27 Apr Evidence of a Brisbane unit glut + Knockdowns increase + Investment lessons from the GFC
Highlights from this week:
- A rise in Brisbane off-the-plan unit sales
- Should agent ‘best practice’ include auction bidder advice?
- Low interest rates encourage re-development
- Margaret Lomas saw the opportunities in the GFC
- Settlement delays could trap buyers
- Defining a ‘housing crisis’
Brisbane units in oversupply – Angie Zigomanis
Kevin: Nearly 20% of the apartments in inner Brisbane are sitting empty, and more than 50 projects have been shelved or ditched altogether as landlords struggle to survive in the city’s over-supply crisis. More than 10,000 new apartments have been abandoned or deferred by developers in the past 12 months amid waning investor demand, rising construction costs, and lending restrictions, according to a new report by economic forecaster BIS Oxford Economics.
Angie Zigomanis – who is the senior manager, residential property, for BIS Oxford Economics – joins me.
Angie, thanks again for your time.
Angie: No problem at all.
Kevin: There’s been a bit of a rise in off-the-plan sales since 2013, allowing for a greater number of projects to reach sufficient pre-commitment levels. Has this added to the problem, or has it actually created the problem?
Angie: Well, it’s created the problem. At the start of this period, the inner Brisbane apartment market was fairly buoyant, vacancy rates were fairly tight, and those conditions set the pre-conditions for investors to pour into the market, whether it’s local investors, whether it’s investors from interstate, or investors from overseas.
One of the problems you get with the apartment market is that people often buy in in today’s markets, but because it takes two to three years for a major apartment project to work its way through to completion, often that project is being completed in tomorrow’s market, and if enough people are buying in today’s market, then you get the situation you have in Brisbane now where there’s over-supply in the future.
Kevin: Of course, some people will commit to buying into a project only to find the project doesn’t go ahead because they just don’t reach those levels.
Have you got a feeling about how many people could be impacted by this, Angie?
Angie: Not really. There are projects, obviously, that are pre-selling that perhaps are unlikely to go ahead, whether it’s projects not getting pre-sales levels or whether it’s the developer business being unable to get finance as well. That’s become an increasing issue as well, just because of the increasing risk that’s emerging for financiers in the Brisbane market. Many are pulling back, and it means that the next round of projects are less likely to go ahead.
Kevin: The latest CoreLogic Home Value Index revealed a fall in unit prices in Brisbane by 0.6%, pretty small, but still, it is a fall. That was in the past month.
Is that going to ease the situation, do you think?
Angie: This is the way markets operate, I guess. When markets get over-supplied, prices drop back to induce more demand. But having said that, I think, at current prices and at current supply levels, it won’t induce enough demand. And I suspect you’ll find the prices will continue to fall back further over the next year to two years.
Kevin: That has to be good news, I would have thought, for anyone wanting to buy an apartment. Wouldn’t you agree?
Angie: Yes, definitely. It makes prices more affordable and gets people into the market a lot more easily. The flip side of that, I guess, is also it means that if you’re a potential first-home buyer, rents are very attractive as well and may keep you in the rental market longer.
Kevin: That’s very true.
How many unoccupied dwellings are there in inner Brisbane? Have you got a number?
Angie: Our estimate is about 17% of apartments, so it’s a fairly high number. That’s an increase from about 11% back at the 2011 Census. The inner-city apartment markets tend to have a high level of vacant dwellings anyway, because you tend to get people from regional areas who have a second home and a bolt hole within inner-city areas where they can come in, see concerts, and what have you.
So, it tends to be higher anyway, but this is higher than you’d otherwise expect, and I suspect a big part of that are recently completed apartment projects that are looking for tenants.
Kevin: We talk about inner-city Brisbane, but are there any better or worse areas of over-supply, say, coming outside of the Brisbane metropolitan area?
Angie: Outside of Brisbane?
Kevin: Yes, some of the suburbs like West End and things like that.
Angie: Yes. So, within inner Brisbane, we suspect the areas with the biggest supply risk are West End and probably just northwest of the CBD, areas like Fortitude Valley, Bowen Hills, etc., where there are just huge [4:03 inaudible] of supply that are being put online, and the supply is being dominated by investor purchases as well.
Kevin: Supply and demand is what real estate is all about. Have you got a feeling for how long it’s going to take to adjust so that the market can get back to a bit more balance, particularly the apartment market?
Angie: We think that will be at least until the turn of the decade, so two to three years out from now, 2020–21, when you’ll start seeing potential rises in rents and things start to get soaked up.
At the end of the day, we’re fairly bullish on the demand side, and on the tenant demand side, there’s strong growth in overseas student numbers, which is a big source of tenant demand. The Brisbane economy is starting to show signs of turning around, and so we’ll see increases in employment in the inner-city areas, and that will attract a lot of young professionals and young professional renters into the city and draw in migration from interstate.
So, we’re actually fairly bullish on the demand side, but just the supply side is very strong. We estimate that there will be over 8000 apartments completed this financial year, compared to a long-term average of just under 2000 per annum. So, this really is a supply story, not a demand story.
Kevin: So, it’s not a matter of build it and they will come; build it and you’re in trouble. But it’s all about, as we said, supply and demand.
What are we likely to see in the next couple of years? Will these prices continue to fall?
Angie: Yes, I think there will be further declines. There will be challenges for rents, and I think as new supply continues to come online in the next year to two years, it means that a person who completes a new apartment building may be able to keep the same rents but that will really be attracting tenants from secondary apartments, so people with older apartments that can’t compete in the market will have to start discounting rents.
As rents get discounted, it means the gap between what people are getting in rental income and what they’re paying for their mortgage starts to widen, and there will be people who become increasingly stressed and will end up putting their apartments onto the market.
Kevin: Of course, affordability is a big driver for sales, and Brisbane is still a very affordable market, I would have thought.
Angie: That’s right, yes. We’re starting to see Queensland now attract population from the other states again. It’s taken a while because the economy has been fairly weak, and at the end of the day, there’s no point in moving to Brisbane if you can’t pay off a mortgage.
But now the job situation is starting to pick up again, we’ve started to see a big turnaround of people from New South Wales moving up north again, and just the most recent quarters of data coming out of the ABS suggest that’s starting to accelerate.
Kevin: Angie Zigomanis, thank you very much for your time.
Angie: No problem at all. Thanks, Kevin.
Housing affordability – Matthew Bateman
Kevin: A very hotly debated issue all the time is housing affordability. Do we actually have a housing affordability crisis here? And if so, what can we do about it? Many, many people trying to make decisions about how to get more people into property, but I guess the bottom line here is sometimes, we have to realize that not everyone wants to be in property.
So, do we actually have a crisis? I’m going to talk about this with Matthew Bateman. Matthew is from ThePropertyMentors.com.au, giving great advice to people who want to get into the property market.
Matthew, thank you for your time.
Matthew: Pleasure, mate.
Kevin: Question: do we have a housing affordability crisis, and if so, what can we do about it?
Matthew: To focus on things, we need some definitions around what a crisis is. “Crisis” is usually a word that the journalists and the media like to bandy around because it draws on really strong emotions, but as investors, we want to try to take emotion out of the equation. So, the best way to look at it, I guess, is to use some numbers and use some figures and work out where the market actually is right now.
The thing about housing affordability is nobody is going to deny that it is a difficult thing to get your foot onto that property ladder for the first time. But Kevin, I’m sure you’d agree, it’s always been difficult relative to the times.
This is a great exercise to do for anyone who wants to put some perspective around things. I remember speaking to my grandfather who was in the Air Force and he had three years overseas, and he came back with about £800 in those days. About £1 a day was what they got paid for basically putting their life on the line and serving our country.
He came back with £800 and decided “I’m back, I’m relatively young, I have a new wife, we’re starting a family. We need a house.” So, he did what a lot of people at that stage did, which was he went and found something that he could afford to buy. And at that stage, it was actually a brand new subdivision in a suburb in Sydney southern suburbs called Caringbah.
Obviously, Caringbah is now a well and truly established suburb, but when my grandfather was buying there, there was no water, no power, no sewer, and he actually built a house himself. It took him around two years to build because – Kevin, I’m sure you’re aware of this – early after the War, there was a shortage of materials.
So, while he had it all quoted up and he had enough to buy the land…. The land was basically £1 a foot of street frontage, so he bought himself a 50-foot street-front block, worked out to be just under a 1000-square meter block. Back then, the land was not the most expensive part given there was no water or sewage; it was the material cost.
He actually built the house himself on the weekends. After working a full 9-5 normal workweek, he’d go on the weekends, get some help from some mates, and they’d started knocking his house together. The house actually stalled for a long period of time because he saw his plaster costs triple, again, just because of the shortage of materials post-war.
Long story short, that property, he’s actually now in the process of subdividing and selling off half of the backyard, of which he’ll probably end up getting close to $1 million on around about 500 square meters out in Caringbah now.
I guess the moral of that story is housing has always been difficult to get into. Do we have a crisis now? I guess just putting that context aside, we have to come back to how do we measure housing affordability? I guess probably the most simplistic measure – and probably the one that gets the most media attention – is the Demographia International Housing Affordability Survey.
It’s a worldwide study. They look at a whole bunch of different cities around the world to say what’s affordable and what’s not affordable? Their metric or their measurement for affordability really comes down to the median or average wage for the country and the median dwelling price. What they do is they basically just say if a house is worth X and the average wage is worth Y, we divide X by Y and it gives us a number.
Now, using their metrics – it’s called a median multiplier or median multiple – they rate affordable housing as being a multiple of three and under, and severely unaffordable being a metric of 5.1 and over.
If you go to the ABS data – which I did recently, just so that the numbers are accurate – the full-time adult average weekly wage is about $1567 a week, or around about just under $82,000 a year. So that’s the average wage, if you like, here in Australia.
The median dwelling price… I’m careful here to use the word “dwelling” as opposed to “house,” because obviously dwellings encapsulate all forms of housing from apartments, units, villas, townhouses, houses, etc. The average dwelling price in Australia is about $687,000. This is ABS data.
That gives us a dwelling-to-income ratio of about 8.4, which puts housing affordability in Australia according to the Demographia study at severely unaffordable. In fact, all of the major capital cities in Australia are in “severely unaffordable” territory.
However, to put the flipside on that, to use their metric of being affordable as three and under for the average wage, that would mean that the average dwelling price in Australia, to be affordable, should be $245,000 or less.
Kevin: So, if I understand you correctly here, Matthew, what you’re suggesting is that that price you talked about for the median dwelling price, about $600,000, dropping back to a third? That’s just not going to happen.
Matthew: Yes, $245,000. It’s not going to happen, and I would ask, do we really even want that to happen?
Matthew: If we look at where Australia holds their wealth, most Australians hold the majority of their wealth in real property. Therefore, if we saw our economy and the wealth of Australians basically reduced by two-thirds, that would have catastrophic outcomes on GDP growth, and we’d probably go into a full-blown depression. So, we have to be careful what we’re looking for or asking for when it comes to housing affordability.
I’d actually like to redefine this model as not being necessarily an issue about affordability, but probably being an issue more around accessibility. If I can just use another quick example to highlight what I mean by that, if we went out and took a typical property here… Let’s say we were in Sydney or Melbourne or Brisbane and we went and bought, let’s say, a two-bedroom apartment and we paid $500,000 for that, in those markets, we should be able to achieve somewhere around a 4% rental yield, or the actual rent to live in that property would be about $20,000 a year.
Now, to purchase that same property for $500,000 on an 80% loan-to-value ratio, I’d need to come up with a $100,000 deposit, but then my mortgage would be on $400,000. Now, if I could get interest rates at 5% – which is fairly achievable today for most buyers or most investors in the market – that’s equivalent of $20,000 a year in mortgage.
So, realistically, to own the home, as long as you have that accessibility factor, meaning you have the deposit, the actual mortgage cost is probably very similar to what a lot of people are paying in rent.
Kevin: That’s fascinating, Matthew. So, what can we do about it?
Matthew: Kevin, there are a number of different ways that people can go about getting their foot on the property ladder. Obviously, that deposit and that accessibility is the bigger issue, so again, a lot of people are choosing to go to the bank of mom and dad for deposits, people are teaming up and joining forces.
One of the things we’re working on behind the scenes with state government and local housing providers as well as community housing providers is we’re looking at some options to actually be able to get more affordable rents into the market, because not everyone wants to buy their own home. There are a lot of people who will choose to or by necessity, will be forced to rent, so we’re looking at solutions in that space.
And one of the things that I think is going to come out in the next year or two or three is probably going to be deposit bonds, and that is governments supporting young people who want to get into the market by basically stumping up that 20% or 25% initial deposit.
Kevin: Fascinating stuff, Matt. I thank you for your time. We can talk a lot more about this.
Matthew: I could talk all day on this.
Kevin: I’m listening to you, and I’m going back on my history as well, my grandparents, my parents and even my own experience. I’m at that stage now where I’m going to become one of those people who talk about the experience.
Mate, it’s been great talking to you. Thank you so much for your time, Matt. Matthew is from ThePropertyMentors.com.au. Thanks, mate.
Matthew: Pleasure, mate.
Failing to get finance before auction – Dene Tucker and Matthew Andrews
Kevin: There’s been an alarming suggestion in a recent YouGov Galaxy poll that 18% of people in Australia failed to get pre-approval finance before trying to buy at auction. You’ve got to be crazy!
Joining me to talk about this, Dene Tucker who is the broker/owner RE/MAX Auction Services for Australia and also Matthew Andrews who is the general manager for Pivotal Financial.
Firstly, Dene, thank you for your time.
Dene: Not a problem at all. Good morning, Kevin.
Kevin: Matthew, welcome to the show.
Dene, I might start with you. Obviously, doing auctions all around Australia, do you find this happens more in any one state than the other?
Dene: Having had the opportunity to consider this since this story came out, I guess I’ve determined that I’m obviously quite privileged, because I’m clearly working with a lot of experienced agents, and frankly, over 5000 career auctions now, I’ve never actually come across this.
Kevin: Is it something that you would come across, do you think? As far as you’re concerned, when it’s knocked down, it’s knocked down.
Dene: Look, my engagement with my agent clients, the salespeople I’m working with week in, week out, I’m pretty confident I’d hear if there was a situation where someone’s bid under a hammer and then not been in a position to go through the deal because they didn’t have the financing.
Kevin: I would imagine it’s just best practice for an agent, though, to make sure if you have someone all the way to come to an auction to bid that at least they’re going to get their finance set. It’d be one of the questions they’d ask them, I would have thought.
Dene: Most definitely. Certainly, in all the training work that we do and have done over years and years, a big part of it is about making sure that people are prepared for auction day when we’re talking about buyers. Certainly, that remains a focus for us as part of the process.
Kevin: Matthew, to you for a moment, I imagine there would be occasions where someone – and I’ve actually heard of this – where someone is going there to buy a loaf of bread or something, they turn up at an auction and think “Wow, I love this place. I think I’ll buy it.” A pretty risky thing to do, but it could happen quite easily, couldn’t it?
Matthew: Yes. And good morning, Kevin. It’s a really interesting question. I think it comes down to the education of the client in the process of applying and being successful for finance and purchasing a home.
Unfortunately, at the moment, a client can turn up as long as they’re a registered bidder at an auction and proceed with a purchase without any finance in place. What Pivotal Financial and ReMax are working together to do is work with the client at the earliest opportunity to prepare them for auction or any of their finance needs.
Normally, this starts off with a pre-approval and the lender’s acceptance of the property they’re liking to look at, so we assess their affordability and the attraction to the area of the properties that they’re looking at.
Kevin: Matthew, when someone does come to you and wants to bid at an auction and you have to set their finance up, one of the things you don’t know about auction is the eventual sale price.
Do you let them work within a barrier of a price range and then you’re comfortable for them to bid within that range?
Matthew: Correct. The main driver is a lot of regulation and compliance within the finance industry at the moment. First of all, we look at the serviceability of the applicant, so what’s the level of debt that they can take on dependent on the end LVR of the property purchase? That’s a big one or a key one in identifying how much they can actually borrow. Then that sets them on the path of the properties that they can look at.
Kevin: In the event that someone did turn up to an auction and bid, then they’re the successful bidder, it gets knocked down to them and they turn up to sign the contract and say “I need to make this subject to finance,” the first thing you have to turn around and say is, “Look, I’m sorry you can’t do that.” What penalties could apply to them in theory if they couldn’t complete?
Matthew: This is probably a question that Dene could help with as well, but potentially, they may be up for a deposit or be liable for the full purchase property or a dollar value of that loan depending on the circumstance of the vendor that’s selling the property.
Kevin: Dene, did you want to add to that?
Dene: Yes, Matthew is absolutely right. The deposit immediately – of course, once that’s been paid and cleared – is to the benefit of the seller. The process from there then becomes a matter of resource, whether or not the seller has appeared to have put the resources into pursuing their contract to settlement or whether it’s economically more viable just to re-enter the property into the marketplace. But either way, if the deposit is paid, then that’s forfeited by the purchaser.
Kevin: Yes, because it’s quite clear, isn’t it – Dene, once again, asking you this question – when you read out the terms and conditions or make them available for people to look at, part of it is that you’re buying this on a cash unconditional basis. It’s quite specific, isn’t it?
Dene: Very specific. From a best-practice perspective, there are probably a couple of things in that chain of process that need to occur. Firstly, when the agent or whoever is assisting them registers the purchaser, that purchaser needs to clearly be told that they’re bidding on an unconditional basis, that’s part of the process.
The next part from a best-practice perspective is to have the purchaser not only sign the registration form and provide the ID as required in statute, but also sign off on the particulars and conditions of sale by auction, which clearly state that there are no conditions attached. So, clauses 3 and 4 of the agreement, which are the more common ones, your finance clauses and your inspection clauses, are removed.
The next part of the process is that it’s re-emphasized by the auctioneer. I do that at every auction, quite clearly emphasizing those clauses are out and that they’re bidding on the basis of it being an unconditional contract.
There’s always going to be an onus on our industry as much as there is on the finance side of this for our people to be able to communicate these things succinctly and clearly and not allow these situations to occur in the process as part of the process.
Kevin: Gents, we’ll leave it there. Thank you very much. Dene Tucker from RE/MAX Auction Services and also Matthew Andrews from Pivotal Financial. Gentlemen, thank you very much for your time, and I appreciate you giving us your wisdom today.
Dene: Thank you, Kevin.
Matthew: Thank you, Kevin.
Lessons from the GFC – Margaret Lomas
Kevin: Are there any investment strategies that do well in “boom and bust”? What a great question. I’m going to ask that question of Margaret Lomas from Destiny Financial Solutions.
Good day, Margaret. How are you doing?
Margaret: I’m very well.
Kevin: Good. Can you answer that? Is there such a thing as an investment strategy that does well in both boom and bust?
Margaret: I can answer that. And I’ll go back to when the GFC first hit, because at that point in time, not long before the GFC, I’d actually invested in quite a lot of properties that you would have considered to be right at the lower end of their markets. So, I’d gone to some capital cities but gone right into those areas that people generally turn their nose up at, and I’d also invested in a couple of larger regional towns, as well.
And interestingly enough, what I found is that once the GFC hit and a lot of people with more expensive property were finding that both their values were down and their rents were also down relatively speaking, I found contrarily that my properties actually all grew in value really well during the GFC.
I think the reason behind that is that when you think about it, people still throughout the GFC wanted to buy property to live in, but they had to amend what their aspirations were. So, more people fell down into those lower price ranges, more people needed to rent in those lower price ranges, and we actually saw a subsequent increase in demand in those lower price range properties and those lower rent range properties.
So, because I owned quite a lot of properties in those areas, I had a great time during the GFC, and my properties rose really well in value.
Kevin: Okay, so turn it around. What happens when it’s the opposite?
Margaret: Well, the thing about that is providing you make sure that the areas that you buy in are also areas that have future potential – because you know there’s some infrastructure coming up, you know that their population is growing, and you know that the demographic is made up mostly of families, and those families need to be met through the future provision of schools and childcare centers and shopping centers – then those areas also continue to grow post-economic stress just the same as any other property will.
So, you get similar growth to any other property after or when there’s no economic stress, but you seem to get better growth while there is some kind of economic stress.
Kevin: What’s your most favored strategy? Or have you just told us what it is?
Margaret: That’s not always my strategy. Certainly, if I think the economy is going along nicely and we don’t have any kind of major economic stress, then I will change that strategy. And from time to time, I will buy from areas where they might not be in that bottom third of the market – they might be closer to the median value – but they exist in areas that border onto areas that already had a lot of attention and grown really well.
And you can see that happening all over the place. If you look, for example, in Queensland and we go to the northern suburbs, let’s say we think about places like North Lakes and Petrie where we have all of that big university development happening, we’ve seen properties in those two areas and Kallangur going up really well in the last few years, and they’ve gained some great value and their rents have also gone up.
If we have a look at those areas and then have a look at their bordering suburbs, we find places like Dekabin and areas like those where there’s a significantly lower buy-in price, but those areas are also subject to the same kind of infrastructure. So, the reason their prices are lower is because at this point in time, they’re still not favored. People still think that they’re not the best area to live in.
But what you always see happen over time is that once those other areas that are doing so well start to just peak up a little too high and come outside of the price range of the average buyer and the average investor, then we see them start to look a little bit further afield and we get pressure on those outlying areas.
And I really like that as a strategy. That’s what worked for me very time I’ve bought.
Kevin: You’ve mentioned there some areas in Queensland. Does the same apply in some of the other capital cities like, say, the outskirts of Melbourne as an example? As you head out towards Gippsland?
Margaret: Absolutely. And let’s have a look at what happened in places like Altona. Now, Altona wasn’t doing that well and it was still fairly cheap to buy in, but when we started to see the areas of Williamstown and those other beachside suburbs that were a bit closer to Altona rise in value, it wasn’t long after they went up that the focus then centered on Altona.
And Sunshine, which is formally an area that people thought wasn’t that great and area, we saw that grow, and then subsequently places like Tarneit are now starting to get attention because they border Sunshine.
So yes, absolutely. We do see this happening everywhere. It’s not something that’s unique to Queensland.
Kevin: Some of these regional areas that you’re talking about, it’s interesting, because we seem to be talking a lot more about regional areas, which I guess in a large way is driven by affordability, how unaffordable some of those inner-city areas have become, Margaret.
Margaret: And we see this happen every 10 to12 years. I still very clearly recall the last time that the regions came under focus by both investors and experts, and we did see people make some really good money out of some of those big regional areas like Bathurst and Orange, like Townsville, Bendigo, and Ballarat. Those kinds of regional areas actually made some good money for people.
But I do warn people to understand that when they do buy in those regional areas, first of all, it’s not every regional area. It’s the major ones that have some kind of industry of their own or some kind of microeconomy of their own that can behave independently to their closest capital city, but also understand that timing is really critical – and even more critical when you’re investing in the regions.
If you do get in at the right time, absolutely, you can make a lot of really good money for the short-term, and it usually has a run of about two to three years. But regional areas do have a greater tendency to then sit a little flat for longer than what a capital city will.
That’s fine because you’re usually getting pretty good rent return as well, just understand if everybody is already talking up a regional town and you can look at the figures and see that it’s already had significant growth in the last year or so, you’re probably a little late to get in.
Kevin: Yes. Just before I let you go, Margaret, could I just ask you for your top three tips for creating a solid investment or having a solid investment?
Margaret: The first thing is don’t read the magazines, because despite the fact that experts are very free with their knowledge these days and they’re happy to recommend different areas, I’m definitely of the impression and the feeling that anyone who is recommending an area, it’s probably too late to invest there.
I like to think I’m a little bit different; I try to get in early, especially with the webinars that we give for our clients where I try to get those areas that no one else is talking about. But you’ll see when you read the magazines that everyone is always talking about the same areas, which means everybody is buying there. And the moment you’re buying in a heated market where there are a lot of people moving in that market, then you’re too late.
And that brings me to the second tip, which is never buy in a heated market. If you find that you start looking in a market that you think sounds okay or you’ve heard that it’s okay but you find that as soon as you find a property, someone else has bought it, then that’s a clear sign that you’re too late to be there.
You don’t want to be competing against anybody else for the buys that you’re making. The minute you’re forced into a situation where you’re competing, you will also pay too much for that property, and you’ll get to the point where you start getting so tired of missing out that you start to adjust what you’re prepared to pay upwards, and pretty soon, you’re even getting out of your own price range.
And I guess the third tip is always think about that family demographic. To me, that’s one of the most critical things that drives growth. I know I’ve said this on your show many times, but it really does bear repeating over and over again. When you think about it, when a family moves to an area, they generally do so because there’s something about that area that’s attracted them, and it will be because everything that you need for your kids is there in that area and there’s an expectation that it will continue to grow and develop.
And when you move there, you put your kids in the local school, and most people are unwilling to move their kids around once they’re in school. You know what it’s like. You have your kids in school; you don’t like to interrupt that learning process by making them school hop.
So the average family is going to stay in an area for upwards of 12 years, and more likely 16 to 18 depending on how many children they have, which then means that as that area becomes more popular, the availability of property becomes less and less because nobody is selling.
Kevin: Well done. Three fabulous tips there to round out our chat with Margaret Lomas from Destiny Financial Solutions. Margaret, once again, thank you so much for your time.
Margaret: Thanks for having me.
Knockdowns increase – Greville Pabst
Kevin: Apparently, according to Greville Pabst, who is the Executive Chairman of the WBP Group, there has been an increase in the number of properties that are being knocked over for reconstruction. Interesting. This could be an interesting development.
Greville, welcome to the show. Thanks for your time.
Greville: Thanks, Kevin.
Kevin: Greville, how big as the increase been?
Greville: Around Australia, the increase in knockdowns is up to 37%, so it is quite significant. I think it’s driven by quite a number of factors. Firstly, I think it’s more affordable to do that now because of the low interest rates that we have. But the other point, too, is because house prices around Australia have become quite expensive, it’s now prohibitive to go and sell and buy because of the high transfer costs and stamp duty.
Kevin: Greville, define a knockdown for me. And who’s doing it? Are these current owners or are these people who are buying them to knock them over to redevelop them?
Greville: Look, it’s a combination. It’s a combination of existing owners who have older properties in the inner-city areas of the capital cities where the land is highly valuable. So, they’re doing that and building something new, or they’re doing a dual occupancy.
Or the other thing is developers are moving in because what the state governments are trying to do is increase the level of density within the inner-city areas, the in-fill. So, the zoning changes have now allowed two houses side by side.
I was dealing with a developer the other day and he was getting 30 apartments on two suburban house blocks. The councils and state governments are encouraging this density, and so a lot of people are actually, in those middle ring suburbs, cashing in to developers.
Kevin: It makes a lot of sense, doesn’t it? Particularly in some of the capital city areas, empty-nesters, they probably have a really nice home on a big block of land. It makes a lot of sense to pull it down and rebuild something that’s going to fit their existing lifestyle because their situation has changed, and then they get the bonus of having some additional property that they can sell off or even hold and lease.
Greville: And I’m seeing that even in Sydney, in areas like Coogee where land is quite expensive. They’re typically only 400-square-meter blocks, but people put in granny flats in the back and things like that.
This whole density is driving it, and the fact that land is so expensive, if you can carve it up and create two or three or four lots, there’s actually good money in doing that.
Kevin: Someone contemplating doing this is listening to this now and saying “That’s not a bad idea. I’ve been thinking about doing it,” what should they be aware of before they start, Greville? What are you seeing?
Greville: There are a number of factors. One is the size of the land. I think the frontage is really important. If you have, say, a 55-meter frontage, particularly in Melbourne, it can allow you to do a side-by-side development. Corner sites are particularly valuable because you can get two street frontages, or if you have a dual street frontage, so if you have another street at the back, you can go a back-to-back development. That’s really important.
Kevin: Greville, is heritage a consideration for people wanting to do this?
Greville: Heritage is very important. It’s something that people need to investigate beforehand, because, of course, there are some properties that are covered by heritage overlays and height controls and so forth, so they simply can’t demolish it completely; they may have to retain the façade.
The same with vegetation. There are now, of course, lots of planning controls around vegetation. They couldn’t simply cut down a tree these days. You need to get that permission to do so.
Kevin: You could go to the council to find that out or even go to a town planner, I would imagine. They would give you all that information.
Greville: Yes, that’s correct. You really need to investigate the local council regulations and engage a town planner.
Kevin: You’ve no doubt been involved in a number of these over the years. What advice have you got for someone to help them add more value to what they’re going to be doing?
Greville: It’s the selection of the property. The selection is critical because that really can dictate what you’re allowed to do. The orientation of the site is particularly important as well. Does it have a north-facing backyard? Is it a corner block? What is the size? What is the frontage? All of these factors affect that.
And zoning is particularly important because, of course, that will dictate the height that you can go and the density and the number of unit that you can put onto the site.
Kevin: I would imagine someone who has the property themselves, they might live in it right now, they should probably also research the marketplace to see, if they’re going to redevelop it, what type of property is probably going to be in tune with the current market.
Greville: Yes, that’s correct. When you’re building and looking to sell something, you really need to build for that demographic. So, you need to look at who is in that area? Are they young professionals? Are they older people? That’s going to dictate what you’re going to be able to get you a good price when you do sell it.
Kevin: Greville, have you been to any auctions lately? Because we saw you on The Block, performing well there. You’ve been still buying plenty?
Greville: The market has gotten easier for us, funnily enough. When the clearance rates are sort of in the range that they are now – between 65% and 75% – it makes it easier for us to buy. It was quite difficult there for a while when clearance rates are nudging 80%. As professional buyers, we were getting outbid. So yes, it’s a much better market now for buyers.
Kevin: Isn’t that interesting? We do a segment every week with Andrew Wilson. We talk about clearance rates, and we bemoan the fact that it’s a 60% clearance rate. We say “Oh wow, what’s happening to the market?” But from your perspective, that’s probably a good thing.
Even 60% or 70% is still a good clearance rate. I think we got spoiled with 90% and 90%.
Greville: 65% to 70% is a very good market. It ensures that there’s balance and you’re still going to get capital growth of 5% to 8%. You’re not going to have four or five bidders at auction, which is going to drive your prices to absolute silly figures. You’re going to have maybe two bidders at auction.
Kevin: You can handle that, yes.
Greville: You can handle that. And certainly, we don’t want competition when we go to auction to buy, so it’s a good market for us and our clients.
Kevin: Spoken like a good buyer’s agent. Good on you. Greville Pabst there, Executive Chairman of WBP Group. You can certainly have him on your side. Good on you, Greville. Talk soon, mate.
Greville: Thanks, Kevin. Cheers, mate. Bye.