Where is the ‘real’ value in property? + Criminals cause rules to be tightened

Where is the ‘real’ value in property? + Criminals cause rules to be tightened

 

Have you noticed how some people seem to rise to the top of their chosen field, or journey ever higher up the property ladder, while others consistently achieve the same “average” results? Michael Yardney helps us reflect on the 7 significant traits Dr. Stephen Covey says successful people habitually exhibit. We have called it the 7 habits of Highly Effective Property Investors.

Speaking of success, we catch up with a young WA property investor who started her portfolio when she was 18 and has grown it to be worth in excess of $2M today. Nadia Hana tells us about her journey, the lessons along the way and what she has to say to any young investor wanting to follow her lead.

Dr Andrew Wilson takes a look at the suggestion that property prices always go up. Well we know from recent times that is not always the case, so how can you pick the cycle?

Where does the real value sit in a property? Many believe that it is in the land and that is why they invest in houses. Is that your belief? Well property valuer Gavin Hulcombe says you might want to re-think that.

Recently we heard in the show that investing in property is not all about cash flow. Rather we should be looking at it as a high growth low yield investment strategy. But is it possible to get both cash flow and capital growth in one property. Josh Masters says yes and he tells us how.

OK, so if Gavin Hulcombe says houses do not necessarily make better investments than units because they have land, we find out from Ken Raiss if new houses make better investments than established ones because of depreciation.

We also hear that there has been a call to tighten home purchase rules after reports that criminals use remittances of foreign buyers and we find out which 2 capital cities will benefit from the slowdown in the Sydney market.

 

Transcripts:

Michael Yardney

Kevin:  I wonder if, like me, you’ve noticed that some people seem to rise to the top of their chosen field or journey, even higher up the property ladder, while others consistently achieve the same average results.

In the 1990s, you might recall management guru Dr. Steven Covey explained what he believed to be the defining characteristics that distinguish highly effective people in his book “The Seven Habits of Highly Effective People.” I’ve read the book. I’m sure you probably have, too.

I want to find out if there are any similarities here between those habits and the habits of top achievers in property.

Michael Yardney from Metropole Property Strategists, I know you have a view on this. What are your thoughts, Michael?

Michael:  Hi, Kevin. Yes, I think there are some similar traits between successful businesspeople, entrepreneurs, and property investors. You’re right, Kevin; they have similar traits. How about let’s go through what Steven Covey had to say, and I’ll give you my take of it in property investors.

Kevin:  Okay, you swing it that way. Habit one, of course, was be proactive.

Michael:  Kevin, you’re right. What he was saying was that life isn’t just a series of events; in every moment, you actually have a choice. You can either move forward and take the opportunities or you can be the passenger of your life.

As a property investor, I’d suggest you be proactive like Steven Covey suggested. Be the pilot of your life, not the passenger. You are where you are today because of all the things you’ve chosen to do, Kevin, and all the things you’ve chosen not to do. Either way, you’re going to either have to run the day or you’re going to let the day run you.

Kevin:  Habit number two was begin with the end in mind.

Michael:  I liked that one when I first heard it years ago, Kevin. It means that you have to focus on your desired outcomes and then do what you need to do to achieve that. The key, I think, for property investors is to block out a lot of the distractions that can inhibit you moving forward because there’s always these things, so-called perceived opportunities, that if you hop onto the latest bandwagon, it takes you off track.

I think all property investors – and not just investors; businesspeople – should write down a set of goals – in property investment, it may be getting to financial independence – and then put a strategy around it. That way, it’s going to be easier for you to make decisions and not get distracted, Kevin.

Kevin:  Indeed. Habit number three was putting first things first. This is about prioritizing, Michael.

Michael:  You’re right, Kevin. What Steven Covey said was once you’ve set your goals, then you have to develop the habit of planning and implementing activities that are going to enable you to reach them. Importantly, you learn to prioritize exactly what you said that you’re doing things in the right order.

As a property investor, I think what you have to do is keep the big picture in mind. Sometimes, you should actually say no to perceive opportunities if they don’t fit with your plans. I know, Kevin, over the years I’ve made more money by saying no to deals than by saying yes to them.

I suggest an investor takes personal responsibility because you can’t change the circumstances, you can’t change the property cycle, you can’t change the market, but you can change yourself. That’s something you have control over.

Kevin:  Exactly. That’s the point, isn’t it? Habit number four was think win-win.

Michael:  I think Covey was basically saying you can gain more out of life through the art of cooperation than with competition. As a property investor, win-win doesn’t only apply to negotiation but, in fact, to all elements of your life. I think you should learn to be happy with what you have while you pursue what you want to have, Kevin.

Kevin:  Indeed. Habit number five. This one may be a little bit difficult, but I’ll just be interested to see what you have to say. Seek first to understand and then be understood.

Michael:  I think what Covey was saying, Kevin, was most people engage in a conversation to be heard rather than to understand. I’ve found when I speak to people, what they tend to do is use their listening time to plan their reply, rather than to actually listen to what I have to say.

I think as a property investor, there’s a way of flicking this to suggest that a lot of property investors suffer with what I call confirmation bias. What they do is they go out in the world with an answer in mind that they’re looking for, and then they search for evidence to support their preconceived idea. Instead, I’d be saying to be skeptical of any preconceptions and try to disprove your own theories rather than continually trying to defend them.

Kevin:  Very good, Michael. It makes a lot of sense.

Michael:  Kevin, if you’re looking for mining towns, for example, there’s going to be enough information out there to support and confirm what your already preconceived idea is. I guess the suggestion would be have a look and see if there’s an argument against it.

Kevin:  Yes, indeed. Habit number six was synergize.

Michael:  I think Covey was basically suggesting that creative cooperation amongst humans allows us to uncover all sorts of new solutions, newer opportunities there. As a property investor, I’d be putting it this way. There’s no such thing as a self-made millionaire.

Kevin, every successful investor I know turns to a proficient team of consultants and to his mentors to inspire and to counsel him. The lesson is surround yourself with people who can lift you up rather than “Negative Nellies” who drag you down.

Kevin:  Habit number seven, the one that I really love, that we sometimes lose sight of, is sharpen the saw.

Michael:  Covey was basically saying that your best asset in life is yourself. In order to be effective, you should really look after the tools that control your mind, your body, and your spirit so that you can maintain the balance in your life.

I guess as a property investor, the message is the best investment you can make is to ensure your ongoing wisdom, don’t be afraid to invest in your education, and be prepared to learn, not only from your victories but from your mistakes.

To become financially independent, Kevin, I think you really should be following these habits of other successful people in other arenas of life because that’s most likely going to help you to become a successful property investor.

Kevin:  I think the bottom line here, Michael, is habit number five: seek first to understand and then be understood. It’s just keeping an open mind to the whole thing.

Michael:  Definitely. That’s one of the challenges that when you keep getting bombarded with all the information in our inboxes and in the magazines and in the newspapers, there are so many different ways one can be successful with property investment. Be open. Get some people around you. Get some good mentors. Save, invest, build your asset base, and then you can become financially independent.

Kevin:  If you haven’t read the book, make sure you pick up a copy of it.

Michael Yardney from Metropole Property Strategists, thank you very much for your time.

Michael:  My pleasure, Kevin.

 

Gavin Hulocombe

Kevin:  You’ve probably heard this myth in the past – I know I certainly have – that houses make better investments than apartments because they have more land. I guess every property has some kind of land component, but there is some confusion about where the real value of the property is. I’m going to talk to Gavin Hulcombe now, who’s a valuer with Herron Todd White.

Gavin, thanks for your time.

Gavin:  That’s all right. Good morning, Kevin.

Kevin:  You’ve heard this comment before – houses make better investments than apartments. Is that true?

Gavin:  I think it’s like all things; it’s really difficult to generalize. I think obviously the supply and demand issues are probably the foremost consideration in terms of where the best investments are.

Look, I guess one of the arguments is always that the land appreciates – it goes up in value – and improvements always depreciate in that when they’re brand new, they’re always really modern and look good, in five years, they’re a little bit dated, ten years, they’re dated a bit further, and by the time they’re 30 years old, it’s a 30-year-old apartment.

I guess the argument is often that the land where you have a house and land component goes up while the house depreciates. If you buy a unit, you get less of that appreciation because more of the value of the unit sits in the improvements and therefore they can depreciate.

But I think the key thing is when you look at apartments, typically they will yield much higher than houses. Again, it depends on where they are and what have you, but as a general statement, units will often [1:29 audio skips] which is essentially the rent as a percentage of the value of the property.

Kevin:  It stands to reason though, the more use you can get out of land, the more valuable it’s going to be. As an example, a normal housing block, if overnight that is rezoned and you can then put apartments up, the value has actually gone up, hasn’t it?

Gavin:  Obviously, it links back to the utility of the land. If it can be developed at a much higher density, then that increases the value of that property because of what you can put on the property.

Kevin:  Okay. Now, the statement there about units being less valuable than houses, you’ve made a very good point about depreciable assets there. How does a valuer go about valuing a house as opposed to a vacant block of land?

Gavin:  As in all valuation, it’s essentially you’re putting yourself in the eyes of a potential buyer, and you take into consideration all of the things that they would – the good, the bad, and attributes of the property. Then in assessing the value, you’re then comparing it to other properties and saying, “Well, what would the market, i.e. the buyers, what allowances would they make for either the busier road or the bigger house or smaller house or better decoration or whatever it might be?”

In essence, you’re always comparing a house to a house. If you’re looking at land, you’re comparing land to land and making the similar adjustments to what a perspective purchaser of that property would do.

Kevin:  I suppose any person looking for an investment property, they have to bear all these things in mind about what type of investor they are – whether they’re a unit type investor or a house and land type investor. I guess when it comes to investing in a unit you’re then dealing with body corporates and a whole layer of different types of administration, as well, aren’t you?

Gavin:  You are, but I think even just going back to your point about as an investor, I think probably investors need to be a bit clearer as to whether they are looking for a yield investment – as in higher income-earning capacity throughout the life of the property – or are they looking for a capital growth investment?

Depending on where a unit is and all those sort of things, it can provide a higher yield, but equally if you go back to the old adage of the worst house on the best street, the land might go up but it’s at a much lower yield while you own that property, but ultimately, it may show stronger capital growth over the longer term.

I think when people are looking at investment property, I think it’s a useful consideration to say “Am I looking for a yield or am I looking for long-term capital growth?” Because I think that will influence your decision, as well.

Kevin:  Well said. Gavin Hulcombe from Herron Todd White.

Thank you for your time, Gavin.

Gavin:  That’s fine. Thanks, Kevin.

Nadia Hana

Kevin:  I had the pleasure recently of having a chat to my next guest, Nadia Hana from Western Australia. I did that on behalf of Australian Property Investor magazine. I was so impressed I wanted to share her views with you. Nadia, from a very young age, started investing.

I believe it was about 18, Nadia. Is that correct?

Nadia:  Yes. That’s correct.

Kevin:  Wow. That is amazing. Tell me, what spurred that interest in property at such a young age?

Nadia:  I come from a family who has been involved in either property investment or developing for many years. My grandfather in the UK was investing there and passed that on to my mother and father. They’ve done – as I said – development then and renovation or flipping houses, as well.

It was something from a young age that I was around, and property often found out its way around the table, something probably I was interested in more than my sister. From a young age, I’ve always been very keen on running my own business, and I would like to think I’ve had a very business-oriented mindset.

I enjoy coordination and planning, and I found that around about 16, my folks started giving me books on property, whether it was at birthdays or Christmases. I found myself reading those and having a keen interest to understand more, and perhaps that would be the avenue that I would take in starting my own business.

Kevin:  Just give us all a bit of an idea about the size of your current portfolio.

Nadia:  Currently, I have a property in Gladstone. I’ve had that since 2011. I purchased my first property when I was 18. Actually, last Friday, I had handover. Essentially, what I did with that property is subdivide and develop into a quad development, and now currently have five properties, which was my goal – five properties by the age of 25.

Kevin:  My reading about what you’ve done is that your portfolio of five properties is worth in excess of $2 million. That’s really quite outstanding. Tell me, do you have a mentor? Who helps you make your investment decisions?

Nadia:  I didn’t get to where I am today without the support around me. My father was definitely the key mentor to guiding me to looking into the area that I purchased my first property in and understanding the value in property investing. My mother also has been a great influence, and more recently my partner, as well.

I probably haven’t had one specific mentor. I think it’s important to talk to various different people, and obviously, you need to be careful what information you act on, but if you try to collate as much as you can, essentially, that will make you in a position where you can make more of an informed decision.

Kevin:  You’re obviously not afraid to buy out of the area in which you live. I think you mentioned one property in Gladstone. That’s Gladstone in Queensland.

Nadia:  Yes, that’s correct.

Kevin:  That’s the other side of the country from where you are now. How do you go about choosing your properties?

Nadia:  To be honest, in terms of a formula, I haven’t had a set formula to date, but there are a couple of key criteria that I look for in identifying a property. Essentially, for me, my preference is to buy a property that either has an opportunity for not just capital growth but either renovation or development. I think that land is where the value is essentially.

With all of the properties I’ve looked at, I’ve given them a few different boxes to tick, and one of them is being whether there’s infrastructure in place and adequate schooling and support or revenue that’s going to be going into that community to increase potentially the rental growth or sales.

Then also looking at buying a house at the lower end of the scale, so not something that’s elaborate, something that to some extent would look rundown, that I’ve got an opportunity to either develop or renovate.

Kevin:  Now, you mentioned earlier that you’ve completed your first development. You’ve just had handover of that I believe. Tell me a little bit more about that. Was that the game plan when you first purchased that property?

Nadia:  No. When I first purchased that property, I rented that property out. It was a 1138 square meter corner block. It had the zoning in place to potentially subdivide, but at that point in time, to be honest, I knew nothing about subdivision or development.

It was something that my father threw around as “You know you could do that down the track,” but I said, “One step at a time. For now I’ll manage this property myself.” I did do that, which was a learning opportunity for me in understanding contractually the relationship between you, an owner, and the tenants.

Once I had rented that out for a couple of years and I secured myself a good job within the oil and gas industry, I had found myself starting to look at what are the options here? I did dabble in renovating that house, but I started to see growth within the area, and that was what we had identified in our feasibility studies anyway – that the infrastructure was going to be significantly improved and growth and schooling. Essentially, quite a few people in the area were starting to put in applications anyway for subdivision.

I looked at as an opportunity and began what was at least a year of just extensive research – reading books, going on forums, talking to people, studying the West Australian Planning Commission information, and understanding all the ins and outs of what would be required in order to subdivide or essentially develop.

Kevin:  We can always learn from other people’s mistakes, and I guess that’s the best way to learn, provided we do learn. Can you share one or two with us that maybe we can learn from? Things that you say, “Well, if I had my time again I probably wouldn’t do it that way”? What were those?

Nadia:  If I had my time again, the biggest one is I would definitely allow myself an additional buffer of funds. At the point in time with the development, going through getting two to three quotes for each contractor, I put a spreadsheet in place, I knew the amount of funds that was required, but I definitely underestimated the amount.

I found myself being about $20,000 to $30,000 short, and so that essentially went from a three-year plan of subdividing through to development to four and a half years. It has been a long process.

If I was to do this again, I would always make sure I’ve got 20%, 30%, whatever you can do just to have that additional buffer for any unforeseen events or circumstances that might occur.

Kevin:  That’s great advice, actually. Tell me about the risks now. Have there been any risks that you’ve taken over these years that you’re really glad that you did take?

Nadia:  Yes. I was trying to think the other day, is it easy to invest and to do this development, because I do think that there are other young people, investors, out there who could definitely follow the same footsteps and do this if they set their mind to it.

Essentially, there have been quite a few challenges and risks that I have had to take. I’ve banked about 80% to 90% at times of my wage to the subdivision and development where I have had a subdivision into an offset account on the property. I had my wage put straight into there and allowed myself very little funds for the four weeks, which essentially is my four-week wage.

There was that element. I sold my car and took public transport, which was a bit of an adjustment at the time. I sacrificed a lot of various things as well – friend’s weddings and events throughout the course of the year.

Kevin:  Nadia, where do you plan to be in say 10 to 15 years’ time? I know that you’ve reached this goal of five properties. What’s ahead for you?

Nadia:  I definitely want to keep investing and looking towards either renovations or developments. I haven’t set a goal yet for 30 or beyond. I’m sure I will because I like to set higher goals and essentially try to achieve them. This one has been quite challenging, but I’m sure there are so many lessons learned that will make the choices slightly easier moving forward.

My partner and I are keen to invest together, and it’s something that he’s started to be part of the process and really added value to where I am today, so I can see us definitely continuing.

I suppose from a work perspective, I do work in the oil and gas industry at the moment and thoroughly enjoy my job. I’ve got a brilliant job there. But essentially, my passion is in property investing and development, so I’d like to see some form of opportunity down the track and see myself whether it’s owning my own business or working in an advisory or mentoring capacity.

Kevin:  Whatever it is that you choose to undertake, Nadia, I know it’s going to be a success. It’s been a delight talking to you – very, very inspirational. I wish you every success in the future. Thank you so much for your time.

Nadia:  No problem. Thanks very much, Kevin.

 

Josh Masters

Kevin:  Dispelling another one of the myths, and that is that you can’t get good cash flow and good capital growth at the same time. Let’s find out if that’s true. Josh Masters joins me. Josh, of course, is from the website buyside.com.au.

Good day, Josh. Good to have you on the show again. Nice to be talking to you.

Josh:  Thanks, Kevin. Good to be here as always.

Kevin:  Is it possible to get good cash flow and capital growth at the same time?

Josh:  I think it is. It’s definitely possible; there’s no question about it. There have been a lot of properties in history that have done that. Some of the properties that just came off the top of my head were some of the mining towns where we saw exponential capital growth happening because of the strong demand in mining. The captured market really made a renter’s paradise, as well.

It’s almost the quintessential investment – isn’t it? – something that gets yield and growth, but it’s very rare. I think the question is probably more around do you want to risk something for the yield and the growth together, because it is a high-risk investment?

Kevin:  It is very high risk. You mentioned mining towns. We’ve had a good look back on that. That was all about the timing, wasn’t it? It was possible to get both, but there were places like Moranbah where unless you actually pulled out at the right time, you were in for a fairly major capital loss.

Josh:  Yes, that’s right. Exactly. That’s where the risk comes in. You can never try and time the market. It’s one of those things that you just don’t know when it’s going to happen. It’s great for the period of time that it does and everyone is making a fortune, but over time, everyone piles into it. Karratha was another one. Moranbah, of course. Port Hedland. All these were stellar performance for the time that they were there, and for those people who got in early, they did really well.

There are exceptions in the market. I have found there are some high-yielding properties. For example, let’s take Western Sydney. If you had invested five years ago, you would have gotten almost positive capital growth there. You could have probably picked up 6.5% on your yield. Now, that would have been great in a low interest rate environment, but as the market progresses, people throw more money into it, prices rise. Those price rises suddenly, bring on the capital growth, but the rents don’t keep pace. It’s not a captured market like you would find in a mining town, so what you’ll find is the yields drop.

Now, if you go out to Western Sydney today, they’ve had great capital growth, but now the yields are sitting around 4.5%, which is actually pretty good for Sydney right now, but it’s still in a negative-gearing situation for most people.

Kevin:  What do you prefer in your own investments, Josh? Do you look for cash flow or do you look for capital growth?

Josh:  Personally, I’m all about capital growth. Many of the clients who come to me are looking to build wealth for the future. They’re looking to do it in a reasonably low-risk environment, and they want a safe investment, but they want to build their wealth over time, and they can afford to put a little bit of money aside for the negative gearing allowance. That tax benefit also helps them.

In my opinion, if you really want to grow a portfolio and you want to grow your wealth – which everybody is in it for, generally – it has to have capital growth. If your property sits there for ten years and it doesn’t grow in value, if you’re making $5000 a year in your hand over each of those ten years, it doesn’t count for much if that property hasn’t made significant gains on it price.

I’d rather invest in something, for example, in Sydney, where ten years ago, the price might have been $500,000, and now it’s $1 million. Suddenly I have $500,000 in equity, half a million dollars in equity. It makes that paltry $5000 a year in positive income almost insignificant after taxes are taken out.

Kevin:  Josh, great talking to you as always, and thanks for your time.

Josh:  My pleasure, Kevin. Thanks for having me.

Ken Raiss

Kevin:  As we dispel or maybe prove another myth – and that is that new properties make better investments because of depreciation allowances – I’m talking now to Ken Raiss from Chan & Naylor.

Probably a reasonably common misconception, maybe. Do you think?

Ken:  I think so. Definitely a misconception.

Kevin:  A lot of people think that depreciation only comes with a new property.

Ken:  Depreciation comes with any property. Obviously, a 100-year-old property might have very little, but it could have been renovated and had some depreciation on the renovations. People don’t understand what that is. Depreciation is an expense but without a cash outlay. The benefit is only in the tax, so if you’re in a low-tax situation or a no-tax situation, then it has little to no benefit to you in any case.

What we have to look at is are we buying a new property that could, in fact, be overpriced? That’s because the developers have their margin in there. Can I say, there’s even less price comparison, because if you’re buying a new property in a building of 50, they’re all the same price, so there’s very little room to maneuver to negotiate a lower price.

The other important thing… And I think it’s a funny thing I’m going to say, but nevertheless true. The name of the game is to maximize your capital growth and income, and people forget that. They look to maximize the things on the fringe, not the main game.

When you’re buying an investment property, you’re doing it to make a profit, to create income for you in the future, and that income is derived from two sources. It’s the increased capital gain that comes over time, which allows you to increase your rent. It also comes from the capital gain itself, but even if you don’t sell, that increased capital gain is crucial because in a lot of instances, it allows you to borrow against that increased capital growth to then go and buy another investment property. It becomes the feeding trough, if you like, of your investment portfolio. You always have to keep that pool growing, so capital growth is critical.

When you’re buying a new property, you’ve really only got the market forces that will give you that capital growth, that rent. If you’re buying in a slump or you’re buying in a time when property prices have been depressed a while, you just have to sit and ride it out, but if you can buy an existing property that you can do a renovation to, then you’re actually manufacturing your own equity. That gives you capital growth, that allows you to increase your rent, and it also allows you to borrow for future investments.

Kevin:  Also, when it comes to depreciation, Ken, there are things like scrapping allowance, which I’d like to talk about, as well. That applies if you’re doing some renovations.

Ken:  Correct. You have to be careful. You have to do the renovation in between tenants to be allowed to claim that scrapping schedule. What the scrapping schedule allows you to do is put a value on all those things that you’re throwing away.

A lot of people buy a property and develop it. They might buy a single property and build a duplex. You can them do what’s called a demolition schedule, which allows you to write off that amount of the building depreciation that hasn’t already been claimed.

You get those in the year that you either did the renovation or the demolition. Then when you build the reno or the new property, you then get a depreciation schedule and depreciate from that point onward. They’re critical.

Just thinking a bit wider, the other thing a lot of people forget when they look at depreciation is if you buy in multiple names, you should get what’s called a split depreciation schedule, not just one. So, one for each of the people on the title. That allows you to significantly increase the rate of depreciation.

Kevin:  Ken, any closing points?

Ken:  One crucial thing is if you ever sell that investment property, you have to add back the building depreciation to increase your capital gain.

Kevin:  Ken, thank you so much for your time. Ken Raiss from Chan & Naylor.

Thanks, mate.

Ken:  My pleasure.

 

Andrew Wilson

Kevin:  I’ve been accused over the years of pumping up real estate prices – if that’s even possible. One of the things that I have said in the past is that property prices go up and down. Do they always increase in value? That’s one of the myths we’re going to have a look at now. My good friend Dr. Andrew Wilson, the senior economist at the Domain Group joins me.

Andrew, good morning.

Andrew:  Good morning, Kevin, my good friend.

Kevin:  Andrew, do property prices always go up in value?

Andrew:  It’s all about the timeframe, Kevin, isn’t it? We do see property prices wax and wane, and it also depends on the nature of the market. Capital city markets, of course, have significant demand and supply drivers that keep them ticking been taking over through the cycles and over the longer term.

However, smaller regional markets can be exposed to significant changes in those supply and demand dynamics, particularly in relation to the performance of local economies. I think regional markets that are exposed to perhaps a single economic driver are those that are most vulnerable for prices to shift and for actual downward pressure on prices over time.

Look, the whole genesis or the basis of property price growth is supply; there’s demand in terms of construction. I think that we’re always a country that never has enough houses really in terms of the big picture going forward.

Even though we’ve seen a spurt in apartment development recently – and that’s a positive for employment generation and economic growth – I think even over time those shorter term oversupply scenarios are soaked up. I think it’s because we are basically a country that has a small number of large urban centers that we crowd into. I think that always means demand is pushing ahead of supply over the longer term, which keeps prices ticking upwards.

Kevin:  You mentioned there about supply and demand. I’m just interested to know about the tipping point. When does a market move from being undersupplied to being over-supplied? What are the indicators there?

Andrew:  Certainly, it’s a continuum. It depends what point of time you take your snapshot in terms of is it over-supplied or under-supplied or balanced? Developers always look for opportunities whereby supply can match the perception of where there are high levels of demand. Particularly with high-rise development, developers have to take a longer term view because of the very nature of high-rise development and significant numbers of new product coming into the marketplace, which will move ahead of demand.

We do see and we’ve seen markets where over time these short-term over-supply scenarios are soaked up and you see prices growth resuming. But they are the key indicators of an over-supply – and that’s falling prices and falling rents.

Kevin:  Is there a point in time in terms of stock levels where a market goes into over-supply? It all relates to supply and demand and that leads onto the number of sales. In a particular marketplace, is there a certain volume of stock that would indicate that a market is going to get some downward pressure on prices?

Andrew:  Again, these are short-term dynamics. We only have to look at the Perth and the Darwin markets to see the impact of, firstly, the surge in fly-in, fly-out workforce through the mining burns, where there was a significant demand from a mobile workforce for housing, which pushed up prices, pushed up rents. Now, when the mining boom ended that fly-in, fly-out workforce also ended, and then we did see much higher vacancy rates and falling prices. Again, over time with population growth and economic revival, those things do tend to balance out.

We’ve seen that particularly in the Perth market where that’s starting to stabilize now after a period where rents and house prices have fallen because of a significant reduction in demand, which was, as mentioned earlier, a reflection of the exposure of the Perth market to one particular strong economic driver, and that was the mining industry.

But other capital city markets – Brisbane, Melbourne, Sydney, and even Adelaide and the smaller markets, Canberra and Hobart – don’t have that same exposure to a single economic driver. That means that they tend to adjust or don’t tend to have the extremes of outcomes that markets have when they are just a one-trick pony in terms of what’s driving economic activity.

Kevin:  You talk about extremes in marketplaces. Sydney would have to be the classic example of extremes. Not just in recent times, but we’ve seen it over the last few decades where prices in Sydney will escalate phenomenally and then they’ll go into a massive downturn. What has actually caused the increase in the Sydney market in recent times, Andrew?

Andrew:  There were a confluence of factors. It was almost a perfect storm. It started in 2012 when the state government changed the stamp duty concession for first-home buyers. We saw a rush of first-home buyers into the market. They purchased established properties because established properties at that point were still eligible for the stamp duty concession. Then that activated change-over buyers that first-home buyers had purchased from. It was like a ripple effect in a pond.

Then along came lower interest rates and it just escalated, and prices growth was a product of those who owned their own homes trading up through the various price levels and regions and pushing prices up because they could, because interest rates fell to the lowest level since the 1960s. So that gave them the capacity to keep pushing prices up.

The other part of that perfect storm was investors. Investors got in on the action and they created their own energy. Prices growth attracted more investors, which pushed up prices, attracted more investors.

The thing that kept that investor market taking over in Sydney was a shortage of rental stock, a shortage of housing, which kept pushing up rents in line with prices growth, kept yields quite reasonably stable, even though they did start to fall when prices boomed. But it was still an attractive proposition, particularly that strong prices growth, and the low vacancy rates that kept investors interested.

A perfect storm in Sydney, but as we’ve seen recently, Sydney prices growth has certainly come back to the pack and, in fact, has fallen.

Kevin:  Will it continue to fall in your view?

Andrew:  This is the big question, isn’t it? We saw the sharpest fall over the December quarter in Sydney’s history, down by 3.1%. Now, confidence is certainly impacted in that Sydney market. Buyers and sellers will sit on the sidelines until there’s perhaps a clear indication of when the market has bottomed out.

But yields are now rising in Sydney. I think that the underlying fundamentals in Sydney are very strong – a strong economy, shortage of housing, strong migration. I think that will get the market up and running sooner rather than later. But there’s no doubt that double-figure prices growth of the past three years is now certainly an ancient and historical factor that is unlikely to be repeated any time soon.

So a much more moderate price outcome for Sydney this year. In fact, we may just see something like 2% or 3% prices growth following a near-15% result last year.

Kevin:  Always good talking to you. Dr. Andrew Wilson, senior economist at the Domain Group.

Andrew, thanks for your time.

Andrew:  Thank you, Kevin.

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Kevin Turner
kevin@realestatetalk.com.au
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