Is this buyer brave or crazy? + What happened to the predicted ‘price crash’?

Is this buyer brave or crazy? + What happened to the predicted ‘price crash’?

Property investors are often unaware that there are two different methods available to calculate the depreciation deductions for the plant and equipment items contained within their investment properties. Brad Beer tells us what they are.

Margaret Lomas says that a man who some are saying is crazy because he bought a home for he and his fiancé without her having seen it may not be mad after all provided he exercised some caution.  Margaret explains.

Michael Yardney shares the 11 things successful property investors don’t do and Dr Dallas Rogers from the University of Western Sydney explains why he is so concerned about proposed high-speed train lines and what it will do for affordability.

Despite what we heard last week about the Western Australian market, Hayden Groves, President of the Real Estate Institute in WA says there are signs of improvement in the west.

AMP Capital Chief Economist Dr Shane Oliver says Australian house prices have been overvalued for more than a decade and we continue to hear predictions of a price crash – so why hasn’t it happened.  We ask Dr Oliver that question today.

 

Transcripts:

 

Margaret Lomas

Kevin:  There was a recent news story about a man who bought a home for he and his fiancé without her having ever seen it – a very brave man, I would reckon. And while some may think that he was absolutely crazy, or as I said very brave, maybe a bit of both, there are others who see no problems whatsoever purchasing a home that they have never seen themselves, let alone inspected it.

But surely, there have to be some things to consider before you jump in at the deep end with purchasing a property. There are two examples here. One is for yourself, you and your partner or your wife, or as an investment. I’m going to ask the opinion of Margaret Lomas from Destiny Financial Solutions and star of Property Success on Sky TV.

G’day, Margaret.

Margaret:  Hello, how are you?

Kevin:  Wonderful to be talking to you again. I guess there are two things here, aren’t there? Whether you’d buy one as your principal place of residence sight unseen, or whether you’d buy one as an investment. Can you differentiate between the two of them?

Margaret:  Let’s start with your principal place of residence, and I’m probably agreeing that you’d be a little crazy to buy a principal place of residence without seeing it first, or without at least one of you seeing it first. I think both need to see it, because we all have different ideas of what’s good and bad.

I recall when we were renovating the home that I live in at the moment, my husband had a whole lot of suggestions that I just thought were crazy, that we absolutely were never going to use. I also had some suggestions that he didn’t like, so we had to collaborate on those.

If you’re buying a house of your own, you’re talking about lifestyle over investment, and people have to remember that. There are things we will compromise on in terms of the property’s capacity to grow and return a good capital gain to get the lifestyle choices that we want or to get the everyday things that we want in the property. We’ll often pay more for a property for particular features that we like that don’t necessarily add value to that property.

For that reason, if you’re buying an owner-occupied property, I think that you should either be looking at it yourself, or these are the circumstances under which I like a buyer’s advocate. Many people know I don’t like buyer’s advocates very much, but for an owner-occupied property, a buyer’s advocate can often hear your brief very well and satisfy that brief.

Kevin:  One of the things that I found, too, is that when two people are looking at a property – a husband and wife – they’re probably going to be looking at it differently. A wife will look at it somewhat emotionally, whereas a male may look at it almost a bit removed, so it doesn’t hurt to have that balance.

Margaret:  Absolutely, and we all do have different needs. Whether you’re a sexist or not, men and women are different. Men and women think differently, they’re programmed differently, and they move about in their personal space differently. There are things that a guy probably wouldn’t even think about, such as the size of the cupboard, that’s very important to a woman, and I think that’s why both of them need to collaborate.

A good buyer’s advocate can have a meeting – whether it be face to face or via the Internet – with a couple or a person and take the brief about what they’re after. A good buyer’s advocate should understand the features that make a home right for a woman and the features that make a home right for a man and should be able to satisfy that brief pretty well.

Now, when it comes to investing, everything changes.

Kevin:  Let’s talk about those changes. Is it because you need to treat it like a business as opposed to a personal decision?

Margaret:  Let’s have a look at all the reasons why buying sight unseen can work, and why it is important that you’re able to do it. First of all, the property that is most right for you from an investment point of view, which is also situated in an up-and-coming hotspot, which will also rent well and satisfies both your short- and long-term investing needs, probably isn’t going to be anywhere near where you live.

You might live in Sydney, and the right buying opportunity for you at the moment could exist somewhere in Brisbane, and the ability to jump up and down on a plane to go and have a look at what will be more than one property in your search for property can become a really expensive exercise, and the costs of that aren’t going to be tax-deductible for you, because you can only claim an expense as a tax deduction on a property that you own that is creating an income for you.

So you could be spending an awful lot of money that will eat into the overall returns of that property, because you’ll essentially have to add them to the cost of buying, and you might not see enough gain – at least in the early years – to cover off those costs. That’s the first issue: if you need to go and see that property, it could become a costly exercise.

Let’s have a look at more important issues. Firstly, your ability to remain unemotional – and as you say, treat it like a business – is really impacted by what you see when you get there. This can either work for you or against you. For example, you might see a property, fall completely in love with it because it looks exactly like something you would live in, but that particular property may not have the growth drivers, the right rent returns, the right demographics, or satisfy any of your personal financial needs for the short and long term.

So you’ll buy that property because you liked it. You probably then don’t go and do enough of the research because you’ve fallen in love with it, and it becomes hard to negotiate well when you’re in love with something. You want it so much that you might actually go over the value that you’re really prepared to pay or that would really make that property a viable proposition.

The flipside to that coin is that if you go and look at a property and decide you really hate it because the look of it doesn’t suit you or you make a judgment call on it, you actually might reject the property that would otherwise make a fabulous investment.

Kevin:  One of the mistakes that I think people make is that they do actually shy away from buying interstate because they tend to be wanting to buy in an area where they’re more comfortable – they know the area – but you miss opportunities if you don’t look outside your existing area, don’t you?

Margaret:  Let me talk about this “Know your area” rubbish. People say they know their area because they live there, but do they? I’ve asked many people about the areas they live in, “What do you know about the area?” and all they can tell me is where the best restaurants are, or perhaps where the bus goes. Very few people know what the growth drivers are in that area, how quickly the population is growing, what the demographics are, what kind of rent return you can achieve and cash flows on properties in that area.

What they know about their area is inappropriate and, in fact, quite dangerous, because it creates that comfort that you speak of, which makes people think it’s the right area to buy in, when, in fact, the right area to buy in could be somewhere else entirely.

I’ll tell you now that I always buy in areas that I don’t know but by the time I buy it, I know it far better than anybody who lives there. If you know how to do the right kind of research, you’re never going to buy in an area that you don’t know; you’re going to buy in an area that you previously didn’t know but now you know well because you’ve done the research.

Kevin:  That makes so much sense, Margaret. We’re going to have to take a very short break. I wonder if you’d stay with us. I want to pick up on your thoughts about whether or not you believe property in Australia is overvalued.

Margaret:  Absolutely.

Kevin:  Great. My guest is Margaret Lomas from Destiny Financial Solutions. We’ll take a break and we’ll come back and talk to Margaret again.

 

Brad Beer

 

Kevin:  Property investors are often unaware that there are two different methods available to calculate the depreciation deductions for the plant and equipment items contained with their investment properties, yet investors can only select one of these methods. Today I’m speaking to Brad Beer from BMT Tax Depreciation.

Brad, I wonder if you’d just give us a rundown of what the two depreciation methods are.

Brad:  Absolutely. There are two methods you get to claim these plant and equipment items under. One is called the diminishing value and the other one is called the prime cost method. Now, diminishing value is a higher percentage of claim, and it’s claimed each year based on the residual value, as in the amount diminishes, so you get more deductions up front and it diminishes down over time. The prime cost, the other method, is also known as the straight line method. It is a percentage of the value in the first year and the same amount every year until it runs out.

The diminishing value gets a bit more deductions in the early years; prime cost gets more even deductions over a longer period of time.

Kevin:  If an investor is only planning on holding a property for a short period of time, why would they choose the diminishing value?

Brad:  The decision between the two: when we prepare our reports, we actually give you both methods. Now someone who owns the property for a short period of time is probably trying to get the most out of it in that short period of time. Diminishing value gets a bit more deductions in those early years, which means more cash flow for the investor while they own that property.

Kevin:  Okay. What kinds of investors might choose prime cost?

Brad:  Someone who chooses prime cost might be someone who if in later years of owning this property – the third year, the fourth year – they expect to have salary increases and might be in a different tax bracket, then these deductions are more useful to them in a later period of time might choose that method. Or if you’re not in a very high tax bracket and these high deductions drag you below in tax brackets, then you might choose the prime cost method, as well. Because these deductions are only useful if you can actually claim them, and if you’re going to change tax brackets based on some of those, sometimes that prime cost might work better in your situation.

Kevin:  So explain how low value pooling works.

Brad:  Low value pooling is something that relates to items that have a lower value, and what you get to do is claim these things at 18.75% in the first year and 37.5% in the following years. Now they’re done under the diminishing value method: 37.5% is quite a high rate, so any of these low value things you get to claim a bit quicker and they are done under that diminishing value method. An investor might select this method because they actually want these deductions earlier in these years, and if that happens, then obviously more cash flow for the investor.

Kevin:  Brad, just in closing, can you give us an example of the differences in depreciation claimed using each of these methods over, say, a five-year break.

Brad:  Yes. I had a look at a couple of examples, and on a house that’s purchased for around about $500,000, I have the first five years of claims on a diminishing value at just over $50,000. Using the prime cost method, the same property came in at about $44,200. So there’s $6500 difference in deductions over the first five years of owning something like that.

A unit of similar value came out a little bit higher, about $8500 difference in deductions over those first five years, largely because a unit often has a bit more plant and equipment in it, so more of those things would have fallen into those diminishing value or prime cost methods.

It makes a few thousand dollars difference to deductions over the first five years of owning a property, which at your tax rate, potentially 30% or 50% of that comes back in cash. As investors, I think we’re always looking for cash now instead of later, so often the diminishing value will work better for most investors.

Kevin:  Yes, but as always, we suggest you take the advice of an accountant who specializes in this area. You can certainly talk to the team at BMT Tax Depreciation. Is that correct, Brad?

Brad:  Absolutely. We can give you the numbers, but we don’t know the rest of your financial situation and do the rest of your tax return. Your accountant will look at both methods that we give you, and they’ll be able to make your best recommendation.

Kevin:  Okay. First port of call will be Brad and the team, of course, at BMT Tax Depreciation. You can use the link on the home page at Real Estate Talk to contact them as well.

Brad, thanks for your time.

Brad:  Great. Thanks, Kevin.

 

Michael Yardney

 

Kevin:  As a follow-on with my discussion last week with Michael Yardney, where we asked Michael to put together the seven top pieces of advice he thinks that every investor should ignore, at the end of that, Michael, we talked about whether or not you could write a book, and that launched into this week’s 11 things that successful property investors don’t do – I guess in a similar vein, isn’t it?

Michael:  It is. Successful property investors, businesspeople, entrepreneurs do things in a certain way, they have certain habits, they have certain traits, and similarly, they have things they don’t do, because the results we have today are the result of everything we’ve chosen to do and chosen not to do. Let’s maybe have a look at things successful people avoid doing.

Kevin:  Okay, what is the first one?

Michael:  The first one is they don’t really concern themselves that the markets are unpredictable. We keep hearing this noise all the time about property booms, property busts, negative gearing coming, negative gearing going. Successful investors set themselves a plan, but recognize that despite their plans and despite their strategies, there are always X factors coming out of the blue that may affect them negatively or maybe sometimes positively, so they protect themselves by planning for the worst yet expecting the best outcome.

Kevin:  What about not questioning advice? I guess this follows on from last week, doesn’t it?

Michael:  Yes, successful investors don’t accept things as true without questioning it. In this uncertain world, we love to be right, because it helps us make sense of things. One of the ways our mind does this is with something called confirmation bias. We actually go out looking for information to confirm the hunch we already have about our property strategy, or a region, a location, or a trend.

I found those who display strong confirmation bias tend to be more overconfident yet they tend to make the least money, Kevin. They seem to want to be right at any cost. Instead, successful investors understand that most of us are ruled by prejudices, so they maintain a healthy skepticism. They question new information, they look for reasons why it may not be right, rather than why what I’m thinking is the right way of doing it.

Kevin:  Interesting, isn’t it? A lot of detectives, too, are criticized for that confirmation bias. They have one guilty person in their mind and they bring all the evidence in around to support that theory. Same thing.

Michael:  It’s just like if you like Apple computers or IBM PCs, Windows. People who like Apple see all the good reasons for it, and actually, people who like Windows. It’s much the same with your football team, as well, so our emotions play a big part in all decisions.

Kevin:  Yes, but I have to say Apple is better. Let’s move on, what about investors wanting things to happen quickly or easily?

Michael:  Successful investors recognize that rarely does success in anything happen quickly or easily, so they don’t look for the next get-rich scheme. Those who have got a long term perspective, those who know how to delay gratification are more likely to be financially successful. I remember Warren Buffet’s beautiful saying – you have heard me say it before – “Wealth is the transfer of money from the inpatient to the patient.”

Kevin:  Yes. Another thing I’ve noticed is that successful investors don’t procrastinate, do they?

Michael:  They don’t necessarily wait for the right time to take action. They don’t try to time the markets. They know there isn’t a “right” time to do anything. I’ve found successful investors gather all the necessary information quickly, make an informed decision, and then, Kevin, they take appropriate action. They’re able to see the big picture; they don’t get caught up in the details, and that allows them to be successful.

Kevin:  The next couple: they don’t do it on their own and they don’t spend time worrying, which is a continuation of what you just said, really.

Michael:  They don’t do it on their own because they recognize that if they’re the smartest person in their team, they’re in trouble, so they’re prepared to pay for good advisors. They’re prepared to pay for mentors who inspire them, who motivate them, who keep them accountable.

The other thing – you’re right, Kevin – is they don’t worry. Interestingly, most things you fear about rarely happen, and if they do, they’re actually not as bad as you imagined they would be. The lesson, I guess, from speaking to lots of successful investors, is that you shouldn’t take things too seriously, because what seems to be a really big problem today, you probably won’t even remember it in five years’ time.

Kevin:  A continuation of something you said earlier about building your team, they may build a team, but by the same token, they take responsibility for their own decisions, don’t they? They don’t let others define their success.

Michael:  They do take responsibility for their own decisions; that’s one of the big things. They don’t blame, they don’t become a victim. They realize that what has happened is because of them. If you believe you’re the cause of all the actions that happen in your life, you act differently, you behave differently, you think differently, much more positively, and similarly as you said, you don’t allow other people to define what success is.

Don’t compare yourself with how anyone else has done things. The unfortunate problem is as you become more successful, people will look at you, people will speak about you, people will wonder how you did it, and those are their negative problems, Kevin, not your problem.

Kevin:  And they accept that responsibility, you said that, but they also don’t ignore problems. They don’t stick their head in the sand; they face them.

Michael:  How often have we seen people just stick their head in the sand – as you say – and hope that the problems will sort themselves out? That happened as the mining boom started to unravel and people thought “No, it’s okay, I’ll wait for it to sort itself out again,” or people just sticking to bad properties, dud properties, bad deals, rather than accepting the problem, crystalizing the loss, moving on, tackling the problem, and moving forward rather than hoping it’s going to go away.

Kevin:  Yes, but having said all that, they don’t speculate, do they?

Michael:  Rather than chase the latest fad, successful investors follow a proven system, recognizing that the only way you can become an expert is by doing the same thing over and over again, rather than trying this one and then trying that strategy. What they’ve learned is that their investment lives are probably going to be boring.

See, a lot of people want to do investment because they think it’s exciting. I’d rather have an exciting life because of my investments, which are probably a little bit more boring, the strategy gives me all of the cash flow that I require.

Kevin:  I’m fascinated with your final point, the eleventh one: that they don’t forget the people who matter.

Michael:  There’s lots of time to talk about money, property, wealth, but what you have to remember is what really matters. No matter how busy I found successful people to be, they take their time to tend to their personal relationships and they know how empty life can be without those who love you, without those friendships.

Kevin:  I’m never too busy to talk to you, Michael.

Michael:  I never forget who my friends are, Kevin.

Kevin:  Michael Yardney from Metropole Property Strategists.

Good on you, Michael. We’ll talk to you again next week.

Michael:  Thank you, Kevin.

 

Hayden Groves

 

Kevin:  There are some very good signs on the horizon for the West Australian market after reporting for so long that it was in the doldrums, but there are signs that it may just have turned. To get a little bit more on this, Hayden Groves joins us, President of the Real Estate Institute of Western Australia.

Hayden thank you for your time.

Hayden:  Good morning.

Kevin:  Thank you very much for your time. The WA market seems to be bouncing back a little bit. What are the signs that you’re seeing that that’s the case?

Hayden:  We are seeing very early signs of a small recovery in the West Australian market. We’re starting to see sales volume marginally increase. It is bouncing around a little bit. But this is off the back of a very slow 2015 certainly in terms of sales volume. We had extraordinarily low numbers in 2015 in the Perth market just in terms of transactional activity. The lowest figure that we’ve seen – about 36,000 property transactions – and when you compare that to 10 years ago, we had 75,000 transactions in the Perth market 10 years earlier. So it’s really been low volumes, but we’re just starting to see them creep up in the early parts of 2016, which is a great sign.

Kevin:  Are there any particular price ranges that are moving more than others?

Hayden:  We’re starting to see where most of the activity was in 2014 was in that sub-$500,000 bracket and a little bit above it, so definitely first-home buyer activity was quite strong in the Perth market in 2013/14. I think in the early stages of this year we’re starting to see that $700,000 to $800,000 bracket come to the fore. So there is some trade-up activity which is very pleasing, and that’s probably why we’re starting to see a bit more transactional activity occur. This will inevitably translate in time into higher prices, because it will drag the median house price up in time.

Kevin:  It will, indeed. Are you seeing that in the regions, as well, or is this pretty well just focused on the Perth market?

Hayden:  Right now, I’m in beautiful Esperance down on the WA coast visiting some of our institute members down here today. Look, they’re reporting very similar conditions to what’s happening in the broader Perth market whereby very low transactional levels are just starting to creep up, a bit more confidence creeping into the property sector down here – but coming off the back of a lot of supply, so a lot of people are still on the market for sale.

We are as an institute telling people, if you’re on the market, you’re not absolutely compelled to sell at the moment and perhaps it would be best to consider coming off the market, so as to keep stock levels low enough, which of course, keeps a floor under the prices from falling back.

Kevin:  I believe that your agency is in the Fremantle market, is that correct?

Hayden:  That’s right. Yes, my business is in Fremantle, which is quite a unique little area in its own with a very strong local buyer base. About 70% of our buyers already live within the immediate precinct, so we don’t get a lot of investment from outside that, just people trading up through that existing market. So our market does get cushioned somewhat from other fluctuations in the broader property market.

Kevin:  Has the release of the State Budget had any impact on the real estate market at all?

Hayden:  We’re not getting the budget until next month. We are lobbying the state government pretty hard to leave property related taxes well enough alone. Already our state government, much like other state governments around the rest of the nation, is overly reliant on property-related taxes for their coffers.

In Western Australia, over 30% of income that flows into the state coffers comes from property-related taxes, stamp duty and land tax. Our state government has raised land tax by 35% in the last three years, so we’d be pretty annoyed if they did it to us again, because of course, as you and your listeners would appreciate, that it really does stymie investment in a time where really we do need more investment in the Perth property market. Let’s hope they don’t mess with it again.

Kevin:  Speaking of investment, I was keen to get your thoughts on any areas you think that investors should be looking at that if there is a resurgence in the market there, that’ll probably grow quicker than other areas.

Hayden:  I like the Rockingham area and its surrounds. It’s still very affordable, and you can live right on the beautiful coast down there for not much money. You can get a family size block close to the beach and probably less than 100 meters to the waterfront and you’re paying around $500,000 for it, so that’s very appealing. I think that will grow quite nicely, that southern corridor.

But closer to the Perth central area, Forrestfield is an area that I think will probably go very nicely, which is near the airport but there’s going to be a new train line running into that area, which will, of course, boost that area quite well because it’s a much needed additional transport link.

Also, too, I think areas around Lathlain and Carlisle, close to the city, I think are probably a bit undercooked over the years and are probably going to enjoy a little bit of a resurgence, particularly in the trade-up market sector. I think that will go quite well.

Kevin:  In those inner-city markets you mentioned there, are they predominately unit-based that you’d be looking at?

Hayden:  Not really. They are diversifying their densities throughout those areas, as well, which will probably increase values more rapidly than other areas perhaps, but we’re a bit slow to catch on sometimes in the west and we’re only really starting to embrace apartment living in any meaningful way.

There’s been a significant increase in apartments being built in and around particularly the CBD, and we’re talking high-end apartments here, so they’re attracting a very high rate per square meter. They are still selling off the plan very, very well despite quite a lot of choice for particular buyers in that sector. So that’s an interesting change in the Perth market. While I think we’re probably a bit oversupplied in that sector, for every one sale, there are still about 24 apartments to choose from, so we are a bit oversupplied.

Anything that’s very strongly located – the new apartments being released in Elizabeth Quay, for example, right in the CBD, a beautiful new environment – they have all sold off the plan very, very quickly for very high prices. So there is still buying activity out there for those prime and strongly located apartment developments.

Kevin:  Great signs coming out of WA.

Hayden Groves, President of the Real Estate Institute of WA, thank you so much for your time.

Hayden:  Good to be with you. Nice to chat to you.

 

Dr. Shane Oliver

 

Kevin:  The long-predicted crash has never eventuated. Now, according to The Economist, Australia’s housing market is 40% overvalued based on price-to-income measures, with one expert warning an entire generation is now praying for a property crash. So why hasn’t it happened? Joining us, AMP Capital Chief Economist Dr. Shane Oliver.

Dr. Oliver, thank you for your time.

Dr. Oliver:  My pleasure. Great to be talking to you.

Kevin:  Why haven’t we had the crash?

Dr. Oliver:  That’s a good question. We occasionally hear these predictions. Most recently, I think it was aired on 60 Minutes back in February, someone talking about a 40% or 50% crash in property prices. But those sort of predictions have been around for a decade or so now, and it hasn’t happened.

Several factors are behind that. One is we haven’t had the deterioration in lending standards that they had in America. Back in America, prior to the GFC, money was going to people who didn’t have jobs, didn’t have assets, didn’t have a means of supporting their so-called NINJA loan – no income, no job, no assets. And of course, that caused massive problems.

We haven’t had that in Australia. Most Australians are servicing their mortgages and paying their debts down at a reasonable rate. We also have, of course, low interest rates, so even though house prices have gone up, interest rates have gone down. So the amount of money that a typical household devotes to servicing their debt isn’t much higher than it was a decade ago despite house prices being higher.

Finally, unlike America and other countries that have had 30% or 40% property crashes over the last decade, we haven’t had an oversupply of properties. There might be in certain areas – the Gold Coast occasionally has that, parts of Sydney, parts of Brisbane, parts of Melbourne – but on a generalized basis, we haven’t had an oversupply. We still have immigrants coming into the country, the population is growing, and therefore that oversupply hasn’t hit the market.

So yes, it’s overvalued measured against income and measured against rent, but it’s still very hard to see what the figure for a crash is.

Kevin:  Yes, the points you make are all very good, too, and we do tend to generalize a lot. The Economist singled out Sydney along with San Francisco, Vancouver, and Shanghai. I thought that might have been just drawing a very long bow to say that the price growth is the norm by comparing all of Australia to those markets.

Dr. Oliver:  It’s certainly not. And the other thing that foreign commentators often miss is that the Australian markets are all very different. Over the last four years, Sydney property prices have risen 40%, but they virtually did nothing from about 2004 up until 2010. It was a very constrained market in Sydney for a whole bunch of reasons. So there is a degree of catch-up after a very weak period.

But then you go around the rest of the country: Melbourne also very strong over the last four years with prices up 30%, but then when you look at Brisbane, prices there are only up 8% or so over the last four years, so it’s been a lot quieter. Price gains have been a lot more constrained.

Likewise, say if you’re a property investor and you want to get some rental income, the rental yield reflecting those gains in Sydney is now very low. It’s down around 4% for a unit, whereas in Brisbane the rental yield is more than one percentage point higher at above 5%. So it’s very wrong to generalize, just to look at Sydney and say that’s indicative of the whole country; it certainly isn’t.

Kevin:  You mentioned there when you were talking about America, about reckless lending. Do you think it’s too easy to accumulate debt in Australia?

Dr. Oliver:  Yes and no. For a typical borrower it’s not. Most people I think are quite responsible with their loans, and banks are quite responsible, as well. But it is possible to accumulate a lot of debt, particularly for property investors. If you know what you’re doing, you can do it quite well. You hear those stories occasionally  in the media about people having 10 properties, they’re all investment properties, the income from them is paying the interest on them. There is a risk there that if something happens and the prices do crash, then those people could be in trouble servicing their 10 mortgages.

But by and large, most Australians don’t have the sort of debt that caused trouble in the US, and I think banks are generally fairly responsible in terms of assessing the income that Australians have and whether that income is sustainable enough to service their debts over time.

The proof is in the pudding. The level of nonperforming loans – that is loans that are in arears by Australian banks (this was from a report from the Reserve Bank just yesterday) – is running around 1% of total bank loans, whereas in Europe for example you’re up around 6% or 8%. Many other countries are, again, quite high. So Australia actually has a very low level of loans that are not being serviced by the borrowers properly.

Kevin:  Just before I let you go, the negative gearing debate: do you think negative gearing has actually encouraged too many investors to get into property who maybe shouldn’t be there?

Dr. Oliver:  There may be an element of that, but I don’t think it’s the main problem. I think negative gearing is often seen as the reason why Australian property prices are high, but negative gearing in Australia dates back for a long, long period, long before this period of expansive property prices we’ve had more recently.

I think yes, there may be some people who are taking excessive advantage of negative gearing and maybe borrowing too much on the back of negative gearing benefits, but by and large, most ordinary Australians use it quite sensibly.

My concern would be that if we do away with negative gearing, then the supply of properties in the Australian property market that comes from investors will dry up and we could end up with a worse situation where the supply situation coming to the market is again not enough to meet up with underlying demand for housing.

I certainly don’t think the negative gearing is the problem and the reason why we have relatively expensive property in Australia; the real issue has been a lack of supply over many, many years.

Kevin:  Dr. Shane Oliver, thank you so much for your time. Appreciate it.

Dr. Oliver:  My pleasure. Have a great weekend.

Kevin:  Thank you very much.

 

Dr. Dallas Rogers

 

Kevin:  A high-speed rail network joining all the capital cities and linking up all the regions might not necessarily help priced-out first-home buyers but instead cause prices to rise in areas currently deemed affordable. That’s according to some experts. Western Sydney University Institute for Culture and Society’s Dallas Rogers warns speculators and investors would be the first people on the ground in the regional areas benefiting from the infrastructure on the look-out for price growth. He joins us.

Dr. Rogers, I understand that you are a supporter of the high-speed rail but you’re casting some doubt on whether or not it’s actually going to help with housing affordability.

Dr. Rogers:  Yes, I’m a big supporter of high-speed rail. I think that we need intercity high-speed rail, so we need high-speed rail that connects up our major cities in Australia. That would be nodes connecting up Melbourne, Sydney, Brisbane, and places like that. But we also need intracity high-speed rail; that’s high speed rail that connects up the cities within our major cities, as well.

And I think that really to answer this question about housing affordability and possibly pushing the housing affordability problem in somewhere like Sydney out to the regions is really how governments – federal and state – will manage four key assets, and those assets are people, jobs, housing, and transport.

Jobs is an interesting one. In Sydney, we have a changing job landscape. We have a move to a knowledge- and service-based economy and we have young people looking to get into these knowledge economy jobs, so things like the creative industries, working in the financial sector, government jobs, things like that. And of course, these jobs at the moment are CBD-based, typically.

So within our cities we need a transport network that gets people to those jobs. Now the question is will young people and others take up the opportunity to use a high-speed intercity rail network to travel between cities to take up those jobs? And the important part of that question for New South Wales is housing affordability in Sydney. Sydney is one of the most unaffordable places in Australia, and median prices are about a million dollars at the moment. They go up and down.

The question is will the housing market and the job landscape and the high-speed rail actually drive people out west to invest in those areas and then come back into the city? I think that that’s an open question. My comment about the proposal was we need to address the housing affordability problem in Sydney first before we think about transporting that problem out to the regions.

Kevin:  Yes. Well, I agree in one sense. One way to tackle affordability, of course, is to make more supply available, and that’s a difficulty in itself in Sydney. If, in fact, you do look at connecting those regions up to the city, you’re going to have a similar sort of problem unless of course those councils do release more land. Because it’s all about land.

Let’s take an area like Goulburn as an example. Once again, if commuting time from Goulburn to Sydney could be cut down to, say, 30 minutes on fast rail, you’re going to find that a lot of people would in fact want to live out there. But is there going to be enough land available to develop?

Dr. Rogers:  I think the interesting question here is will people want to travel that far from Goulburn to Sydney? That’s 200 kilometers, and of course, high-speed rail will cut down the travel time, but people are increasingly wanting to be closer to where they work.

So I think the question about the high-speed rail is one about is it about moving people from Goulburn to Sydney and back again every day for work or is it about building Goulburn as a regional center with its own jobs and its own economy but being within easy access to Sydney? And I think that they’re two very different questions.

If you compare somewhere like Goulburn to a city on the edge of Sydney – somewhere like Campbelltown, which is about 60 kilometers southwest of Sydney, right on the fringe of Sydney – a place like that stands to benefit far more from a high-speed rail network, and you’re probably likely to see a lot more growth in house prices because Campbelltown is well placed to move a lot of people in and out of Sydney, and people are already actually doing that commute.

A professor, Bill O’Neil, from our university, the University of Western Sydney, has just released some research that shows that 75% of western Sydney-siders use their car to get to work now but they wouldn’t do that if they had public transport options. They’re projecting that in about 20 years, about 820,000 Sydney-siders will be using cars to get to work if alternative public transport options aren’t available.

In this cohort of people we have a lot of young people, a lot of people getting degrees, and a lot of people wanting to take up those knowledge economy jobs. So I think that if somewhere like Campbelltown is connected into this high-speed rail network, it’s likely to see a lot of growth, not somewhere like Campbelltown.

Currently in Campbelltown, about 92% of all the workers travel on public transport to the city. So Campbelltown and Penrith are the two major nodes where people are using public transport to and from the city every day to get to work, and if we connected those nodes up to this high-speed rail, I think that those places would get the biggest benefit.

Kevin:  I’ve often wondered whether people will use fast rail to travel to work or whether the Internet has given them the ability to live in some of these regional areas and work and only have to commute to the city maybe once a week or even once a month. That’s when fast rail could help them cover those vast distances.

Dr. Rogers:  Yes. Somewhere like Goulburn is completely reinventing itself at the moment. They have an open source Internet project there where they’re trying to get free Internet around the city, and they’re really trying to attract treechange economy workers to that space. And I think that that’s the key here.

We need to stop thinking about bringing the regions into the cities and start to think about how high-speed rail can do the opposite, and that is reinvigorate the regions themselves. How do we get jobs to the regions? How do we use these high-speed networks to act as a benefit for the regions instead of outsourcing our own urban problems to places like Sydney out west, out to these places? I think we need to invert that logic a little bit.

Kevin:  Makes a lot of sense.

Dr. Dallas Rogers, thank you so much for your time.

Dr. Rogers:  Thanks a lot, Kevin.

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Kevin Turner
kevin@realestatetalk.com.au
2 Comments
  • Julie
    Posted at 14:38h, 14 May Reply

    Hi Kevin
    Could you talk about negative gearing and how depreciation comes into this and particularly how depreciation is treated then when you sell a property ie and how it affects and is then taxed as capital gain. I don’t understand it properly but would line to be more informed as part of the negative gearing discussion that is currently going on.
    Cheers
    Julie

    • Kevin Turner
      Posted at 08:31h, 30 June Reply

      Sure Julie. Listen out for it. Kevin

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