19 May Why investing in property doesn’t make sense + Agent to the stars tells all + How to check a sellers motivation
Michael Pascoe, finance and economics commentator tells us why, in his opinion, investing in property doesn’t add up. He doesn’t say don’t do it but he points out why many investors go wrong. We wanted to get a balance to what Michael Pascoe said so we asked Michael Yardney from Metropole Property Strategists, for his opinion and you might be a bit surprised to hear his view.
A person’s motivation to sell is rarely just about financial reasons according to buyers agent Patrick Bright. He joins us to explain how you can spot a sellers motivation and why its important.
We catch up with the world’s most successful celebrity real estate agent – Josh Altman star of the hit American TV show Million Dollar Listing LA. He shares some interesting stories.
Brad Beer from BMT Tax Depreciation explains how you can get the maximum deductions available from your investment properties. Handy advice in the lead up to the end of financial year.
Bernard Hickey from Hive News New Zealand has a waning for Australian investors looking to cash in on the hot market there. He gives us detail about a new tax on foreign investment that has been mooted by the NZ Prime Minister.
Michael Pascoe –
Kevin: Joining me now is Michael Pascoe, finance and economics commentator, over 40 years’ experience in all forms of media.
It’s a pleasure to have you on the show, Michael, and thank you for your time.
Michael: My pleasure.
Kevin: You’ve written an article that was called “Why Investing in Property Doesn’t Add Up.” Could you tell us a bit more about that piece and what it means for Australians who are looking to invest in property?
Michael: There are a couple of things to it. First of all, it’s obviously a very general piece, because there isn’t one Australian property market; there are about 10,000 of them at least. But on the averages now, there has been such a surge in prices that you’re obviously not going to see that same soaring capital appreciation, obviously, until we digest a pretty big lift over the last few years.
The other side of it is supply has responded to demand, there has been a lot more building. That’s showing up and investors have certainly been active, meaning there’s more rental property around, meaning some rents are beginning to fall, other rents aren’t rising, and if the gross rental return isn’t flash, then the net rental return is even worse.
Kevin: When you build that on top of the credit squeeze that we had to have, with the banks toughening up on lending and so on, we’re probably going to see a lot of those units that are being built and apartments being built being left vacant or not being able to be sold, too. Will that add to that problem, or is that part of it?
Michael: I’m not so sure about that end of it. I think before you get to that situation… I presume you’re talking about properties that have been sold off the plan and then people can’t get finance.
Kevin: Yes, I am.
Michael: That’s a problem that the market will digest, but I think it’s a fairly short-term problem. The longer term is if you look in very rough figures, if you assume that prices on average are only going to rise by about the inflation rate for the next few years – and some people would call that an optimistic view; I think it’s not unreasonable. So let’s say prices go up by 2% a year. When you buy an investment property, depending upon what state you buy it in and how much it is, you’re paying as much as 5% stamp duty, so you’re not going to break even on your stamp duty for two and a half years. On top of that, you have land tax. Again, depends on where you are and how big your holdings are, but that has another bite of it.
My suspicion is that investors very rarely are honest and accurate in their assessment of costs of owning property. They might look at the gross yield and think, “Well, yes, that’s that. Well, we’ll be able to get around it, and we’ll still be making 2.5% or 3%.” I think a lot of investors in property, by the time they factor in all their costs, might be lucky to make 2%.
Now, you throw those numbers into the mix and it means an investor buying today, if they’re fortunate and buying the average property, they’re really not going to be ahead for three years. And that’s if they buy a property that’s still appreciating, and there are pockets clearly around the country where they’re not appreciating.
So it really is a challenge. The easy money seems to have been made in residential real estate. It comes along once every decade or so. Prices go through the roof. Like every boom, everyone piles in, and the people who pile in last to any boom tend not to do so well.
Kevin: You mentioned in the piece – that I thought was very good, too – that there are exceptions to this, and you just acknowledged that yourself, that there will be different parts of Australia that will still improve. What about properties where you can actually add a twist, add an extra bedroom to give you a better rental return, Michael?
Michael: That’s clearly where the professionals come into it, as opposed to the mug amateurs who just get burnt. That ability to pick a property that does have potential other people don’t see, the occasional bargain buy, the occasional stress sale that can do well, that makes the exception.
I’m talking very broad averages. By nature of those broad averages, there are some that are doing well. If you look nationally, the consensus view from people who watch property seems to be that Brisbane is going to fare better for a while yet, that the party is pretty much over or close to being over in Perth and Melbourne, and of course, the party is going backwards in Perth.
One interesting thing that I’ve come across in the last week or so from a finance broker and also from the comments made by the Reserve Bank’s Financial Stability Review is that it seems to be upside in Adelaide. Now, poor old Adelaide doesn’t get much of a look in and tends not to fly as high as any other state but also tends not to fall as low. I’m told that a couple of major banks are still happy to lend to developers for units in the Adelaide CBD when they’re not happy to lend for units in the CBD of the East Coast cities.
Kevin: That’s interesting. Just on another point, should property investors be focused more on long term, and if so, how long term?
Michael: Property investors have to be focused on the long term, because except when there’s a crazy boom on when you can buy and flip something fairly quickly – except for that once in a decade period – I would think looking at property in anything less than ten years, you’re fooling yourself. Part of the return that comes there is really for savings anyway if you do have to service the debt.
APRA and the banks have probably done investors a favor on a couple of fronts. I think they’ve forced a pull on the market, they’ve made people look a bit harder on what’s happening, and given what is happening with the returns, that’s a good thing. They’re also really encouraging banks who in turn encourage their clients not to do interest-only but to actually start knocking off some of the loan, and that should be a very helpful factor over the next several years.
Kevin: Jonathan Tepper, a researcher and economist from the UK, has loudly predicted that the Australian market is going to crash spectacularly within the next 12 months. He’s predicting 20 to 50%. What are your thoughts on that?
Michael: Oh, spare me. He’s another one, the latest in a long line of doomsday callers. I go back a fair way. I remember Steve Keen, when he came out with his famous prediction, and you have that klutz, the American who turns up here every couple of years with a new book he’s trying to sell.
Kevin: When he’s a got a book; yes, that’s right.
Michael: They make the same predictions. Nothing is impossible in the financial world, as we all know, but to have a serious housing crash in Australia, you would need to have a serious rise in unemployment. If you look at how Australians behaved during the 1990–91 recession when we had double-digit unemployment, the last thing they let go of is their real estate. We eat dog food before we sell the family home. So to get the sort of mass sales you would require to seriously crash prices, you’d have to paint me a scenario where we have a major rise in unemployment, and there is nothing on the horizon that you can say is likely to lead to that.
One of the things you never have to worry about is missing bad news. There will always be someone who wants to tell you bad news; it takes a bit of effort to go and find a more balanced picture. And the more balanced picture is that the Australian economy is close to pulling off an incredible transition from its resources boom into something more sustainable. We haven’t done it yet, but it’s looking like we could do it, and we have a situation where we have jobs continuing to rise, we still have good population growth, and as long as you have more employment and more people, it’s hard to see how you could have a really major property crash.
Also, unlike the lending institutions in Europe and the US, our banks haven’t lost the plot. We are fortunate to have APRA pull them up, as APRA had to pull them up last year and this year. So I just can’t see why that’s the probable outcome, because you get the odd clown who looks at charts from the other side of the world and does a taxi driver survey in western Sydney and extrapolates that to the nation. It doesn’t make sense.
Kevin: And more importantly, has a book to sell.
Michael: That tends to be the case.
Kevin: Michael, it’s fantastic talking to you. Thank you so much for giving us your time today.
Michael: A pleasure.
Kevin: Just before the break there, you heard what Michael Pascoe had to say about the Australian market. Let’s get not so much another view, but an extended view on that. Michael Yardney joined from Metropole Property Strategists.
Michael, I know that you’re familiar with what Michael Pascoe had to say. What would be your reaction to his sentiment?
Michael: Kevin, it may surprise you, but I agree. I think Michael Pascoe is right, most new property investors are going to fail over the next couple of years.
Kevin: What does that say about the market, or does that say something about the investor?
Michael: It’s really nothing new here. Statistics show that 20% of property owners sell up in the first year and up to about 50% of people who get into property investment sell up in five years of owning a property, so as I said, most property investors fail. Those who stay in the market, 93% of them never end up with more than two properties, which means they never get the financial independence they require.
Of course, at this stage of the property cycle, I think we’re not going to have anywhere near as much capital growth. That means mistakes won’t be covered up by the strong growth that particularly the Melbourne and Sydney markets have experienced, and Brisbane to a different degree over the last year or two. I think that means a larger percentage of those who get into property will be disappointed.
Let me be clear, Kevin. I’m not actually suggesting you shouldn’t get into property investment. What I’m saying is to be successful, you actually have to do things differently to the average investor.
Kevin: Is it that we’ve gotten carried away with the boom or the optimism, Michael?
Michael: I believe lots of beginning investors bought in thinking they could buy any property and it would double in value in seven to ten years’ time. Property should never be seen as a short-term investment, and the thought that any property is an investment-grade property is also very wrong.
Michael was correct in saying that on average, properties are probably going to only go up over the next couple of years in line with inflation, and in some locations, property values are going to go down. But if you talk about averages, some will outperform and some will underperform. I guess that’s how averages are made. What a successful investor needs to do is find those properties that will outperform. Otherwise, he’s right; property investment won’t make sense.
Kevin: Do you think we’ve gone too much for generalizations? That statement about property values are going to double every ten years, that may happen in some areas and some properties, but that doesn’t happen across all markets.
Michael: First of all, it doesn’t happen across all markets, and also, it happens more when there’s high inflation. Currently, with inflation low and interest rates at historic lows, you really don’t need double-digit capital growth to make a property work strongly for you.
It’s unlikely over the next while that those sort of returns, double-digit growth, and properties doubling in seven to ten years will occur. But there are ways you can make your property outperform, and that’s by finding the sort of property that’ll be in strong demand in the future, that will be pushed up in value by lots of owner-occupiers not investors wanting it. It’s owner-occupiers who buy with their hearts, not their calculators, who push up property values.
Find the locations with those owner occupiers have more income, higher disposable income, can afford to and are prepared to pay, and then I like buying properties where if the market is not going to do the heavy lifting, I’d be doing it by doing some renovations or redevelopment, so there are still going to be opportunities at the next stage of the cycle, while other people are sitting on the sidelines, wondering what’s going on.
Kevin: You say the next stage of the cycle. What stage are we at?
Michael: Each state is in its own stage of the cycle, and Kevin, even within each state, we have multiple markets – some at different price points, some geographically, some have different property types.
For example, what I mean by that is if you look at the inner-city Brisbane apartment market and the near-city Brisbane apartment market – and it’s really much the same in Melbourne, as well – there is an oversupply, where they’re in a more mature stage, and really, in some ways a slump stage where property values are dropping.
That’s not always reflected in the sale of new properties, because that’s an artificial market, in many ways supported by foreign investors. But when those newish properties in the high-rise towers come onto the secondary market, we’re finding that the values of them – the real value, the market value when the market tests it – is maybe 20%, 30% less than the contract price.
In some markets or in regional towns, mining towns, we’re already at the stage of the cycle where we’re pedaling backwards. In other parts, the market is still moving forwards. Only over the last week or so, Domain sent out its quarterly review, and we saw that in Melbourne, property prices are increasing and in Hobart, they are, but interestingly, in every other capital city, property values are tracking backwards – on average. Again, that means not all properties, but some are.
It’s a time where you have to be cautious, and if you want to think about property investment, be very selective in your property purchases.
Kevin: You say to be selective. Are we looking therefore at properties that outperform the averages? If that’s the case, how do we find those?
Michael: What we’re looking for are properties that are going to remain in continuous strong demand over the next year or two when demand won’t be as strong. In general, 70% of properties are bought by owner-occupiers and overall about 30% by investors. But that equation got tipped over over the last couple of years, where investors lead the pack, particularly in Sydney, where up to 50% of properties were being purchased by investors, pushing out first-home buyers.
In general, 15% to 20% of properties are in the first-home buyer category, so to become a successful investor, to choose those properties you just asked me about, Kevin, I’d be looking at those that are attractive to the wider demographic who can afford to and are prepared to pay, and that’s more in the upper price brackets, not the first-home buyer market where they’re more interest-rate sensitive and job-sensitive, and not investment-grade properties, which are often the new and off-the-plan in the big complexes, but properties in streets in the middle-ring suburbs of Brisbane, Sydney, and Melbourne, and all of our capital cities, really, where people are still getting married, getting divorced, having kids, getting new jobs, and moving on with their lives.
That’s going to continue on over the next couple of years, despite all the other things that are happening in the world. The properties that will attract them – not that we want to sell to them, but they’re going to push up the value of properties next to ours, similar properties to ours, to make sure that our property values, our investment properties, don’t falter.
Kevin: The culture of home ownership that we have in Australia has probably driven us and made us be prepared to pay more, or as much as we can, to get a home. Has that influenced us or actually tarnished us a little bit, if we’re looking for investment properties?
Michael: Kevin, homebuyers in Australia own bigger homes than in other parts of the world. Most people have a spare bedroom in their home. Many people will buy a home they’re going to be proud of. It’s a very different culture to overseas, you’re right, and Michael Pascoe in his interview with you a moment ago said a beautiful line: “They’d rather eat dog food than give up their homes when things get tough.”
So the fact that 70% of properties in Australia are owned by owner-occupiers – and in fact that 50% of them don’t even have a mortgage – underpins our Australian property markets. It means that as an investor, you’ll be buying in an investment market if it’s not dominated by investors, and that leads to a level of stability to the market.
But you’re right; you were asking does that taint investors, and I think many beginning investors buy a property thinking, “Could I live in it? Would I live in it? Is it the sort of house that I’d live in?” That probably isn’t one of my criteria for investment-grade properties, Kevin.
Kevin: Michael, we’re out of time, unfortunately, but I want to thank you for that insight, and also surprised to see that you did agree there, but I can understand now when you describe to me why you would agree with Michael Pascoe.
Michael: My pleasure, Kevin.
Patrick Bright –
Kevin: Whenever I ask a seller what it is they look for when they’re looking to buy a property, they always talk about the motivation of the seller. I wonder just how important that is, or in fact, how you can even spot a motivated seller, and what is one anyway? Is it about desperation? Is it about their need to move on or just their desire to move on?
My next guest is a buyer’s agent, and I guess Patrick Bright from EPS Property Search deals with this all the time.
Patrick: Hi, Kevin.
Kevin: Probably a common question you’re asked, as well, about the motivation of the seller: How important is it to know that, Patrick?
Patrick: It’s helpful to know that you have a motivated seller, but at the end of the day, it’s important to buy from someone who is motivated to sell. There is a percentage of people who put their property on the market simply because they’re just testing the market or they’re not highly motivated or the local sales agent has knocked on the door or rung them and said, “Look, would you think of selling? What are you looking for?” They say this number, and they say, “Well, if I can get that for you, would you be prepared to sell?” and they’re looking to get it on the market. That’s not what I would call a motivated seller.
Someone who is motivated has actually bought something else and they need to sell theirs, and they are happy to listen to fair market value, and they are not going to hang out for a Disneyland price.
Kevin: I think you’ve often said in the past – and I’ve read a brief on this – that it’s rarely just about financial reasons that would make someone motivated to sell. Is that correct?
Patrick: Yes. There are a number of reasons, but I think the top few are if there is unfortunately a relationship breakdown that does happen and people need to separate and move on with their lives and they need to separate the financial aspects of their lives, as well, which is unfortunate but reality.
The financial difficulties as we’ve just mentioned do come into play, but I think the main thing that they’ve already purchased elsewhere is very strong, particularly in a rising market. Most people want to find something before they sell because they know they are going to sell it because the market is tight. So it’s often about finding what they want first, getting that, and then they don’t want to have two mortgages. They have to get on with it pretty promptly because a lot of people can’t fund two mortgages at the same time.
They could be relocating for work. There could be difficult tenants. It could be an investment property and they’re having trouble with a tenant who has gone a bit feral on them. It’s not common, but it does happen. That’s why it’s good to have landlord insurance, of course. But they could be giving them some difficulties, so they’re just over it and they want to sell.
There are a bunch of reasons that people do want to shift a property. What you want to do is ideally buy from someone who is motivated to sell, because they are more likely to listen to a fair market price.
Kevin: How reliable is it when an agent does actually put on an ad “Owners have purchased elsewhere”? As you’ve indicated, that is a good motivator. Things like “Desperate to sell,” “Must sell now.” Are those just marketing ploys?
Patrick: Absolutely they are. They wouldn’t publish something like that unless there was some truth to that, otherwise it’s misleading advertising. You’re taking a very big risk to be publishing something that isn’t factual.
I remember when I was a selling agent 20-odd years ago now – getting on – one of the things we noticed was that if you put “Highly motivated seller” or “Mortgagee sale” or “Deceased estate” on a property, the amount of extra interest was dramatic. In fact, if you could get away with it you would probably advertise the fact that the property is a deceased estate even though it wasn’t, just to get extra interest.
Those properties very rarely sell for a conservative price, because most buyers are doing this for their first or second time, they’re not educated, and they go along and they think it has got to be a bargain whatever it sells for. Some of those properties sell for really silly prices, because you have everyone thinking, “Well, whatever I buy it for, it’s a desperate seller and I’m going to do well.”
You do have to do your own independent research. You do need to make sure that you’re making an educated offer on the property or setting an educated, well-researched limit so that you don’t get caught up being that person.
Kevin: How do you approach that as a buyer’s agent? If it were going to auction and under that kind of duress, would you try to secure the property before the auction?
Patrick: It depends on the property. I see every property without a price because I’m going to do my research. Prices that are listed on properties are very often what the agent had to promise the vendor to get it on the market or a price that the vendor says they want, which isn’t often very realistic but the agent needs to run with that initially until they get buyer feedback and then educate them on what the market value is. I’ve been in real estate 20-odd years now and I don’t know anyone who has ever told me their home is worth less than I thought it was. I’m unemotional about it, and they are.
You need to get that independent assessment. Do your own numbers, because you don’t want to be influenced. Let’s say they put a million dollars on the property and it may only be worth $900,000. Then someone says, “Well, if I can get 5% off that asking price, or if I can get it for $950,000 I’d probably be getting a good deal.” But what if it’s only worth $900,000? You’ve now been influenced by that million-dollar asking price.
Ignore asking prices. Ignore price guides. You need to do your own research. That way, you set your own sensible, well-researched limit. Then if their price guide or whatever guide the agent has provided if there is one being provided, you can factor that in if you want to. But you’ve done your own research separate to that.
Kevin: That’s really good advice: make up your own mind rather than be conditioned by the agent. As you rightly point out, everyone wants more than their property is worth, and that is probably what the pitch price is going to be from the agent because they are working for the seller.
Patrick: Correct. There are two types of prices that get pitched. There is the Disneyland silly price that gets pitched because that’s what they need to get the vendor’s agreement to get it on the market, or that is what the vendor has agreed to sell at only, so they have to pitch that price. Or you get the underquote price where it is really pitched low to get a lot of interest, but it’s well below where the vendor would really sell at.
Do not get caught out being underquoted or overquoted to and influenced by a price. I hear people say this at barbeques and gatherings: “I got a great deal.” I say, “Well, good on you. Well done. Just out of curiosity, what were the numbers?” And they say, “Oh, they were asking $1.1 million for it and I wore them down and I got them down to a million and twenty.” The question I would have is was it ever really worth $1.1 million?
People will convince themselves that they have a good deal when they may not have. On occasion, you might have got a great deal because you have got a motivated seller on the other end of it and that was the best offer they got and they took it and they ran.
By the same token, don’t be afraid of properties that have been sitting on the market for more than six weeks because they get a stigma that they’re stale. They may have had a silly price or they may have poorly marketed or they may have been poorly presented, and people can’t see through that. Some of the best property deals I’ve bought at great prices have been from the fed-up seller, if you like, who has been on the market six, eight, or ten weeks or they’re with their second agent and it’s been listed before.
Every property has a digital footprint. If you Google the address, you could find out historical advertising and you could find out how long it’s been on the market or if it’s been with a previous agent. Then you know the seller is a lot more motivated than they were last time.
Kevin: Some great advice there from Patrick Bright, EPS Property Search.
Patrick, once again thanks for your time.
Patrick: A pleasure, Kevin, as always.
Brad Beer –
Kevin: In the lead-up to the end of the financial year, investors will be busily preparing their documentation to ensure that they claim the maximum deductions available for their investment properties, and why wouldn’t they? Now, of all the deductions that an investor is entitled to claim, property depreciation continues to be the one that is most commonly missed. I wonder why that is?
Brad Beer, who is the Chief Executive Officer of BMT Tax Depreciation, joins us. Is this one of the most misunderstood deductions, Brad?
Brad: Yes, I think it’s misunderstood. Because you don’t pay for it and it’s a non-cash tax deduction is probably one of the big reasons that that is the case. People don’t understand that if they haven’t paid for it they may still be able to get a deduction for it. They don’t really understand much about their investment property sometimes, so it’s often missed.
Kevin: From your experience, how many actually miss out on depreciation deductions?
Brad: We’ve done some research, and probably close to 80% of investors don’t maximize their deductions. It’s not that they’re missing out altogether, but it’s that they’re not claiming as much as they can claim. It’s because they guessed, their accountant guessed, or they used some information provided. It needs to be done properly so that you can get the maximum deductions, because if you don’t, you’re just leaving cash on the table.
Kevin: You’ve obviously looked into this. What are the most common reasons why investors don’t claim all their depreciation entitlements?
Brad: I’d call two of the most common things. One is that people sometimes buy investment property without a full understanding about the numbers. I think you really should crunch numbers. The most common thing I hear is, “That’s tax. I think my accountant looks after that,” or “I have got a good accountant.” Now accountants are our friends, but accountants also sometimes need specialists in certain areas to make sure you’re getting the most out of that property.
The second most common thing I would hear is that people think old property doesn’t get depreciation. It does. It’s not as much, and there are some things about age that do matter, but the important thing is that old property still gets some depreciation. Let’s find out how much, make sure it’s worth it, and get it assessed if necessary.
Kevin: Someone who is listening now may be a property investor who hasn’t been claiming depreciation or may be doubting whether they’re getting it all. What should they do?
Brad: It’s really easy. We’ve got calculators on the website or we could talk to you about your property. With the address, we can see some photos usually these days and get an indication of what sort of deductions could be claimed.
Have a check against your tax return and see what you are claiming, and if you haven’t been getting it all you can easily go back and amend up to two years of tax returns and can potentially get some money back from the tax office, which is always nice.
Kevin: I have read on your site about the site inspection process. What is that?
Brad: Depreciation is a claim on the wear and tear of the building and items within it. In order to work out what this claim is, it relates to the construction costs and the value of items in the property. In order to get that done properly, in order to find all of these things, we do a site inspection.
We go out and visit. We’re quantity surveyors. We estimate the construction costs of the property, we put the values on the items, we identify everything we can to claim as fast as we can. It’s important for the site inspection to make sure we’re thorough and we get everything we can so that we can maximize deductions and therefore your cash flow.
Kevin: Bottom line here, Brad, if we could. Could you explain the impact of depreciation deductions, and what sort of impact can they have on an investor’s cash flow?
Brad: It’s a good question. Depreciation is wear and tear of items to create a deduction. As I say, a non-cash tax deduction, so you don’t pay it out. What it means is a deduction that you don’t pay out. On average, a first-year deduction… Against the hundreds of thousands of residential depreciation schedules we’ve done, the first year claims around $10,000.
What that means is the first-year deduction is about $10,000 at your marginal tax rate. You get cash back in your pocket in some way. There are other numbers to be involved in this, but effectively it should mean if your tax rate is 47 cents on the dollar, it’s $4700 in your pocket. If it’s 30 cents on the dollar, that’s $3000 in your pocket. So it is cash that you do get back if it’s done properly.
Kevin: Brad Beer, who is the Chief Executive Officer of BMT Tax Depreciation, has been my guest. That’s something you should look into. You can use the link that’s on our website at RealEstateTalk.com.au to contact Brad and his team and just check. Find out whether or not you are getting all of those allowances that Brad has been talking about. Obviously, it’s going to make you a lot happier financially.
Brad, thank you very much for your time. It’s always great talking to you, mate.
Brad: Thanks, Kevin. Great to be here.
Bernard Hickey –
Kevin: Just like in Australia, when there is a Reserve Bank decision in New Zealand, there is a lot of interest about it. It happened this week, and joining us to bring us up to date on that and the New Zealand market generally, Bernard Hickey, publisher for HiveNews.co.nz.
What did they decide to do, Bernard?
Bernard: The Reserve Bank kept the Official Cash Rate at 2.25%, which was widely expected. There were about three economists out of about 17 who thought there might be a cut this week, although financial markets were expecting a higher chance of a rate cut.
There was no rate cut, but the Reserve Bank did indicate it would likely cut the Official Cash Rate one more time later this year 2%. That would see mortgage rates drop below 4% in New Zealand. Most people in New Zealand take out fixed-rate mortgages, and they are currently around the 4.2% mark.
Kevin: So when the Reserve Bank in New Zealand adjusts the rates like that, is that an automatic follow-on from the bank, or do the banks make those decisions independently?
Bernard: That is a really interesting point, because with the last rate cut which was a surprise on March 10th, the banks didn’t pass it all along to floating-rate mortgages. New Zealand is a bit different from Australia in the way that the mortgage market operates. In New Zealand, most people now with mortgages have fixed-rate mortgages, so they will take out a one-year or an 18-month or a two-year mortgage, which typically at the moment have rates at around about 4.2% to 4.6%. About 25% or so of mortgages are floating-rate mortgages.
On March 10th, the banks – which are the same big four banks that you have – decided only to pass on about 15 to 20 basis points of the 25 basis points of cuts to floating-rate mortgages. They argued that their foreign funding costs were higher early in 2016 than they had been in 2015.
Kevin: It would appear to me that the market is still very, very hot, particularly around that Auckland and even Northland area. I was surprised to see that Gisborne actually had a bit of a movement, too, in its asking price. What is happening in that area?
Bernard: Gisborne and Hawke’s Bay are unusual in New Zealand in that they are relatively small provincial areas with relatively weak local economies, and particularly in Gisborne’s case, falling population. So its house prices have been underperforming over the last decade or so, particularly relative to Auckland.
But what we have seen in the last six months or so is that Auckland property investors in particular have looked to leverage up some of their equity gains in Auckland by buying property elsewhere. There have also been some people who have decided to move out of Auckland to crystalize their capital gains, which are tax-free in New Zealand, and buy a bigger house on a bigger section or maybe a lifestyle block in a regional area. Gisborne is a pretty attractive part of the country. It has some great vineyards, it has the most sun, and it is a pretty attractive place for a lot of people.
We are seeing a bit of heat now starting to build up in some of these previously unloved provincial areas, like Gisborne, like Napier, like Dunedin, and to an extent Wellington. It’s also being driven by a change in Reserve Bank policy in November.
In New Zealand, the Reserve Bank is the regulator of the banks, not APRA, and the Reserve Bank specified that from November 1st, if you were a rental property investor in Auckland, you couldn’t borrow more than 70% of the value of the property. However, outside of Auckland you could borrow up to 80% of the value of the property.
So a lot of property investors now look ahead in New Zealand to a future of no capital gains tax, no stamp duty, and falling interest rates along with an economy that is growing solidly at 3% with jobs growth of 2.5% – so plenty of demand for property.
Kevin: There’s a big debate over here, too, in Australia is about negative gearing. That’s something that you don’t have in New Zealand.
Bernard: That’s right. Losses are ring-fenced in New Zealand, so it’s much harder to make a big loss on a rental property and then offset it against your income tax. One thing to watch for, though – some news that has broken the last few days – is that the Prime Minister, John Key, has suggested that New Zealand might introduce a land tax for non-resident owners of property in New Zealand.
We have some of the same stresses on our property market here where first-home buyers are struggling to get in. There is plenty of foreign investment, particularly from China, and there is a lot of political pressure on the government to do something about that because we don’t have any restrictions on foreign buying of property here.
When we say a land tax, that’s a tax of let’s say 1% per year on the value of the land every year ongoing, not a stamp duty. The government hasn’t said they are going to go ahead with it yet, but the Prime Minister has talked about it. That means if you are an Australian investor buying a property in New Zealand, you could be subject to this land tax on non-residents – if it is brought in.
There is still a lot of news to come yet. We still haven’t heard the detail, but the Prime Minister did suggest that this week.
Kevin: It’s very interesting. We will follow what happens on both sides of the Tasman. Of course, one of the major banks here, Westpac Bank, cutting off its book entirely for foreign investors, so we’ll see what happens there.
Bernard Hickey is the publisher of HiveNews.co.nz.
Bernard, thanks for your time.
Josh Altman –
Kevin: Josh Altman is the world’s most successful celebrity real estate agent, and I’m proud to say that he joins us. Josh, of course, works with some really big stars, people like Kim Kardashian, Kanye West, Britney Spears, Ashton Kutcher, Miley Cyrus, and many, many more. He is their real estate agent, and he is also the star of the hit TV show Million Dollar Listing L.A. and he is coming to Sydney, Melbourne, and Brisbane in June. We’ll tell you a little bit more about that, but firstly let’s welcome him to the show.
Hi Josh. Welcome to Australia, and welcome to our show.
Josh: Thanks for having me. I’m looking forward to coming out to Australia. I can’t wait.
Kevin: That’s June 14th, 15th, and 19th respectively on a tour around Sydney, Melbourne, and Brisbane. We’ll give you more detail about that in just a moment.
Josh, firstly, tell us about how you became a real estate powerhouse and where your passion for buying and selling property came from.
Josh: I definitely am in love with real estate, for sure. I’m a real-estate-aholic is what we like to say here. But it didn’t all start with touring around celebrities and selling $20 or $30 million houses; it actually started when I moved out to L.A. about 13 years ago.
I started working in the mailroom for $7.50 an hour. I had saved all the money that I had made in the mail room. I ended up investing in a property with 100% financing and ended up flipping that property and making more money in three months than I had all year long in the mail room. So I went and I quit my job, and I decided that real estate was the way for me to go.
Ever since, I’ve sold about $2 billion worth of high-end residential real estate, and now we sell properties all over the world.
Kevin: Tell me about that transition from becoming a successful developer or real estate entrepreneur to then selling properties and then moving up and selling them on behalf of people like Kim Kardashian. Was that a hard market to break into?
Josh: Well, yes. My background is that I’ve flipped a lot of houses, as well, which helps me be the type of agent that I am because I really understand all aspects of the real estate business as far as rehabbing properties, flipping properties, financing them, and now, of course, selling them.
When you work in Los Angeles as a realtor, you’re going to have celebrity clients one way or another, because everybody is famous out here; it’s just breaking into that upper echelon of the A-list celebrity clientele. The most important thing is always treating them the same as you would treat anybody else.
A lot of times you have to realize that we only need these people one time showing them the house. The rest of the time we’re just dealing with their entourage of business manager, attorney, managers, accountants, and so on. It’s not like we’re driving around spending tons of time with Kim and Kanye.
Kevin: Of course, you’re a TV star in your own right. You and your brother have your own television show. What is it like when you meet these guys? They obviously know you because they must watch the show. Is that a big attraction for them?
Josh: For some people, it is. For others, it actually is not a big attraction because they’d rather keep their finances private. I would say out of, let’s say, 100 clients a year, I only put 10 of them on the show. I have to be very careful to let people know that not every showing or every deal I do is taped, because we have a very private side of our business, as well.
There is a fine line that I have to deal with, as well, because I don’t want to become a celebrity. I’m not a celebrity; I’m a real estate agent who happens to have a show. I don’t want people to think that I’m too big to show them a $500,000 condo or a $1 million house, which is on the lower end of what you can find here in Los Angeles, because then that will start affecting my business. It’s a fine line of being on TV and selling houses.
Kevin: The competition we see between you and your brother Matt in the show, is that real or is that just done for television?
Josh: Of course, that’s real. That’s healthy brotherly love competition. Matt beat me up my whole life growing up because he was three years older than me – until I started going to the gym and then I beat him up once, and ever since then, we’ve been best friends. He is the best partner in the world to have. Nothing better than working with your family and having somebody that you can trust 100% always to have your back. With that, I also now have my wife – Heather – who works with us, which really completes the full circle of having all family involved in the business.
Kevin: I read somewhere, I think, and correct me if I’m wrong here, that you sold the most expensive one-bedroom home in history. Is that correct?
Josh: Yes. It was $21 million. It was a one-bedroom home. It was a very famous estate owned by Dick Zanuck, who was a very well-known movie producer here in Los Angeles. The gym was built by Arnold Schwarzenegger, who was a very dear friend of his, as well. So that was pretty cool.
We have many records, but that one definitely takes the cake. I just listed a $53 million house that is 53,000 square feet with an indoor and outdoor tennis court and an indoor and outdoor pool. We come across some pretty wild houses out here.
Kevin: How do you get the prices on these? Some of them are very unique. I’ve watched the show, and I can see where there is a bit of a battle. Every seller wants more than what it’s really worth. How do you establish value in your mind?
Josh: That’s a good question, because a lot of these houses are so unique and they are one-of-a-kind that a lot of times in the higher end there are not that many comps to go after. As far as a normal house, you can pretty much figure out what it’s going to sell for because there are 10 other houses like it.
But when you are dealing with a mini Taj Mahal, you have got to take all different things into account: what buttons it hits, what the amenities are in the property, the acreage, the square footage, what type of buyer, and do those types of buyers typically pay more? There is a lot that goes into the equation.
Kevin: Who was the most difficult person you’ve had to deal with as a high-profile star? I don’t know whether you’ll even be prepared to answer that question.
Josh: Myself. I’m a real pain in the butt when it comes to buying and selling houses, let me tell you. I’m super picky. I typically pick up about three houses a year. I write about 50 offers a year and only end up with about three houses. I’m pretty picky myself.
Kevin: So you actually offer on about 50 – like one a week, on average. Is that right?
Josh: Yes, that’s correct. For me as an investor, it’s all about getting the best deal. So what better way than to write a bunch of offers, throw them against the wall, and see what sticks.
Kevin: Are you holding onto these properties, or are you flipping them?
Josh: As of right now, I’m flipping them. But it just depends on the deal. I’m always open to holding them, selling them, partnering, building, knocking down, whatever it is. It just really depends on the deal.
In fact, I just got married two weeks ago, and we just closed on our newest dream home in the Hollywood Hills last week, so I’m pretty excited about that.
Kevin: Congratulations. Well done.
Are the properties that you’re buying in different parts of the States, or are you buying primarily where you’re selling?
Josh: I’ve always been very big on buying what I know. If I can drive around and I can see it, then I’ll look at buying it. If I can’t, then it’s not something that I’m too excited to do. A lot of people pitch me properties in other states that are good deals, but I like to see it, feel it, drive by it, and touch it.
That’s how I look at my real estate portfolio. They are mostly in the areas where I am the expert, because I know what a good deal is and I know it better than anybody else in the area. That’s typically what I do. I have three houses within about 22 houses of each other. I guess you could say that I like a specific area.
Kevin: We’ve heard some horror stories out of the States in terms of real estate and what has happened with the market there, how it tanked in areas like Detroit. Is the market generally starting to improve in the States again now? Is supply and demand getting into a bit more of a balance?
Josh: I’ll tell you this, the market right now is super hot. As far as globally, we are still very cheap compared to every other major market. We are a destination location, as well, which is nice.
But I will tell you there is going to be a lot of inventory hitting the market in the next six to twelve months. That is due to the market continuing to go up and a lot of people investing in the market are finished building those houses that they had been buying. At that point, you are going to probably see a little of an adjustment and there will be some good deals for you to buy.
Kevin: So the market is likely to come back a little bit, do you think? Will there be certain parts of the States where that will happen more than others?
Josh: Yes. For me, it’s always invest in location, location, location. That’s the one thing that will be the safest bet in real estate. In good markets or bad markets, if you’re buying overlooking the park in New York City or if you’re buying in prime Beverly Hills, those are always going to be strong locations to buy and invest your money in.
Kevin: Josh, great talking to you, and thanks for your time.
Josh: Thank you for having me.