reason for that to, for it’s growth to be sustainable.
Kevin: Cate, what has your research shown you about the reasons why people want to downsize? What are the benefits?
Cate: Yeah, there are a couple. So, for some it is about changing gears and not having life in the fast lane. Or, for young buyers it might be raising their family, in a beautiful area, where they still have amenities around them, but they’re obviously not paying city prices. But, for the downsizers, and this is the segment that we’re talking about today, it certainly, it is a move to preserve some cash if they can, so a lot of people sell out of Melbourne and Sydney and they’ve got sizeable sale prices and chunks of money to then invest into their retirement plan. And if they’re moving into a regional property, chances are, they won’t be downsizing the quality of the dwelling, they’ll just be taking a step away from the city and changing their lifestyle, and having some money in the bank.
Kevin: Yeah, I sometimes think that ‘downsizers’ is the wrong word to use, cause you get the feeling that it’s like downsizing in quality or downsizing in size, but it’s a combination of a lot of things. You know, with baby boomers now, they got so much capital in their own property, especially if it’s in the cap city area, that they’re actually quite wealthy.
Cate: You’re absolutely right. And, it does depend on where they are in their life stage. I mean, if they’re getting on and they really want something that is low maintenance or if they’re really enjoying their money and travelling a lot, they tend to use the term, lock and leave, that might mean that they’re not on acreage, they could have a townhouse by the water. So, there’s lots of different types of properties and ideals that baby boomers will go for, but we certainly can’t just refer to it as downsizing. Because, I think, some of them are really upgrading. I’ve seen some superb purchases when they’ve been able to sell out of capital cities, and change they’re lifestyles.
Kevin: Your organisation, Real Estate Buyers Agents Association of Australia, has got members all around Australia.
Cate: We do.
Kevin: Are there any states or territories that stand out more in terms of, you know, these popular regional areas?
Cate: Wow, that’s a good question. I couldn’t say states that stand out more, I mean we’ve had some fantastic insights from our Northern Queensland member, Jennifer, and she certainly talks about what she’s seeing at the coal face in Cairns, we’ve got members in the Sunshine Coast, the Gold Coast. We’ve even, we’ve got a member in Tasmania, who’s been able to tell us a little bit about what’s going on there. I think across the board, it’s an enormous amount of insight that we have and we certainly all swap notes and share what’s going on and we stay in touch on our forum. But, no, I wouldn’t necessarily say that we’ve got one state that stands out. Obviously, Queensland’s got a lot of commentary though.
Kevin: Yeah. Well your backyard, of course, is Melbourne, Victoria. That’s tipped as being one of the biggest capital cities in Australia in the years ahead, and certainly is struggling a little bit with affordability. Now what are you finding in Victoria, are some of the common areas?
Cate: Well, interestingly, we’re seeing our major regions out preform Melbourne over the last year and a half, and that’s not a shock. Melbourne has had a correction. But, we’re certainly seeing some sustained growth, and Ballarat, Bendigo and Geelong have continued to grow in value. We are seeing jobs created in all of those regions. We have other regions in Victoria as well, but they’re the three major ones. On seeing some tree change adaptation into Geelong, with working families, and the fact that Geelong is only an hour on a train, or an hour commute from Melbourne, means that it’s a realistic option for people who want to keep their jobs in the city. And, when we contrast, certainly Ballarat and Geelong, to Sydney, Newcastle or Wollongong, Ballarat and Geelong are actually very close to Melbourne, in contrast. So, there’s no shock there that these regions are now being embraced and they’re actually growing.
Kevin: I’ve been talking to Cate Bakos, who is the vice president of the Real Estate Buyers Agents Association of Australia. Cate, once again, thank you very much for your wonderful insight.
Cate: Always a pleasure, Kevin. Thank you.
Commercial investment made easy – Chris Lang
Kevin: Well, there’s a certain amount of mystery attached to what’s involved with commercial property investment. Like anything, it does come down to the fundamentals. Chris Lang from commercialpropertymadeeasy.com says that while there is a fair amount of information you need to know about commercial property, it does actually rest with just six pillars, and that’s what we’ll talk to Chris about. Chris, welcome to the show. Thanks for your time.
Kevin: Help us understand what’s involved. Where does someone start with commercial property investment?
Chris: Well, you’re right, there’s a fair amount of information out there but most of it is not in a simple format for the average investor to easily make use of and you can very quickly become overwhelmed. You need to understand that investing in commercial property is a game. Sure it’s a very serious game, but nonetheless, it’s just like any other game and it has its own set of rules. So until you understand those rules, it’s very hard to enter into the game and it’s only.. You start to enjoy real success once you begin to master those rules. Having said that, it’s certainly not rocket science and it just takes someone with a clear head who’s prepared to learn and can think on their feet. Now, obviously you want to have a good return on your equity or your capital that you invest in the property, but there’s more to it than that. And hopefully we’ll cover some of those things today.
Kevin: Well let’s that start on that, if return on capital is not the be all and all, what should we focus on?
Chris: I guess the first thing you need to do is to safeguard your initial capital. You don’t want to become sidelined by chasing what appears to be a good return on your capital, only to experience the anguish of putting at risk the return of that initial capital when the time comes to sell. You need to take good advice. You need to learn how to properly analyse properties. However, if you have any doubts at all, you just simply don’t proceed with the deal. No matter how appealing it may look.
Kevin: Let’s talk about liabilities for a moment. In the area of liabilities, what gets your attention most?
Chris: The good news is with investing in commercial property unlike residential is that your tenant pays most if not all of the building out goings. So really your focus needs to be on your borrowing costs. And my preference would be for a fixed interest loan. It may cost you an extra half percent, but it will allow you to sleep at night and besides the interest is tax deductible. And another thing worth considering would be nonrecourse finance where there is no requirement for personal guarantees as the property provides the sole security and this will limit your borrowing to between 60 to 65%, but it also reduces your overall exposure going forward.
Kevin: For many investors getting into residential property, they believe it’s as simple as buy and hold. Does that necessarily apply with commercial property as well?
Chris: When you merely sit on a property, your only source of growth is from inflation or automatic annual rental increases. However, there are other ways that you can add value to your commercial property. Sometimes it’s as simple as a cosmetic upgrade about 12 months before the market rent review to help maximise your rental growth. And with commercial properties you often have the chance to subdivide them and you can actually even do that with smaller strata titled properties. You can actually further subdivide them and a lot of people don’t realise that.
Kevin: Let’s talk about reviewing a portfolio because we do know, it’s not about set and forget and I’ll talk about that in a moment but how often should a commercial property portfolio be reviewed and what’s the process?
Chris: Well, most people view property as a longterm investment, which is correct. However, I recommend my clients undertake a formal four year mandatory review of every commercial property they own. That doesn’t require them to sell it, but it does force you to convince yourself as to why you should continue to own that property and your final decision will be based upon the remaining term of the lease plus where you are in the current property and economic cycles. And if you decide to hold the property and have been adding value along the way, you’re probably in a good position to have it revalued and then release some additional equity in order to go and purchase another property.
Kevin: This is pretty much a mindset you’re talking about here. It’s almost like having every part of your portfolio ready to sell almost.
Chris: Yeah, it is because you need to understand that your personal circumstances could change at any time and therefore your plans to add value should be hatched as soon as you settle on that property and then progressively implemented while you own it. And we talked earlier about the possibility of further subdivision, and the secret is to do that early during your ownership because while the cost of doing that is not all that great, it can sometimes take up to nine months before the new titles formally issued. And that way if the need does arise for you to sell there’s no need for a mad panic to get everything ready.
Kevin: You mentioned earlier about the tenant, I want to pick up on that because I’m keen to know in commercial transactions where the tenant sits in the transaction and where do you believe they sit in relation to the investor’s relationship with the agent? Chris?
Chris: You’re probably aware that commercial leases are generally for at least three, sometimes up to 10 years. So your relationship with tenants is vital for your success. If you think about it, it’s the tenants that are effectively your partners because they are the ones who are actually paying the interest on your mortgage and therefore be responsive to their needs and engage a managing agent who thinks just like you do. Because that way when the market rent falls due, your tenant will see you as a caring landlord, and your new rental should reflect the good relationship that you actually cultivated.
Kevin: What’s the bottom line here for a safer and more sound commercial investment journey? What are your top three tips for the beginner?
Chris: Top three tips. Well, firstly, you need to learn as much as you can as quickly as you can by reading books or enrolling in courses. Now, having said that, you need to choose wisely because there are plenty of American and a handful of Australian books, but unfortunately not many of them will prove to be all that helpful. And I say that because you’re looking for books to provide you with hands on use tomorrow training rather than something that’s been hyped up with examples that you’re unlikely to be able to easily emulate. Secondly, you need to start putting together your own team of trusted consultants. And I’m talking about people here, like a lawyer, a good lawyer, not just a family lawyer, an accountant, a mortgage broker, a building consultant and so on. And not only will they safeguard your interests and give you added confidence, but they will also shorten your learning curve along the way. And lastly, you need to get yourself a mentor to provide guidance and the one extreme, there are those who will want to have you enroll in their expensive courses and the other extreme, there are those who just want you to immediately retain them to go and purchase a property on your behalf.
Chris: However, what you want is someone who’s prepared to initially share information with you, expecting or without expecting any formal upfront commitment so that you can get to know, like, and trust them and then as the relationship builds, you can start working together and start to establish yourself as a successful commercial property investor.
Kevin: Yeah, it’s a very good point you make there Chris too, because I think it’s a two way street here. It’s one thing about understanding who you’re talking to, but by the same token, the mentor you choose really needs to get an understanding for you to decide whether they can help you. Very, very sound advice. I’ve been talking to Chris Lang. Chris’ website is called commercialpropertymadeeasy.com and when you go there, you’re gonna find an opportunity to get an ebook as well, or a book that’s called The Investor’s Guide for Success with Commercial Properties, It’s been written by my guest, Chris Lang. Chris, thank you very much for your time.
Chris: My pleasure.
It is hard to say goodbye – Shannon Davis
Kevin: There’s an excellent blog article on PropertyTv.IO, check it out. It’s written by Shannon Davis who joins me again. Shannon, of course from Image Property. Good day Shannon, how are you doing?
Shannon: Good day Kevin. Good, thanks mate.
Kevin: Yeah, I was taken to this article because I think it gives us five excellent points, If you’re thinking about selling your property, what could actually turn people off? The last thing you want to do is turn an agent off, the last thing you want to do is turn a buyer off from buying your property. Research before you do it. In other words, no one really wakes up and just says “I’d like to sell my home today.” Well, if they do they’re crazy, because there’s so much work you’ve got to put into just understanding where you are in life, Shannon.
Shannon: Yeah, definitely. It’s not an exercise to be undertaken lightly.
Kevin: Okay. Well let’s walk through some of the areas. You say you’ve gotta look at your goals, your finances, and the market?
Shannon: Yeah, definitely. Begin with the end in mind. I think one of the first people I wanna talk to is my accountant just to see how I’m gonna be off in a tax sense, and what the property owes me, and perhaps where I wanna move to, what do I need for that sort of thing. So one of the most important people to start with and begin with the end in mind is to actually talk to your accountant about what sort of proceeds you’d need, and then if that’s possible in the market.
Kevin: Yeah, we talk about researching the market too and its not just about where prices are going, it’s where when you list your property, who are you going to be in competition with? What are the features of your property that make it stand out compared to the other properties that you’re going to be competing with? This is all very important research before you call an agent in, Shannon.
Shannon: Yeah. Attend a few local open homes and remember this one thing, that it’s prices achieved not prices advertised. So, usually there’d be 3 months that lags before the prices are updated into portals if the vendors have access to that information. It’s not the prices advertised. There can be a discrepancy there of say ten to twenty percent and it gives some perspective and there’s a full sense of confidence.
Kevin: Another point too that you make in your excellent article is that small problems can actually deter buyers. My advice to anyone who’s looking at putting their property on the market is to walk around with a clipboard and look at your property through a buyer’s eyes. In other words, what are they going to notice that you’ve probably overlooked that really needs repair? It’s very easy to turn buyers off, Shannon.
Shannon: Yeah, definitely. A lot of buyers out there just want to move in turn-key sort of thing, and if you want to go 1 step further, actually invest into a building and pest inspection yourself so you’re aware of any potential deal-breakers before they arise and can make sure that you’ve attended to those things. If a prospective buyer is looking at things, they’re always going to round up the amounts they need to repair a wall, or a garden, or a retaining wall. All they’re going to do is put that into the offer and it’s going to end up in some low balling.
Kevin: Another thing too when we’re talking about buyers and turning them off is that buyers have the luxury of searching for properties. They can look at them online. You’ve got to be very aware of what that first appeal. You never ever get a second chance to make a good first impression.
Shannon: No, definitely. I talk to prospective vendors, making sure that curb appeal really stands out because you’ll have lots of drive-bys from local purchasers. They need to be incentivized to get out of the car. Really cut back and clear out, and get everything shiny from the front and make sure you’re not losing prospective buyers there.
Kevin: If you think that buyers don’t make up their mind before they get into a property whether they like it or not, you are wrong. I can tell you from real experience that people have been in the car with me and they’ve said, “No, I don’t even want to look at this.” I’ve said, “Look, please, you need to have a look on the inside, don’t judge it from the outside.” And they’ve ended up buying it because … an agent needs to get them into your home, so do not run the risk of ruining that first impression.
Kevin: Shannon, the next point I want to make is a point you make in your article is one of the hardest things for a seller to do and that is to remove themselves emotionally from the property. When they list it, it’s no longer their home, it just becomes an asset that’s going to go up for sale.
Shannon: Yeah, definitely. That’s part of the process of decluttering. You actually are in the mood to sell. You’re going to drive past that for sale sign every day. You’re going to make yourself scarce for inspections. You might as well get on with the job of starting to put things into storage and remove them so prospective buyers can see themselves in the dwelling. You always think they can see past a few things, but in my experience it’s much easier to make them imagine themselves in the surroundings.
Kevin: The 5th and final point you make in your article is a very important one too, and they’ve got to understand that we’re in competition with a lot of other properties, but by the same token it’s who represents us. The agent is actually going to make the difference. I’ve seen really bad agents wreck sales because they were such bad agents. The importance of getting an agent … The point you make, is an agent you can trust.
Shannon: Yeah, definitely. Trust is what we need in all relationships and that person, he or she, is going to be your person in the room. You need to be able to trust them in that negotiations that they have your best interests at heart. They don’t have commission breath, they’re actually trying to get the best amount of dollars for you, and that comes down to trust. Never tell an agent what your bottom dollar is. You’ve just got to always keep that information in house so that this person is working to get the best result for you in the shortest amount of time, in order to move you on to where you want to be. That’s going to take a lot of trust, perhaps multiple meetings and making sure that you feel comfortable with that person.
Kevin: Yeah, absolutely.
Kevin: Great stuff. Shannon Davis, from Image Property. It was good talking to you, and you can catch all of Shannon’s great articles. The blog articles, you’ll find them at propertytv.io. Thanks for your time, Shannon.
Shannon: No worries Kevin, any time.
More pain for city prices – Graham Cooke
Kevin: According to Finder, property prices across the nation haven’t hit rock bottom yet, with further dips predicted on the way. Joining me from Finder, Graham Cook. Good day Graham, how are you doing?
Graham: G’day Kevin, how are you doing?
Kevin: Yeah, very well thank you. Some pretty sobering news here, what’s on the… where does this come from? Because these are pretty big predictions of drops that you’re predicting.
Graham: Yeah, we are indeed, more drops, not to ignore that these are falling on the back of massive drops we’ve seen over the last year, with property prices falling, you know, 30 to 40 percent in some cities, already. So we asked economists very specifically in our monthly survey, how much they expect the prices to drop, by the end of the year, across Sydney, across units and houses in very different Australian capital cities. And the average for the Eastern Cities, for Sydney and Melbourne was about, near kind of eight percent for houses and near six and a half for units. So we’re going to see probably by this fall, quite significantly, the biggest … sorry, the biggest percentage drop expecteded in Sydney apartments, because there is talk of an oversupply there of 7.7% drop by the end of the year. And then the biggest dollar drop was with Sydney houses 6.2%, so that was 57k off the selling price.
Kevin: Yeah Graham just help me understand here, because I always get confused between medians and value, when we talk about medians thats an indication of where the market is currently active and buying, it records the number of sales, and so on, as opposed to an average.
Graham: Yeah, it’s the median price over the last three months, is the price that we test. The average would be-
Kevin: That’s not an indication of value, that’s simply an indication of where the market is moving and if people are starting to buy down in the range, it’s going to move the median down, it doesn’t move the value down.
Graham: Well that’s true, that’s interesting, it kind of depends on what way you define value. This kind of topic comes up all the time where the market is over or undervalued. Another way of looking at value is whatever price you can get for something at a particular time is the value of that thing as it partakes to the time itself. So it’s kind of almost a semantic arguement there… it does look like the dollar prices are going to continue to go down, so yeah. You could also say the market is overvalued and will continue to drop, so-
Kevin: Yeah, but if medians move down by seven percent it doesn’t mean that values have dropped by seven percent. They may have even dropped by more, but most cases they will have dropped by less, and I think many people get confused when we talk about the drop in the median, they instantly think they’ve lost about seven percent value in their property which is not always the case.
Graham: No, yeah and it will change massively, you know, suburb by suburb and it will change depending on the type of property and it’s more of a general indicator but if you look at more macro numbers, looking at the general sense of these drops. We also ask economists for their economic sentiments, on a bunch of different economic metrics, there’s five things we ask about. We ask about employment, wage growth, housing affordability, cost of moving and household debt, and we’ve tracked, we’ve asked this question every month for the last year, we’ve tracked the positivity on all those metrics over the last 12 months and the biggest change I’ve seen is with housing affordability. So, the positive outlook on this is over the last 12 months the positive sentiment for housing affordability has gone up hugely from about 5% a year ago to nearly 50% and that’s the biggest swing I’ve seen on any sentiment metric. So, if you are in the position where you’re a first home buyer, you have most of a deposit saved, if you can still get a loan, those are the people in the best position right now.
Kevin: With a federal election coming up too, I know this is a little off topic but we’ll keep it on topic, with a federal election coming up and Labors moves or discussions about wanting to change negative gearing and capital gains tax, to make houses more affordable. It seems the market is adjusting itself without those sorts of changes.
Graham: Yeah, it’s true, I mean the changes have been so dramatic already it’ll be interesting to see what changes, altering the negative gearing rules, might have, might accelerate these downward trends even further, because it might make property even less appealing for the investment market. So it’s really all to be seen there, and also interesting is going to be, we were doing some coverage of the budget earlier today, the income taxes are going to go down, for most people are going to have a thousand dollars more to spend in their bank accounts at the end of the month. Two thousand dollars for couples, so it’s going to be interesting to see the impact of that, but any federal budget that happens just before an election is going to be designed to appeal to the highest number of people possible.
Kevin: Yeah, certainly the feedback out of the budget has been mostly positive, and we also noticed in its most recent review the Reserve haven’t lowered or adjusted the rates so just on another topic, you also highlighted in another release that one in two mortgage holders struggle to pay, even with the cash rate on hold. Do you think we’re far away from a drop in rates?
Graham: I think we’re quite a far away from a drop in rates, I think we’re probably looking at an increase in rates more than anything. To illustrate the change in sentiment here in the market, there’s another thing we look at with economists which is the number of economists which indicate the next rate movement, whenever it happens, is going to be a positive. It’s an indication of the percentage of economists who think the next rate movement is going to be up, and we’ve tracked this for the last year as well.
Graham: Since April 2017 to around November, December last year this stood at 70 to 80 percent, a pretty flat line across the whole period of economists predicting a rate increase. And then thats dropped quite significantly from 80 percent to 40 percent earlier in the year and now down to 24 percent, likely cuts are what we’re going to see on the way rather than an increase. As to when that’s going to happen, the average date we’re seeing from economists is kind of towards the end of this year. August was the most popular month … but we’re kind of yet to see … it’s interesting the different commentaries we’ve got from economists.
Graham: One of them was Matthew Peter from Queensland Investment Corporation, was one of our panellists, and he was saying if the RBA can withstand market pressure for a further six months, many of the current headwinds generating recession periods, the trade wars, the growth of the euro, Brexit, god knows what’s going to happen there, and the housing market downturn may have actually passed or the RBA might not need to cut rates at all. Which would be interesting because it will give them more wriggle room in the future, one of the issues in Europe for example is their rate is so low, that no lower to move. So we’ll have to wait and see.
Kevin: Graham Cook, thank you very much. Graham is the insights manager at Finder, thanks for your time Graham.
Graham: Thank you Kevin, any time.
The decline is ‘declining’ – Tim Lawless
Kevin: The pace of declining property values has eased relative to the past four months according to CoreLogic’s Hedonic Home Index. The CoreLogic head of research, Tim Lawless, noted that the market downturn has become geographically more widespread. He joins me to talk about that. Tim, welcome to the show.
Tim: Hi, Kevin.
Kevin: What do you mean by that? What leads you to that conclusion, Tim?
Tim: I think there’s two broad themes that we’re seeing in the data at the moment. One is that we’ve probably moved through the worst of the downturn and the fact that we are seeing the rate of decline is just starting to ease off a little bit. What we’re seeing at the same time is that more regions around Australia are moving into either flat conditions or negative annual growth. You can see that in some markets that have been really sustainable and quite affordable in their housing conditions, like Brisbane and Adelaide. For example, Brisbane values are now down a little more than one percent over the past 12 months. Adelaide values have tracked a little bit lower over the quarter. We’ve seen a lot of steam and a lot of momentum coming out of that market over the past year.
Kevin: If there is a downturn, is it just in the city areas? Or is it … You’re indicating that it’s more widespread, so spreading into the regions, Tim.
Tim: It is. Absolutely. There’s a few trends we’re seeing across the regions. A really broad brush way to look at the regions around Australia is there’s about 42 individual SA4 subregions around the country and only 18 of those regions are reporting positive annual growth now. The areas that values are still rising tend to be around Tasmania and areas fringing Melbourne, areas like Geelong, Ballarat, Bendigo, Latrobe for example, are still showing some decent growth, as well as regional Tassie. Also, some of the markets around, say for example, you can see the Riverina, around New South Wales. Interestingly enough, even though it’s largely an agricultural area, we’ve seen values rise by about five and a half percent the past 12 months.
Tim: We’re also seeing less weight coming from the mining regions. Those areas were generally dragging the overall regional averages down quite severely. Most of the key mining regions now, around say the Pilbara in WA and the Bowen Basin of Queensland, have now moved back into some level of growth. We are seeing less drag from those areas, as well.
Kevin: One of the things that it highlights for me is just the cyclical nature of the market, how one day we’re talking about the mining areas being down, the next they’re in transition again. It’s really a moving feast, Tim, isn’t it?
Tim: Of course, it is. You can just see the absolute diversity in markets around the country. Part of that is related to this phase in the economical cycle and demographic trends. That’s a classic example of the mining towns where commodity prices have bounced back quite nicely. We’re starting to see a little bit more fixed capital investment in those markets.
Tim: If you look at some of the weaker conditions, generally you’d expect weakness to be caused by either, say, a rise in interest rates or some sort of weakening in economic conditions or a shock like the GFC, but we’re not really seeing any of those factors evident at the moment. The downturn or the weakness that we’re seeing in most markets I think is probably more due to credit availability. This is really a downturn that’s been caused by a drying up or a turning off the tap of finance.
Kevin: Tim, how does the national index compare to, say, five or even ten years ago?
Tim: There’s always diversity. Five years ago, of course, the market was still in a very strong growth phase, mostly being driven by Sydney and Melbourne. Remember, Sydney’s annual rate of growth peaked out at nearly 18, 19% in around about 2015, 2014, just before the first round of macro prudential policies rolled through. Melbourne wasn’t really too far behind that. We’re also seeing other markets like Brisbane, Adelaide, Hobart were generally coasting along in a what you’d probably describe as a fairly sustainable rate of capital gains. Come forward five years and we’ve seen a fairly broad based changing of the guard. Hobart is now the best performing marketplace by quite some margin. Canberra is really the only other capital city where values are holding firm and not declining. Over the past 12 months, they’re already up by three percent.
Tim: There has been a lot of change over the past five years. Ten years ago, of course, we were just coming out of the GFC and there was a lot of stimulus in the market. I’m sure we can all remember the boost of the first home buyer’s grant. You get $14,000 for an established home, with 21,000 for a new home. There was a cash handout to school halls, insulation, all that sort of stimulus. Maybe we’re starting to move towards something a little bit more similar to that. I think when we see the budget being handed down, we probably will start to see some more announcements around tax savings, probably a big spend on infrastructure, policies designed to provide some stimulus to the economy and to the household sector, which hopefully will provide a little bit of buoyancy or at least help to offset some of the headwinds of the housing market.
Kevin: Your report also indicates the first negative reading since at least May 2005 for the rental market, Tim.
Tim: Yeah. This is the really interesting component of the housing market at the moment. We saw across the combined capital cities rents over the past 12 months were down by 0.1%. In essence, that was a flat rating. Most of that downwards pressure is coming out of the Sydney market where rents were down three percent, 3.1% over the last 12 months. This is the first period where we’ve actually seen Sydney rents falling on a sustained basis. Our rental series goes back to about 2005.
Tim: I think what’s happening in markets for rental conditions is probably two things that are conspiring to slow rental growth down. One would be that we’ve seen so much investment in the market, which has introduced more rental stock as well as new construction activity. At the same time, we’ve also seen a little surge of first home buyers back into the marketplace in Sydney and Melbourne due to stamp duty concessions that went live back in July of 2017, as well as the fact that we are seeing more first home buyers holistically because of more affordable housing prices and less competition with investors.
Tim: I think that’s why we’ve seen rental rates slow down or go negative in Sydney, but most other markets are still seeing rents only rising quite subtly. Melbourne rents were only up two percent the last 12 months. Brisbane was up 1.4%. Adelaide only 1.2%. Generally speaking, quite sluggish rental conditions around the country.
Kevin: Tim, a great report. Thank you very much for your time. Tim Lawless has been my guest. Tim is the head of research at CoreLogic and reporting on the Hedonic Home Index. Thanks for your time, Tim.
Tim: Thanks, Kevin.