With banks tightening up on lending, especially to investors, finance is likely to be the ‘x factor’ in 2017 according to Michael Yardney. Michael discusses where he sees the smart money going next year.
Kevin: According to Michael Yardney, finance may just be the big stumbling block for a lot of investors next year. He joins me. Michael, of course, is a regular on our show – Michael Yardney from Metropole Property Strategists.
Michael, thanks for your time.
Michael: Hi, Kevin.
Kevin: Michael, you say that getting finance is going to become difficult. It’s interesting to see that at least one of the banks is really cutting back on lending to investors. Is this behind your concern?
Michael: It’s a combination of things, Kevin. While interest rates are low – and they may even go down a little bit more considering what’s happening with Australia’s economy – the banks’ serviceability criteria have been tightened.
In other words, investors – particularly investors who have multiple properties – have to be able to service all their loans at highish interest rates – often 7.5% to 8% – and be able to pay off their loans at the higher levels, as if they had principal-and-interest loans.
What that means is the banks are stress testing, allowing themselves some leeway in case the markets change, but it’s going to make it harder for already established investors to get new loans. They may just have to sit tight for a year or two, Kevin.
Kevin: One of the things that I’m hearing from a lot of investors is that while it is great to get a lot of information – and there is a lot of information available on the Internet, and even through our show, we talk to a lot of people – it’s actually cutting through all that information and deciding what would be best for you. Is that a big challenge for next year, do you think?
Michael: It’s going to become a bigger challenge because there are so many mixed messages and so many people purporting to know what to do. One of the challenges is not only going to be to find which properties to buy that are going to be investment-grade but also to know who to listen to, who not to listen to, and also which properties not to buy, which markets to avoids.
Because if we just look back 12 years, a lot of the so-called hotspots or potentially strong markets haven’t really transpired, have they, Kevin?
Kevin: No, they haven’t, Michael. It’s interesting to hear you say there about who you should be listening to. What are the warning signs? Is it that if someone comes out and says, “I’ll tell you how to get 50 properties in five years and you’re going to make $1 million every year” – those sorts of promises?
Michael: Of course, there are those whole group of spruikers who have got a vested interest, who are trying to sell you either educational programs or their own properties or properties that they’re selling. And of course, there are the property developers and their associated agents and marketers who have a particular product to sell. It’s actually not too difficult to fiddle with figures and make it sound like that particular location is going to do well because of demographics, infrastructure or population growth.
I’d be getting advice from someone who’s independent, who’s unbiased, who doesn’t have a product to sell –and interestingly, someone who’s borderless.
I think over the next year or two, the big change or the continuation of the trend we’ve seen is that Sydney and Melbourne are going to outperform the other capital cities, relative to their own economic growth, their own population growth, their wages growth in those areas and making things affordable.
The other thing is the wealth effect, because those who are already in that area now have more equity than they had a year or two ago. So, I think the gap is going to widen over there next year.
Therefore, speak to advisors who are borderless and who don’t really care where you invest as long as it’s going to be an investment-grade property in the right location.
Kevin: Yes, it comes down to having a formula. Michael, is there a type of property that you would recommend avoiding? And here I’m talking about things like off the plans, units, or houses in particular areas.
Michael: In the last couple of years, houses – or properties with land – have actually appreciated more in value than apartments. It’s because, in general, we have an oversupply of apartments.
That doesn’t mean that there are not more people wanting to live in apartments – and it’s a trend that’s going to continue – but at the current stage of the property cycle, particularly in Melbourne, Brisbane, and Perth, there is an oversupply, which is causing a dampening of apartment values, even established apartments. Interestingly, it’s not as obvious in Sydney, where there isn’t that large oversupply.
I’d be avoiding new apartments in the CBD, I’d be avoiding off-the-plan apartments because you’re usually paying a premium, and I would be careful with – I definitely wouldn’t be avoiding – buying established apartments, to make sure that you’re buying them at the right value and the right locations.
Kevin, I think the other area that’s going to suffer in due course is a lot of the new house-and-land package suburbs in the outer suburbs, because there has been an interesting trend. Overseas investors, often the Chinese investors, who were buying off-the-plan apartments are now being led to those outer new suburbs, and there is going to be a whole group of new investors oversupplying those areas.
Kevin: Where did we get it right in 2016, and where did we get it wrong with some of our predictions?
Michael: I think those who predicted that it’s going to be the areas where economic growth, wages growth, and established housing has increased in value have done pretty well. The fundamentals haven’t really changed – the fundamentals of supply and demand, the fundamentals of demographics driving property markets, and the fundamentals of local economy driving property markets.
While we all have the same federal government, we all have the same tax schemes, we all have the same interest rates, interestingly, there’s been a huge disparity, and it has fallen back to those fundamentals of local confidence, local economic growth, local population growth, and supply and demand, Kevin.
Kevin: Michael, it’s been great working with you not only through 2016 but for the many years we’ve been working together. I look forward to chatting to you again next year. This is probably the last chance we’ll have to have a bit of a talk during 2016, so I just wanted to say thank you for all your support and help.
Michael: Thank you very much, Kevin. I think next year is going to be a challenging year, where we’re going to have a bit of a credit squeeze, so it’ll be interesting talking throughout 2017 to see how that transpires.
Kevin: Certainly will, and we’ll certainly get your input. Michael, thanks again for your time.
Michael: My pleasure, Kevin.