Is there a bubble in Australian property? – Simon Cohen

Is there a bubble in Australian property? – Simon Cohen

 

In today’s show together with Simon Cohen, from Cohen Handler Buyer’s Agents, we look at the trend leading buyers to invest outside of the city limits due mainly to the emergence of major transport systems and roads. We also look at why so many investors struggle to get past one investment property.

 

Transcript:

Kevin:  A few weeks ago, I had the pleasure of talking to Simon Cohen from Cohen Handler Buyer’s Agents out of Sydney. Simon Cohen returns once again.

Simon, I want to talk to you about a couple of other things this time – one, about whether or not you see a bubble. Is there a bubble in Australian property?

Simon:  I don’t know if “bubble” is the right word. I think definitely the market is exceptionally hot, and it’s a great time for people to buy with historically low interest rates. I do think prices have changed, not for a certain period of time, but I think they’ve changed for good. What may have been $650,000 is now $750,000, and we have certainly seen that median house price move to around $1 million, which is the highest it’s ever been.

I’m not sure there is a bubble. It’s certainly a hot market, it’s a heated market, and there are definitely more buyers than stock. Will it burst? I’m personally not that confident it will.

Kevin:  I don’t think you can say that the entire Australian market is one market. If you look at Sydney, it could be argued that maybe that’s slightly over-inflated at this point in time and there might be a correction coming. But if you look at other markets around Australia – like Brisbane – Queensland continues to perform at a steady level. I think it would be hard to argue that there is a bubble.

Simon:  Agreed. Really, it depends who you ask, right? Some people think Brisbane is always a little bit behind and will catch up. Some people think it’s had an over-supply of property and won’t. But I absolutely agree with you. Every market is different and most people only talk about Sydney and Melbourne, which are the two hottest markets out there.

Kevin:  Another thing I wanted to talk to you about – because I know you’re in touch with a lot of investors – is why most property investors only ever get to one investment property and then find it difficult to get past that.

Simon:  I think most people save and save and save for their deposit, buy that investment property, and then really don’t know what to do with it. To me, it’s a huge enigma. The beautiful thing about property is you can buy it and after three months, you can have it revalued, and if you buy well, you don’t need any more cash. You use the equity in the first property to keep growing your portfolio. We see heaps of our clientele, year on year, continue to do that.

I think most people maybe don’t have the right advice, or they don’t know how to structure it, or they think just having one is enough. But the point of having the first one, which is the hardest one, is that you can get many more down the track.

Kevin:  I’ve spoken to a lot of commentators in this show, and it seems apparent to me that the reason a lot of people stop is because they probably don’t have a strategy. They know they want to get into property investment. They get their first one and think, “Good, I’ve made it now and I’ll sit,” but they don’t have a strategy to move on.

Simon:  Exactly. The hardest one is the first one. It should be smooth sailing from there.

Kevin:  Simon, on another topic, just while I’ve got you there, when you’re looking around for your buyer clients, tell me about investment moving out west because of the emergence or the need – I guess – for major transport systems to be developed as populations grow out.

Simon:  Absolutely. One of the offices we have is out west. A year ago, we were looking at an area like Parramatta, which is the fastest-growing CBD in Sydney, incredible infrastructure. The smartest thing you can do as an investor is look for areas that even if the market slows down, they have reasons why they’ll continue to grow – as you say, transport, offices moving out there, and things like that. It’s far more affordable. The yields are a lot higher.

Living in the east, in the north, and around the city has become so expensive that areas further out west where there is incredible transport and infrastructure make absolute sense for people to live in, and so they make really great investment opportunities for clients.

Kevin:  It’s always great talking to you, mate. Thank you so much again for your time. Simon Cohen from Cohen Handler has been my guest.

Mate, we’ll catch up with you again soon.

Simon:  Always a pleasure. Thank you.

Tags:
Kevin Turner
kevin@realestatetalk.com.au
31 Comments
  • zack
    Posted at 18:38h, 22 September Reply

    It’s a buyers Market.Not a Sellers.So Demand is in pockets.Not all over Australia. It’s seriously stupid to say it’s a right time to buy.When Properties are so overpriced. Australia was in a much better place when houses were cheap and interest rates were high.

    • Kevin Turner
      Posted at 15:24h, 23 September Reply

      Did you buy a property “when houses were cheap and interest rates were high”. If not – why not?

  • zack
    Posted at 18:44h, 22 September Reply

    Australia is in Chaos.The conservatives know not what to do.The Housing Market Is So overpriced it’s ridiculous. Young people will never ever own their own house unless they move to Queensland or Tasmania.Where there’s no work.The Turnbull Government is lost.It governs purley for the wealthy.

    • Kevin Turner
      Posted at 15:21h, 23 September Reply

      What a negative outlook. I feel sorry for you Zack!

  • Michael Leister
    Posted at 16:30h, 29 September Reply

    Simple maths is all that is required.
    What did a home cost in 1980 compared to the average wage.
    What does it cost today to the average wage.
    The variance will tell you its over priced.
    All due to banking and political greed, stimulated by the valuer general office neglect, particularly in the 2000 to 2005 period.

    • Kevin Turner
      Posted at 16:57h, 30 September Reply

      If only life was that simple Michael. Sometimes you have to stop blaming others and just get on with life.

  • Greg
    Posted at 16:45h, 30 September Reply

    Zack. Quit whinging and wasting time. Every day you wait you’re losing out on money. Just buy, buy, buy. Everything will go up. So get cracking. Oh.. you need to have a job first, stop spending it on going out every night or holidays so you can save a deposit. Just do it.

    • Kevin Turner
      Posted at 16:56h, 30 September Reply

      Well said Greg

  • Paul
    Posted at 00:21h, 26 October Reply

    Kevin

    Do you have any concern about how refinancing difficulties affecting property unity developers, especially in Brisbane and Melbourne, could affect other property markets such as house prices in the inner West in Sydney.

    Please explain your reasoning. Thanks!

    • Kevin Turner
      Posted at 09:31h, 10 November Reply

      Thanks paul. We plan to answer your question in a show

      • Paul
        Posted at 17:52h, 10 November Reply

        Hello Kevin

        Thanks for your reply dated November 10th. Please don’t forget to contact me when you raise my points in your upcoming show.

        Paul

  • Kohaud
    Posted at 00:25h, 06 November Reply

    Is perth a good city to invest in property?Thinking of buying 1 property for investment. But price in the CBD is very high. Not sure where can I get an apartment for $400,000 in perth with good rental demand.

    • Margaret
      Posted at 19:42h, 15 December Reply

      I live in Perth and have watched the prices coming down, and I believe we have not yet hit the bottom, especially in apartments. They were saying on the local news there will be a glut of apartments in the CBD next year, (2017) and almost 20% of the office space in Perth city is vacant. . Also the vacancy rate is very high and rents are coming down, if you are lucky enough to get a tenant. We had one investment property which was vacant for three months, and we had to drop the rent $65 a week 15% and give a free week’s rent to get a tenant. Keep saving and wait, better prices are coming. Be patient,

  • Grace
    Posted at 19:21h, 08 November Reply

    What goes up must come down. I have lived in London for 10 years and coming back to Australia feels very much like back in UK in 2007. Prices were going up and up and up for years and people lived in a believe that property market will always go up and there is no way they can lose money on buying houses and so they did – as they do here, also as an investments properties but not only. And then over night many lost their houses as a result of negative equity as their mortgage repayment were higher than what the house was then worth so they had to sell it to get themselves out of the mess. Suddenly from the sellers market it become a buyers market and houses or flats were out there for grabs at the discount prices.
    As previous comments have mentioned Australia is/feels very overpriced and it just feels like back in London before the house market crash- a big bubble that is about to burst. This is how it feels for somebody who lived in London and experienced the big house boom and the big crash afterwards. Here it may not happen tomorrow but chances are that it will.

  • JA
    Posted at 19:04h, 14 November Reply

    Bubble or not, the lack of affordability of residential property in Australia is not good for the citizens of our country. At it’s core, real estate is a mere utility to provide shelter and a home. The market has turned this utility into a financial speculation, and in my opinion, Australia is not a better country for that dynamic. The real estate boom since 2001 has created a financially disenfranchised class of people, who did not or could not (due to their youth) enter the property market at the time when property began its vertical value rise, and they will never on the whole recover from that…they missed the boat. I have made plenty of money in property, its been very good to me. However, to have a nation where a significant section of the population must be bound in debt serfdom for the term of their lives in order to pay off 1 house……there is more to life than this, and it creates profound and lasting anger, resentment and jealousy. Very Angry people in a democracy = not good outcomes for the nation. And, this is if the bubble (if there is one) does not burst. If it does burst badly, the pain will be exponentially worse.

    JA

    • Kevin Turner
      Posted at 08:34h, 18 November Reply

      I wonder what we will be saying in 10 to 15 years time. I seem to recall hearing those sentiments 10 to 15 years ago.

  • House Guru
    Posted at 22:11h, 17 November Reply

    Kevvy and Simmo, you have got to be joking. Do you blokes really have any authority on house investments, or in this just a conversation you recorded between yourselves at a backyard BBQ with a skin full? By 2018, Sydney and Melbourne will be down in the region of 15 to 25%. By 2020, down 25 to 40%. By 2025, house prices will have halved, unemployment nationally will be over 15%, crime will be through the roof, and 10 to 15% of the nation will be homeless. Dark, DARK times ahead.

    • Kevin Turner
      Posted at 08:30h, 18 November Reply

      Hey House Guru – are you sure it is not you who has had a ‘skin full’?

  • Paul
    Posted at 19:27h, 18 November Reply

    None of us here has a crystal ball so lets keep this debate civil.

    Interest rates appear to be turning round so those among the housing property class who are more exposed will begin to start sweating especially if they are investors in the type of property that has just been sold for $161K in Melbourne just a short time ago…

    What is a requirement is for the government – state and federal to do a 180 and scrap any impediments to housing investment in this fair country.

    Anyway, if you can’t afford the main capitals, go live in Adelaide, Hobart or rural areas. Let the rest of us enjoy our gains!

  • matt
    Posted at 21:21h, 01 December Reply

    Its simple all markets have corrections just like the UK did in 2007 but its now doubled and in some parts of london tripled due to the high living standards good countries can offer. The brisbane market is steady apartments are oversupplied and hard to sell but a good house on a good block of land in a good suburb will always be in demand. Sydney and Melbourne apartments will be oversupplied soon but it will correct itself. Its simple put down 20 percent and work hard to pay down the debt and go from there. Nothing in life is easy i own 5 properties and only have 50 percent debt if the market comes off i will buy another one. To say it will half in 10 years is someone who will be left behind due to being scared when he reads the horse shit people write on comments like this.

    • Kevin Turner
      Posted at 07:41h, 02 December Reply

      Thanks Matthew. You have a good strategy and I like that you have your debt to equity ratio at 50%. Kevin

      • Yawn
        Posted at 21:02h, 03 January Reply

        Supply and demand govern prices. I know its a simple formula but sometimes overseen.
        Australia has a small population and demand fuelled by China will never stop as these investors seek a more appealing place to live.
        Sydney is the best city on the planet and we will continue to be bought out.
        My issue lies in the fact that i have to run a business in fair competition with workers rights and pay my taxes. Chinese buyers do not face these regulations yet buy our soil.
        Our infrustructure and farming is already being consumed.
        My advice is start a family trust and work for yourself.

  • Michael
    Posted at 11:00h, 02 December Reply

    That Australian house prices are massively overvalued compared with their historical trends is beyond doubt. The question is whether this is a new paradigm or merely a sustained bubble. The global suppression of interest rates by central banks has been a major contributor but Australian governments have fuelled the rampant speculation by a combination of regulatory and tax policy.

    That this combination of policy levers is sustained during a period of historically low interest rates tells you everything you need to know about how governments are beholden to large scale special interest groups.

    Unfortunately land is a scarce resource with a vital social utility function unlike say listed equities. Government policy should and (but for the feckless nature of our politicians) would recognise this (and be adjusted accordingly) if the interests of the economically disenfranchised were properly considered.

    Property investment is a perfectly legitimate pursuit in the interests of providing basic economic security and even long term modest wealth accumulation.

    When the incentives operate to encourage rampant speculation and excessive wealth accumulation at the cost of broader social cohesion, economic justice and the promotion of broad egalitarian social ideals (remember those!) then something has gone terribly wrong at a fundamental level.

    Paraphrasing Upton Sinclair: It is difficult to get a man to understand something when his income depends on him not understanding it

  • Simon
    Posted at 21:23h, 19 December Reply

    So….we’re now asking real estate agents if there’s a property bubble. “It’s a great time to buy with historically low interest rates”. The Ponzi scheme keeps on growing…..

  • DJ77
    Posted at 16:00h, 21 December Reply

    Using word property bubble is wrong.. what we have witnessed is a credit bubble. This is becasue while housing prices have blown up by 100% over last 10 years.. so have debt levels, and amount of interest only loans has increased from less than 8% in 2005 to nearly 40% in 2016. If this is not sign of speculative buying I am not sure what is.

    That said, while market is growing at 10% per year and rates are bellow 5% (lending not RBA) it is a good strategy and a lot of people (my self included) have done well out of RE. But this strategy very quickly falls apart the moment RE prices flat line, let alone fall.

    Now question is can RE continue this 5-10% or more growth? Well lets look at it this way, if prices growth continues to outpace wage growth (which is 2-3%) at some point you will come to a point where 100% of income is needed to cover mortgage payment. This is not analysis this is basic math. How far are we from that point ?.. Well in Sydney it reached that point few years ago for a single income and is now pretty much at point where dual median income of 2×80,000 = $160,000 is over 6x the median price of just over one Million.

    Anybody who thinks this is sustainable… there is a nice property with waves shaped roof right on the harbor that I can sell you cheap. RE party has been wild but music is about to stop, and banks are already lifting rates outside RBA cycle, and FED is due to lift 3-4 mode times next year.

    Personally I am happy to have cashed in this year and have 0 debt and deeds to my primary place… as well as some spare coin siting in the bank. Lets see what 2017 brings. Good luck all.

    DJ

  • Irish
    Posted at 20:05h, 06 February Reply

    Why does the situation in Sydney remind me of Ireland 2008? Property will always go up, it will never come down. interest rates are so low you need to invest now. And boom, the whole thing came crushing down. In Ireland the average debt per household was 8x the gross income before the crash, in Sydney it is 10x at the moment. Yes interest rates are low, but for how long? Didn’t the US just put up theirs? What happens if we loose our triple A rating? Yes money will become more expensive. Only people with pink sunnies will deny that Australia has been in a recession for three quarters now, And we are not likely to come out of that.

    i have seen million Euro properties in Ireland going down to 200k. And guess what? The banks wouldn’t let you out of the contract and you can’t sell. The only way out is to commit suicide. Not very nice to see your next door neighbours dangling from a tree when you want to drive your kids to school.

    But back to Australia. This looks like a massive Ponzi scheme to me and as with every Ponzi scheme it will collapse. Property prices should reflect how well an economy is doing. Flipping properties is not creating any value. The properties are not being improved but are being sold for 20% more every time the keys are exchanged. This is a non sustainable business model. And the world is full with examples where this went where the property market in Oz is going – down!

    Funny that it is seen as Un-Australian to discuss this in a pro and con way. Only very dumb people look on the chocolate side only.

    I have bought and sold properties in Australia and Europe and hold an MBA degree from a well known university – in short I know my stuff.

  • Richard Close
    Posted at 17:40h, 01 March Reply

    A great time to buy because interest rates are so low? Any professional investor knows that the financing decision is separate to the investment decision – ie invest when the valuation is attractive – if it is then anything you gain on interest rate fluctuations is an added bonus.
    I laugh when I hear people take a view on property based on interest rates -.if they are experts on rates then invest in bonds – at least they are more liquid than property.
    It’s a simple fact that in a declining interest rate market – property prices go up – but the reverse is true also – and i see rates going up from here, little chance of them going down. Property is over friends – the great Aussie Ponzi scheme is about to come to a crashing halt.

  • Chris
    Posted at 17:16h, 29 March Reply

    The valuation of property is the problem. In order to “create” equity, properties are valued in a thumb-sucking way. Without equity buyers and “investors” cannot buy, so banks cannot have world-record profits on their mortgage loans. Without increase in prices the incentive for capital gains by negative gearing drops.

    The pressure to artificially inflate prices is way too high. If this is not a bubble, ie overinflated prices to fund a sort of pozi scheme for buyers and investors, then this is the miracle investors have been waiting for. Why invest in shares if the return is dependent on real fiscal and economic data, when you can buy property which is in the interest of banks to keep the prices going up?

    Problem is that this is dependent upon the bottom feeders making enough money to buy in at the bottom of this pyramid scheme, and with salaries dependent on real life economics this is at a standstill, and has been for at least the last 4 years. Robbing Peter to pay Paul is fine as long as Peter is moving up, but Peter is not!

    Then again, you have a government who is planning to give the banks a tax break, the poor things. That should give them liquidity to finance some more mortgages based on the increasing equity being created by inflating prices…

    Ad infinitum, or as ponzi-shemes imply, untill the day the card house comes tumbling down. As a taxpayer, and thus a sponsor of my wealthier countrymen in their endeavours to retire in style, I hope that day comes sooner rather than later.

  • Roj Blake
    Posted at 15:37h, 05 April Reply

    ” it’s a great time for people to buy with historically low interest rates.”

    Really? and what happens when interest rates start to rise again as they are destined to do?. We have had historically low interest rates since the GFC but those times are slowly coming to an end. Once interest rates rise many people who have purchased these ridiculously overpriced homes may not be able to keep up with the huge repayment hikes. Be warned, this housing market is a house of cards.

  • Rebecca
    Posted at 17:58h, 26 April Reply

    I’m 30 and am paying off investment property in a large and growing regional city, I aimed for a low-priced older apartment in a central location, it’s tenanted although rent is flat and capital growth rates are slower but at least I know I can still afford the repayments if interest rates rise/it’s vacant for a time. I’m relocating to Melbourne and will definitely be renting as much I’d like to live in my own house I can’t trust the Melbourne market not to burst in the near future.

    To say the first property is the easiest and then encouraging people to buy more and more just doesn’t work anymore. If the bubble bursts all those people with their negatively-geared, over-priced properties relying on equity they no longer have, they are going to be hit hard by the fallout and it’s going to impact the whole economy. Although I hope the greedy trying to evade tax with their investments finally get whats coming to them!

  • james H
    Posted at 17:12h, 12 May Reply

    I don’t think people understand why interest rates are so low and how there will be a breaking point, it’s a bit hard to explain whilst keeping people’s interest but essentially when the central bank is forced to buy up most of the economies bonds it could break then or maybe it will last until the central bank has ownership of all the economies equities. Look at the swiss national bank… except they are huge buyers of US equities. my oh my are the swiss smart bankers. Japan’s central bank is already running the real risk of owning the whole economy in the next 10 years and i’m extremely doubtful the cracking point wont happen at some point before.
    Isn’t it a bit rich to say buy a property when we are living in a central bank run global economy fuelled on debt? but who knows maybe we will go in to negative cash rates, enforce no cash money and then helicopter money will become a legitimate economic policy and all will be well with the world. FML, I can’t see the future and money earnt buys nothing these days. Only thing that doesn’t go up in value is cars and food it seems. please just empty the central bank balance sheets to give us youngsters a chance. What ever happened to disruptive policies?

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