30 Mar Have your cake and eat it too + DIY property management + Don’t throw the baby out with the bathwater
Highlights from this week:
- Get a life and live well
- NZ owners selling up quicker
- Take control of the management of your investment
- Be careful what you wish for with negative gearing
- Will Sydney really tank?
Get a life and live well – Paul Glossop
Kevin: Paul Glossop is a professional property investor. He’s a qualified property investment advisor and a buyer’s agent. Paul initially started architecture before transferring his focus to education. He started his working life as a teacher working at one of the roughest and toughest schools in the UK. A series of fortunate events brought him back to Sydney, where he has been for 10 years investing in property.
Kevin: Paul has amassed a portfolio which has been focused on capital growth, development opportunities, and cashflow. The success of his portfolio has given him the financial freedom to take a calculated risk and walk away from a successful corporate career and start something that he was truly passionate about, and that is helping his family and others change their lives through investing in property.
Kevin: In 2015, he founded Pure Property Investment, an independent property investing company that has been a back-to-back finalist in the Optus Business Awards. Paul is also a board member of our good friends at PIPA, Property Investment Professionals of Australia. Paul has written a book called A Surfer’s Guide to Property Investing. Paul joins us as a guest. Paul, the title probably tells us that you spend a bit of time on the old board.
Paul: Yeah, yeah. Well, hopefully it’s the right kind of board and not necessarily the board meetings, so to speak.
Kevin: Well, you’ve got to have a mixture of those, haven’t you, for a bit of balance?
Paul: You do. You’re absolutely right. It’s been… for me, I’m definitely a surfing tragedy, I call myself more than anything else. My friends and the audience that have hung around me in the ocean, will know that I’m still not the greatest surfer. But that’s what I do enjoy about surfing. It’s not something that you, Iv’e personally mastered, but yeah, mate, I’ve spent much time in the ocean as I possibly can, both by myself or with my kids.
Kevin: Yeah, it’s interesting. It’s a bit like golf, because you virtually compete with yourself, but you can do it with a whole bunch of friends. So, it becomes a social thing, but you’re not in competition with your mates necessarily.
Paul: You know, it that someone’s actually compared it to something like that. As a proper golf hack. I completely accept that. It’s almost the same where you can have absolutely the best days out there and think it’s the best sport going and you could have times where you get nothing but frustrated and want to toss the clubs in the nearest pond there, but It’s absolutely something you can do by yourself with anyone, and you’re forever learning, that’s for sure.
Kevin: Mate in the introduction I said that you were a teacher in one of the roughest toughest schools in the UK. Where was that?
Paul: Yeah. I was kind of thrust very early into my teaching career into a head of department, in the Phpe department, in a place called Woolwich Arsenal, for anyone who has spent a bit of time in London. It’s on the Greenwich side, probaby about 10, 15 minutes, a bit further down from Greenwich. You know, I say the roughest and toughest, I did experience and was exposed to some pretty wild things in a year career as head of department there. I think I probably grew up in a relatively average area in Sydney and saw some pretty wild things as a student. But at that time there was some stuff happening in Woolwich which was leading up to some really unfortunate events. It was well after 9/11, but before really what was boiling in a bit of a melting pot in the London area, pre Brexit, pre all the racial I guess issues that were happening. Then it was a really, really intereting place to work, live and teach. I actually worked and lived in the same area. I actually lived in an old munitions factory. The old Arsenal Gallery, which is an amazing place to live.
Paul: It was a great time and a very interesting time as well.
Kevin: I imagine that gave you some good grounding for teaching. It’s a wonder it didn’t turn you off teaching altogether, but then you went into a different style of teaching about property. But were there any good lessons you learned out of that experience?
Paul: Yeah, definately. I think to me the lessons first and foremost were that perception is most certainly not reality when it comes down to what you expect it all to be and really there was so much that I was green and naïve to, going into a career as a teacher that I thought would be a walk in the park. And probably more of managing staff than managing children, as well as adolesants, and dealing with a whole host of people of this huge school, that was almost 1800 students at the time. So, it was something that to me, understanding that there is so much more to doing a very good robust job in any vocation that I was very naïve to at the time. So, knowing you’re onions, for lack of a better term, it’s something that I was probably a little bit naïve to, knowing what meant or what constituted being a good teacher. It wasn’t just teaching kids, but there’s all the other aspects around pedagogy that you need to focus on.
Kevin: Yeah absolutely. In the book you draw a lot of comparisons naturally to surfing and property investment, because the book is called the The Surfer’s Guide to Property Investing, so we should expect that. Obviously there are some lessons cross over there between surfing and property investing. So what’s been your biggest lesson out of that?
Paul: Someone who’s been surfing since I was very early teens and someone who’s probably surfed right up and down the East Coast of Australia and over to the West Coast, and basically every part I could find across the continent of Australia and New Zealand or across Micronesia a bunch of other places, across North America, one thing that is always very obvious is that there is never anything that’s quite the same. And being in a position where you always have to understand that, wherever you go, that you have never been before from the surfing perspective. There are always lessons to be learnt and I do liken that to property as an investor, not only my business and my team are based in Sydney, but we unfortunately, or fortunately, depending on which way you look at it, haven’t bought in Sydney for probably the best part of four years during the lead-up to the boom, and now the back end of the boom, which teaches us lessons in other markets. Because we were buying in Hobart before other people were buying, and we’re not buying there anymore and haven’t bought there for some time.
Paul: But there are so many lessons about other markets that look at the whole success leaves clues, addage, which is something that we are very much accustomed to in most markets. Now it’s trying to find out what those key fundamentals are. Just because a place is cheap, doesn’t make it a good market, and just because the place is near a coastal environment doesn’t make it a highly desirable lifestyle location. So there are so many thing we have to consider that I do find akin to surfing that there’s no two breaks the same. There’s no two markets that’s the same. The dynamics just change and you need to be on top of them.
Kevin: Yeah, well explained. Hey, in the book you talk about evolutionary investing. Can you tell me what you mean by that?
Paul: Yeah, look it’s something that I kind of toyed with a little bit. It was always something that went back to the evolution of being kind. And I think most of your listeners would be familiar with the Darwinian drawing of the cro-magna man right through to the actual physical upright human. And for me it sort of comes down to trying to liken that to say, as an investor, when you really are starting off, there’s so much that you just don’t know. And there’s so much that will change over your career as a property investor and you’d want it to change. You don’t want to be stagnated to say this is what I know, this is all I’ll ever do. And that might be looking at just a straight buy and hold investment, is that, a lot of the time when you’re just starting out, there’s stuff that you don’t know is kind of good because it means that you can stay focussed on what you need to do is actually get that first investment secured.
Paul: But over time the ability to be a really seasoned and what I deem to be a professional investor, means you really need to become sophisticated and understanding the different attributes of buy and hold investment, cash flow investments, and pure capital growth investing, right through to small and slightly larger scale development and then looking further down the pathway of things such as commercial industrial, and the whole gambit of it all kind of evolves as you invest. And I think the beauty of it is you can always learn and there are always opportunities and you don’t necessarily need to start at the deep end. You can definitely, and most of the time its most advantageous to really become accustomed to the basics, but evolving as an investor, does open the eyes and opportunities up to things that you just wouldn’t be privy to if you kept those blinkers on the whole time.
Kevin: Yeah, that discussion about evolution leads me to my next question, because in the book you recommend that people should look at diversification by looking at commercial and industrial property as well as residential. Are there different skill sets required for those different types of investing in commercial, industrial and residential?
Paul: Unequivically, and I’d almost liken them to really a different investment qualities or strategies full stop. Regardless of whether they’re both investing in something that’s physical and actually real. For me the variations are huge in that the commercial stage as a general whole. Some being first and foremost becomes a completely different learning curve and anyone who’s bought in residential and haven’t even tinkered with the discussion in funding a commercial investment will start to realise very quickly that it’s not something that is very similar. On the flip side of that, though, when you need bigger deposits, higher lvr’s, are easier to access with residential stage, there are better tax avantages when you delvage a little bit deeper into the commercial stage, but obviously with the tax advantages, there’s other negatives such as longer vacancies, potentially subdued capital growth, and for me it’s sort of a need to fit a certain area of your portfolio as opposed to probably someone saying I’m a commercial property investor.
Paul: I personally think there’s space for all of those variations, including commercial and industrial developments, buy and hold, cash flows and for me, commercials is usually something that I find fits the later end of an investment portfolio to power it off, usually from a bit of a diversification and ideally if it’s bought correctly a cash flow play that allows you to hold the rest of that portfolio for the long term.
Kevin: It’s a great read, the book is called A Surfer’s Guide to Property. I’ve been talking to the editor of that book, or the author, sorry, not the editor, the author of that book.
Paul: I gave the editing a bit of a crack.
Kevin: No, the author of that book, Paul Glossop, and Paul is from PurePropertyInvestment.com. Hey Paul, thanks for your time.
Paul: Thanks, appreciate it.
NZ owners selling up quicker – Kelvin Davidson
Kevin: One of the things that a lot of real estate agents will look at is periods of ownership of a property. Why is that important? Well, it’s one of the indicators as we move more into an environment of predictive selling that agents will want to know at what point in time does a seller, or the owner of a property, look at becoming a seller. Interesting to read a report from CoreLogic in New Zealand, the CoreLogic Market Pulse that came out recently talking about that in New Zealand.
Kevin: I’m joined by Kelvin Davidson from CoreLogic in New Zealand. Kelvin, thanks very much for your time.
Kelvin: It’s a pleasure.
Kevin: I understand that ownership in New Zealand is getting less. In other words the period of ownership is actually reducing. Is that correct?
Kelvin: Yeah. So, whole periods have started to come down just a little bit in the last year or two. Although it’s really important to point out that they’re still quite a lot higher than they have been in the past. So back in 2005 it was only about four years on average between buying and selling, and moving onto the next one. Now it’s up at about eight. So, yeah, there’s been a pretty big rise and I think that’s really tied up with properties just getting less affordable. People can’t afford to move as often as they used to.
Kevin: Obviously it’s not at its highest point now, but is it far from it?
Kelvin: It’s not far off, actually. So there has been a bit of a dip recently, as I say, in the last couple of years. But, yeah, only about falling from eight years on average to about seven. So, yeah, it’s still close to that peak. But, as I say, still a lot higher than the four that it was a decade ago.
Kevin: Are you noticing is there much of a difference between first home buyers, how long they’ll hold a property and say multiple property owners, as an example?
Kelvin: Yeah. First home buyers tend to hold for a shorter period than investors. It wasn’t so much the case for much of the period we’ve looked at. But certainly in the last couple of years we’ve seen a bit of a gap open up. I think that’s really just down to restrictions on speculative behaviour, really. So, those investors or multiple property owners, they just … the environment just hasn’t been right for them to trade as much as they used to. Capital values have flattened off so there’s just not that real drive to flip, basically. Because you’re just not making the capital gains that you used to. As well as restrictions on finance.
Kevin: I guess many people are motivated to sell because of an improving market, and not wanting to wait until it comes back a little bit so that they technically, I guess, will lose money by selling at the wrong time. How much of that is speculative, and how much of it is a necessity would you say?
Kelvin: Hard to say. There’s always going to be a bit of speculative behaviour going on. I think for the most part we know from some of the surveys of investors and what we hear from talking to investors that a lot of them genuinely are in to be long-term holders. So, I think speculative behaviour will go on but I don’t think it’s the norm. It has because a lot less common lately, as I say, given that flattening of capital values. But also there’s been restrictions put in place by the government too.
Kelvin: We’ve got this bright line test here now, which is basically a capital gains tax. So, if you buy and sell within a relatively short period of time you’re often on the hook for capital gain. So there’s just lots of things we’ve all built up to, to make it just a bit much less attractive to speculate and to flip.
Kevin: Well, there’s been different markets around the world. Of course, Sydney and Melbourne have improved dramatically. We’ve watched that over the last several years. Auckland has been one of the stand outs in this region. What are you seeing between Auckland and New Zealand in terms of hold times? Is there much variation?
Kelvin: Auckland has been a hotter market than the country as a whole, and consistent with that… hold periods have been shorter in Auckland. So people have … There has been a little bit more of an incentive there to try and make a quick buck, I guess if you want to put it like that. Yeah, so those Auckland hold periods have been shorter and generally they’ve followed the same path as the country as a whole. Yeah. It just flattened off a bit lately. But still shorter.
Kevin: Excellent. Thank you very much for that insight, Kelvin. Kelvin Davidson is from CoreLogic in New Zealand. Thanks for your time.
Kelvin: No worries. Thank you.
Take control of the management of your investment – Justin Jefferies
Kevin: A decision that many property investors need to make is with their rental property, are they going to manage it themselves or are they going to put it in the hands of a professional property manager. There’s a website that’s been developed called lodge.com.au that helps private landlords manage their own property. I’m talking to Justin Jefferies who is the CEO for Lodge. He joins me. Welcome to the show.
Justin: Thanks Kevin, great to be here.
Kevin: The reason why I want to talk to you is because I was interested to read the other day, and I’ve got to admit that I didn’t know this. I knew that tenants are responsible for maintaining the yard of a property that they’re renting, but it’s the landlord’s responsibility to ensure that all the tools that they carry, use to carry out the maintenance, are actually provided and maintained. Things like lawnmowers.
Justin: That’s correct. I’ve lived in rentals where the landlord hasn’t provided the equipment, but depending on which state or territory your in it spelled out pretty clearly in the different residential tenancy acts and it is the landlord’s responsibility to provide the tools.
Kevin: If they don’t provide the tools, and then the tenants don’t maintain the property, I guess I’ve got very little recourse. Is that right?
Justin: Look, I think what a tenant could do likely if they weren’t maintaining the property … And by the way, this same thing holds true for pools, right? I mean, generally the landlord has to provide the the mowers … Or sorry, the scoops and hoses and pool cleaning material. But if the pool is not maintained or the lawn is not maintained, probably you’re going to hear from the landlord what’s going on with the weeds out front. And I think that’s where a conversation would ensue. But it’s clear that landlords do need to provide the equipment. For something like pools, tenants need to provide the chemicals, oddly.
Kevin: Yeah, that’s very strange. I guess an easy way around this with pools or with yard maintenance is to have a professional come in and do it as part of the tenancy agreement. Then there can’t be an argument either way. From the tenant or the owner, can it?
Justin: Yeah, that can get expensive. But it’s interesting, as long as long as the work’s done and it’s a reasonably done, I don’t think you have to mow the yard every Saturday morning, but you also don’t want to have weeds that are two feet tall.
Kevin: Okay. The website is lodge.com.au. That was established to help private landlords manage their own property. Justin, keen to know from you two things. One, what do you see as the biggest mistake private landlords make? And also why did you set the site up? Obviously, because there’s good demand there.
Justin: Yeah, sure. Well, first of all, the reason why we set it up is there are about 2.2 million residential property owners in Australia. Probably 500 to 700,000 of those are self managing depending on which source you check. And for many it makes sense to self manage their properties. Typically it depends again on the state, but you know most landlords will pay six and a half or 7% of rent collected to property managers. And then there are additional charges for finding a tenant, renewing a tenant in some cases. And some of those might be one or two weeks of rent collected. So it gets pretty expensive. And if you look at it, those percentages really haven’t changed much over time. So if you look at rent appreciation over time, 7% of rent 10 years ago was a lot less expensive than 7% today.
Justin: Now you can argue that a property manager’s expenses have gone up. They certainly have, but in most cases, rental growth has outpaced the increase in the cost of doing business. So many self managing investors will buy first generation property and if you’ve bought a unit, and it’s brand new construction, it’s less likely that something’s gonna go wrong in terms of maintenance, et cetera in that time that you own the property. And what we’re hearing from a lot of landlords is that, were it not for the fear, uncertainty, and doubt that I’m thinking about, I would love to go to a product like yours and we’re working with those landlords and bringing them on to our platform, but for many self-managing landlords who aren’t using any system and cobbling together their own way of operating a system like ours makes a lot of sense.
Kevin: Can I just talk to you about something in relation to that and that is that everything’s fine if you’re managing your own property until something goes wrong. The moment it goes wrong, that’s when it all comes unstuck. And yeah, it’s not so much about maintenance always. It can be about late fees or it can be some damage to the property. And that’s really when, if you haven’t got the systems in place, you’re going to be in trouble.
Justin: That’s right. And I think that the best thing that a self managing landlord could do is download the residential tenancy act for their state and get familiar with that. Allows a arrears management, there’s all the notifications there around rent collection and usually when you get in trouble around missed rent payments and so forth. If you got landlord insurance, the first thing the insurance providers going to do is say I need to see every bit of communication that’s gone on with this. One was rent paid, what was communicated back and forth. So it’s really important to have a system of record. You can do that with our application whether you use our application or not. It’s really important to keep records.
Kevin: Some of the insurance companies won’t provide insurance for private landlords. Is that available through your site?
Justin: It’s not, though we are, we are talking with one provider now and it’s my understanding that it’s generally pretty well available.
Kevin: Justin, just before I let you go. Just tell me a little bit more about the system. How does it actually help a private landlord manage things like rental arrears and record keeping?
Justin: Yeah, sure thing. So our system offers tools, resources, insights to really supercharge self-managing landlords. And we do that by offering products and services, which traditionally have only been reserved for property managers. So as an example, if you want to advertise for a vacancy with REA or domain, you need to be an agent to do that. And we are an agent, but we allow you to self manage and really advertise on those sites. Additionally though, you can screen for tenants. We have a partnership with Equifax. You can digitally sign leases, collect rent, handle maintenance requests, et cetera. And what we offer is the ability to have that system of record that’s really important. So you’ve got document management, you can have all your property materials together. I can take a picture of a tax invoice on your phone and upload it right into your account.
Kevin: So if you’d like to manage your own property, if you’re a property investor, suggest you have a look at that site. It’s called a lodge, lodge.com.au. My guest has been Justin Jefferies. Justin, thanks for your time.
Justin: Thank you, Kevin.
Be careful what you wish for with negative gearing – Louis Christopher
Kevin: Well, there certainly is a lot of talk about what might happen with negative gearing. There have been many, many reports out on the likely impact of Labour winning the next federal government, then fulfilling their promises to look at making some changes to negative gearing and capital gains tax. There’s a very interesting report that I want to talk to you about now that was released by SQM Research. I have the author of that, and the head of SQM Research Louis Christopher on the line.
Kevin: Louis thanks very much for your time.
Louis: Good day, Kevin. Good to be here.
Kevin: Yeah. Louis there’s a lot of detail in this, and the thing that surprised me a little bit was … Well, surprise probably isn’t the word. But, I was delighted to see that you’ve taken a very positive outlook to this and not necessarily just gone with one side that says, “Well, this is going to be negative.” Let’s have a look at what the likely impact is. Surprisingly you’ve indicated that we’re probably going to see a somewhat rosey outlook initially. But will that last? Can you walk us through your results.
Louis: Yeah. That’s right. So, look, we’ve done a forecast on each capital city regarding the projection for rent and the projection for dwelling prices. Overall our view is what’s likely to happen first once we see this policy passed by parliament, and let’s assume in its present form, is that we’ll see some further price falls. Those price falls will be fairly significant in Sydney and Melbourne in our opinion. For other cities the price falls will be more muted in our view.
Louis: The reason why we think Sydney and Melbourne will be more significant is because those two markets, even while we’ve had a correction they’re still over-valued. So, we think having less investors in the market, which is one of the views in this report, as a result of this change in taxation, property taxation policy. We’ll see less demand for real estate in the market.
Louis: So, prices will fall and in a way that’s what Labour wants to achieve out of this negative gearing policy. They’ve been on record saying they want to improve affordability. Well, how do you do that? By falling prices of course. So, that will happen.
Louis: Now, when it comes to rent our view is that we’re not expecting to see an immediate rental surge like what we had back in the 1980s. It will depend on each capital city. Looking at Sydney and Melbourne, once again, our view is that rents aren’t likely to rise immediately but they may well at a later point. We’re thinking perhaps years two and three into this policy change we’ll start to see a pick up in rents.
Louis: Now, the reason why … Sorry, I’ll-
Kevin: You’re all right. Keep going. Yep.
Louis: The reason why is because with the central view that we’ll see less investors in the market, that’s going to have a negative impact upon housing commencements and the housing completions. There’ll be less new stock in the market. Given our very strong population growth rates, it means existing stock we see now, our surplus in some cities will be quickly absorbed and that’s when we’ll start to see some upward pressure on rent.
Kevin: Some would argue, though Louis, that the measures that have already been taken have dampened the investor market already.
Kevin: Are we sufficiently down the journey that we wouldn’t need to make these changes that Labour are foreshadowing? Or do you think that, that’s a positive?
Louis: I think overall we’re in favour of property taxation reform, including negative gearing reform. We also would like to see a reduction in stamp duty taxes as well. And potentially consider a low broad based land tax in replace, we’ll say, the stamp duty. So overall we’re in favour of property taxation reform. But how it is done, how it is executed, and when are critical. We all know property is a very large component of our national economy. If you were to hit the market during a downturn, particularly for Sydney and Melbourne, that could create a second leg and have negative ramifications for the economy. We believe potentially it could create an economic shock. Right now, given how the economy’s a bit patchy right now, we’ve got to be careful how we actually do this.
Kevin: Do you see build-to-rent schemes? In other words, you know, bigger institutions coming in and maybe filling a bit of a gap that’s being created by mum and dad type investors leaving the market?
Louis: Yes I do. So, long-term our view is that changing negative gearing will likely see a rise in rental yields. We think that, that will occur over the long-term. So we’ve done some research and international comparisons and it’s pretty clear to us that rental yields are higher on countries where there’s no negative gearing.
Louis: So, if the market does trade on a high rental yield it will encourage many … In our view, many superannuation funds, particularly industry super funds, to invest in residential property. Provided that is regulated potentially we could see an offset down the track where that investment increases the supply of affordable rental accommodation.
Kevin: What about off the plan investors? I would think that they’re probably at risk here.
Louis: Well, so this is the thing. Labour has in their policy that they’re going to keep negative gearing on new property. Now, Kevin, both you and I know that off the plan development investing can be risky at the best of times. One of the reasons being is these properties generally come on at a premium to the rest of the market and then all the fixtures and fittings get depreciated and it can be a bit of an issue. A little bit like a new car rolling off the showroom floor.
Louis: Creating more of a gap where, okay, your first buyer has a benefit, but your second buyer doesn’t have the benefit. Means that, that second buyer’s going to demand a discount. That means that the probabilities of that first buyer losing money when they sell is higher in this instance.
Kevin: There’s, obviously, going to be … The impact on this will be sales turnover will fall, stamp duty obviously revenue, therefore will fall as well. This could create somewhat of a hole for taxation collection generally across the nation.
Louis: Yes. Our forecast is that total sales turnover would fall in the first couple of years. Our estimate is about another 12% from the 2019 levels. That would have a negative impact upon stamp duty receipts. We estimate that stamp duty revenues nationwide would fall by some $2.3 billion. It’s a fair amount. You know, Labour needs to consider that when they’re doing their estimate savings that they think they’ll get out of negative gearing reform.
Louis: So, yeah, that’s a negative ramification. Look, it also goes to show, though, that look I’d like to see where we are less reliant on stamp duty for revenues. I don’t think it’s a great thing for government, state government. It creates a bit of a boon bust in their budgets.
Kevin: Yeah. But getting rid of it’s going to be a tough one. Although this-
Louis: I agree.
Louis: No, I totally agree. Once upon a time we got rid of wholesale sales, stamp duty and tax duty and replaced it with the GST which took cooperation with all the various states.
Louis: I agree, it’s unlikely, Kevin. But it’s possible one day.
Kevin: Good on you. Hey, Louis, it’s a fantastic report. Thank you for doing this. I guess we just got to brace ourselves for the fact that it looks like it might work in the short-term but in the long-term we have to brace ourselves a little bit. Yeah, good report, Louis. Thanks very much for your time.
Louis: No, thank you.
Will Sydney really tank? – Veronica Morgan
Kevin: You’d be excused for thinking that the Sydney property market is crashing, tanking, and that other markets around Australia, particularly, say, Melbourne, might be headed the same way. Well, let’s get a bit of an insight. Veronica Morgan is from Good Deeds Property Buyers, and she has a really good handle one what’s happening in the Sydney market, working in that market all that time. Veronica, good day. Veronica, how are you?
Veronica: Hello Kevin, I’m good.
Kevin: Yeah, that’s the question. Actually, a lot of people are asking me, “What’s ahead for Sydney? Is Sydney really worthwhile looking at; is it overpriced?” What do you say to people who ask you those questions?
Veronica: The first question is how long do you want to own a property for? People are always looking for the hotspots; they’re always thinking, “What’s going to go up next?” But it’s like, well yeah, fine, there might be lots of other areas that might go up in the short term more than Sydney, but then what will they do? So the longevity and the period of time that somebody intends to own a property does come into play and has to be thought about. I think to the … I’ve long said, and I will continue to say, that inner Sydney and inner Melbourne are the two areas in the whole country that have the most, the strongest foundations for long-term sustainable capital growth. There’s always going to be peaks and troughs, there’s always going to be ups and downs, but when you project it over 10, 20, 30 years, then those are the two markets that have shown in the past and also have the fundamentals and the foundations to continue in the future, long term to be the best performers.
Kevin: Veronica, what about the people who say, “Well, am I better off holding off for 12 months?” Will the market be better off for a buyer in 12 months?
Veronica: That’s … and I can certainly understand that. There’s two things I want to say around that. The first one is, everybody’s waiting for the bottom, because they want to feel really smart that they bought at the cheapest possible price. But the thing is, when will we know that the bottom has hit? When it’s past tense. And so therefore, smarter people than me try to pick peaks and troughs in markets and can’t do it consistently, so the thing is … That’s the first bit. When will we know it’s the bottom? Who knows?
Kevin: Yeah, when it’s too late.
Veronica: Yeah, exactly right. When it’s in the rear vision mirror. But the other side of things, is if you are wanting to buy, if you’re wanting to buy for your home, then you need to buy a home when you need to buy a home. That’s got nothing to do with what the market’s doing. If you’re buying as an investor, then same deal in a way: you’ve got to buy when you’re ready. But the timing isn’t so important, it’s actually what you buy, the quality of the asset.
Veronica: And I can tell you, I’ve been seeing … I’ve been watching this market like a hawk for years, but particularly in the last, say, 18 months, I’ve still seen certain properties get very, very competitive at auction and before auction, in a suburb where nothing else is selling. Good suburbs where all the substandard property does flounder and takes a lot longer to sell, and the vendor has to accept the reality of pretty harsh price drops at different times. And then there are some properties that are actually A grade properties with multi-faceted buyer appeal: that continue to get competition. And so those properties don’t really fall in value.
Kevin: Well, the reasons you’ll buy an investment property is for more than just the price, and where prices are going to go. It’s all about the returns, the quality, where it is, how easily is it going to be able to rent … All those things. The value of the property only matters when you sell.
Veronica: Look, it does. And I’ve done a lot of case studies, and in any particular suburb … So you’ve got to pick a good location. That’s number one. Everyone knows location does 80% of the heavy lifting. But the asset selection is the fine tuning of this. That is the real difference. Now, just to give you an example: if you had a million dollar property that you bought in day one, in 10 years’ time, the difference between if it went up on an annual basis of seven percent per annum … Now, it’s not going to go up linear in a nice, neat line. We all know that. But it’s the compound annual growth of seven percent, versus five percent or versus three percent over that period of time. The gap between the under-performer and the over-performer gets bigger and bigger, and after 10 years only, a couple of percentage points, we’re talking $300,000 or more.
Veronica: Now you might save yourself $50 grand on the purchase price, but extrapolate that to if you bought a crap asset that’s costing you hundreds of thousands of dollars because they just don’t go up at the same rate as a really good asset that you might pay a little bit more for … So this idea that you make your money when you buy, right, that is all predicated on this idea that you’ve got to get it at the right price. Well, I say it’s true, but only by buying the right asset.
Kevin: Mm-hmm (affirmative). Let me ask you this question, Veronica: if I were to talk to you in 12 months’ time and I hope we’re still talking in 12 months’ time …
Veronica: I’m sure we will be.
Kevin: If I were to ask you in 12 months’ time how the Sydney market has performed, what would you say? What do you think you’ll be saying?
Veronica: I don’t expect it to do much different than what it’s doing at the current time, to be honest. When I look around … And it also … I just have to caveat whatever I say, but there’s not one Sydney market, okay? There are hundreds, probably, of markets. Every suburb is a market, and within every suburb, there are numerous markets.
Veronica: I focus on the inner areas, because I do believe that there is underlying demand for quality property in all market conditions. The outer areas, where there’s a lot of supply and there’s not a lot of scarcity in terms of the variation of that supply, then they are going to … There’s going to be a period of time … There’s going to be a long period of time where it’s going to be very, very difficult until investors basically start re-entering the market. In these inner areas however, what I am observing, and certainly on the ground, and I’m talking to agents all the time, there are a lot less investors out there. And I’m talking anecdotally. Agents wouldn’t be saying … 18, say, two years ago there might have been 60% of the buyers are investors, and now it might be as low as five.
Veronica: When you’ve taken all of that out of the market, and you’re looking at owner occupiers, who are now deciding to say, “You know what? I’m sick of all that sitting on my hands. I’m going to get on with my life.” And that’s what we are starting to see on the ground. Then these markets basically go back to equilibrium. And I just think that they’ll sit fairly stable for a while.
Kevin: Yeah. It’s great to talk to you, because as a buyer’s agent, you would be sensing that the power has shifted to the buyer, the negotiation power? In talking to agents, as I do all the time, particularly in the Sydney market, they’re saying that it’s absolutely dead. They’re finding it so difficult to get sales across the line, so therefore there’s a lot of negotiation power for the buyer right now, Veronica.
Veronica: Yeah. Yeah, there absolutely is much more power. But it still only works if you’ve got a motivated vendor.
Kevin: Yeah, well I suppose, but then anyone who’s on the market right now you’d have to think is pretty motivated, otherwise why would you be on the market?
Veronica: Most of them are, but there’s still the odd one that isn’t prepared … I think also what they fail to understand, is that they’ve got to get the pricing spot on at the outset. And if they don’t, they lose opportunity to get their top dollar. And their top dollar may not be as high as what they really wanted.
Kevin: Do you find generally that a seller who is going to auction is probably more motivated than someone who’s got it on the market at a price, ’cause generally auction properties attract fairly extensive marketing. Does that make them more motivated, do you think?
Veronica: That’s a good question. I think certainly in the inner areas, even if the property is going to be offered at private treaty, so for sale at a price, they tend to invest the same amount of money in marketing it. It doesn’t really make much difference in inner Sydney, so say, in that 10 to 15k radius, I would say that the advertising spend is very similar. I think that typically as you say, when people put their property on the market, they don’t put it on the market on a whim. They do want to sell, but there’s a lot of emotion tied up in it, a lot of their needs in terms of what they need to get, in order to better do what they want to do. And there’s a lot of that’s perception as well. There’s all of that tied in with it, so that makes it difficult. And what I observe is that if they have not been managed well by the agent, they’re the times when you might have a vendor that’s sort of run away a little bit and a bit out of control.
Kevin: Yeah. Because generally, we’re still seeing success rates at auction around the 50, even mid-50s percent. Which is not too bad in what is a pretty slow market. So it seems to me that sellers at auction are still a lot more motivated.
Veronica: Well, yeah. And this is the funny thing about clearance rates, is what is the clearance rate really reflecting? Is it reflecting buyers’ activity, or is it reflecting vendors’ willingness to meet the market?
Kevin: That’s right.
Veronica: Yeah, so it’s a very interesting measure, and it’s hard to determine exactly what that means in these sort of market conditions. But certainly, I think also agents are becoming more skilled, because when you come off a period of five years of massive growth, a doorstop could sell a house. Almost literally. And these agents have had to up-skill very quickly in terms of how to negotiate with buyers whose motivations have changed, and where there’s not competition to actually make the buyer pay more. And when you’ve got an auction with only one registered bidder, for instance. And I remember that myself, back in 2003, when the market changed. And all of a sudden, we had to learn a whole suite of new negotiating skills. So I think as they get better, then they’re going to get better results at auction.
Kevin: One of the other things … because as you know, we do a couple of shows with CoreLogic too, where we look at the auction results, and we look at clearance rates, and we talk about how they’re declining, but it doesn’t take into account sales after auction. It only looks at the sales leading up to and under the hammer. That would be another … ‘Cause agents are telling me that their success rate of going to auction is still around 85 to 90%, so therefore we’re seeing a lot more sales happen after auction. So there’s still a lot of pressure on sellers.
Veronica: Yeah, exactly. This is the interesting thing about auctions as well, and you’ll hear it from quite a few sales agents. They’ll say that the auction isn’t the be all and end all, the auction is just part of the process.
Kevin: That’s right.
Veronica: And so when you’re in an area such as … my office is in Balmain, so obviously areas such as this, there’s a lot of variety in the housing stock. So it’s quite difficult to price an individual property and know exactly where it will sell. And so what the auction process is … one of the benefits of it is to give that agent feedback from buyers, and they gauge the reaction to quoted prices and all the rest of it, so that they can actually feed that back to the vendor and get a much clearer idea on the price. And so therefore if it does pass in, and they’ve been listening to the market, and the vendors been listening to the agent, that asking price after the auction will be spot on, so much so that it doesn’t last on the market very long, ’cause the price is part of the marketing of it. And when you see a property that sells within two weeks of auction, that is very much the auction process working.
Kevin: Wonderful. Always good talking to you, Veronica Morgan. Thank you very much for your time. Veronica is from Good Deeds Buyers Agents, and it’s always a delight having you on the show. Thanks, Veronica.
Veronica: Thank you.