Michael Yardney agrees with Michael Pascoe

I wanted to get a balance to what Michael Pascoe said so I asked Michael Yardney for his opinion and, like me, you might be a bit surprised to hear his view.
Transcript – 
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 Yardney from Metropole Property Strategists, thanks for your time this morning.
Michael:  My pleasure, Kevin.

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