11 Aug Is Negative Gearing safe now? + 40 regional locations set to boom
In our personality profile this week we get up close and personal with Pete Wargent. Pete reveals some of the great lessons he has learnt along the way.
Millions of baby boomers will be a driving force of Australia’s property market over the next 20 years and many will head to the affordability of regional Australia. Today we identify 40 regional locations likely to be targeted by baby boomers and these are areas every investor should want to know about.
MFAA Director Melissa Gielnik tells us about a spike in parental guarantee loans. What are they you might say. Melissa explains.
Well with the election behind us now, the question on every investors lips is – is negative gearing safe now? Because it became a focal point of the election and the result was so close, it should serve as a major ‘wake-up’ call for property investors according to Simon Buckingham. We take a look at what is likely to be ahead because as Simon says – it’s not over yet!
Here is an amazing stat – less than half of all Australians could be homeowners by 2017. That’s next year! That is part of the HILDA Report. Michael Yardney tells us about the report and some of its findings, as we ask – what’s happened to the great Australian dream of everyone being able to own a home to call their own?
The bank of Mum and Dad – Melissa Gielnik
Kevin: Gee, we’ve heard a lot lately about how unaffordable property is, but we’re also hearing that the older generation – that is, maybe the parents or grandparents of people who are currently trying to buy a property – are among some of the most wealthy in Australia. Well, it just could be that the housing affordability issue that is gripping the nation for first-home buyers may just be improving through something called parental guarantees.
Many parents who have built up equity in their home are ideally placed to help their children – or grandchildren, even – move up the housing ladder much sooner. Parental guarantees are the loans of the future and can be an excellent affordability housing solution for young buyers according to Director of the MFAA and Managing Director of Smart Lending, Melissa Gielnik, who joins me.
Melissa: Hi Kevin. How are you?
Kevin: Thank you very much for your time. I’m great, thanks.
Tell me firstly, what are parental guarantees?
Melissa: As the name suggests, it’s a home loan where the family guarantees the applicant – so the younger family member using their property. Kevin, this is a limited liability loan. What that means is, the parents are limited to a dollar amount, an actual value. The loan is actually a win-win for both. The parents actually get to have a dollar value as a guarantee and the applicant gets their property.
Kevin: These parental guarantee loans have been around for some time, but I understand now that there are more financial institutions offering these as an alternative.
Melissa: Yes, there are. The market for this type of loan has really grown, being that it is a loan of the future. It’s really taken off. It’s quite heavily promoted now. It’s an alternative to applicants having to save a deposit, but also for the ones who have saved, Kevin, using a family pledge loan or a parental guarantee means that they can avoid lender’s mortgage insurance.
Kevin: That’s a great bonus, isn’t it? Yes. As the Director of MFAA, I guess you get to see across what really is happening because you’re very representative of what’s happening with borrowers. Could you give us a bit of an idea about how many parental guarantee loans there might be in the market right now?
Melissa: We’ve seen a spike in the numbers. It’s around 15% of the entire market. I can’t give you a dollar value on that or a number value. But about 15% of the home loans written are parental guarantees currently.
Kevin: That’s fairly extensive, isn’t it? Can you give us a bit of an idea about some of the conditions that have to be met by both the buyer and the parents to qualify for these types of loans.
Melissa: There are both conditions and considerations. With the conditions, parents firstly need to own or almost own their home. Equity is the key. The applicants themselves need to be able to service the loan. Parents don’t help service the debt. The applicants need to do that via their own income. Then the applicants must also display and have the financial capacity to pay the loan back. I think they’re the main conditions.
With the considerations, parents must consider whether they want to use their home to help their child, and the applicant needs to consider whether or not they can actually afford the loan and stretch themselves with their budget.
Kevin: Melissa, would you think that the increase in relying on the financial security of parents is a necessary evil, or just an easy way out for first-home buyers?
Melissa: Honestly, I really think it is a combination of both. It is an easy way in to the market. We keep saying it’s the loan of the future because as housing prices continue to rise… In Victoria, for example, an average $400,000 home, a client needs to save a 5% deposit of $20,000. They need government costs of $9500. Mortgage insurance is $13,000. So an average first-home buyer buying a property of $400,000 needs $43,500 in cash. When you look at it in that context, it’s almost becoming a necessary evil.
Kevin: Do you think that the banks are responding here to what they see is growing unaffordability for first-home buyers? In other words, are they trying to be a little bit more flexible in the way that they can by offering these parental loans?
Melissa: Yes, absolutely. I think the key between just adding mom and dad onto your home loan and doing a parental guarantee is the limited liability. Limited liability means that the parents, again, are committed to a dollar value. So should the child not pay their debt, the parents know exactly what they’re up for.
The banks have definitely created that market as opposed to mom and dad using their house wholly and going on the child’s loan. It’s a much better way of doing that. And it does mean that the applicant, Kevin, has to afford and be able to service the debt based on their own income, not mom and dad’s income.
Kevin: That’s a very good point, too. There has been a fair bit of criticism – and we carried it in our show recently, too – from a number of people saying that first-home buyers should stop whinging; it’s not all that unaffordable. Where do you stand in all this? Do you think it is getting tougher for first home buyers? And if so, why?
Melissa: I do. I think just the average price of a home has grown so much. We’ve seen really large rises in house prices. The market has just grown generally. So when you think about perhaps when I bought my first home, I may have only needed $20,000. Now you need $43,000.
Wages haven’t actually risen in accordance with house prices, so it is becoming harder to save. A lot of people already rent, so you’re renting and trying to save at the same time. Most moms and dads own their homes these days. They’re a generation that paid off their debt quite early, and they’re willing to help their children. With affordability being down and parents wanting to help, the family pledge loan makes sense.
Kevin: You mentioned earlier in our chat that about 15% of loans written by some brokers now are these parental guarantee loans. That leaves about 85% of people who can’t actually get one of these loans. What advice would you have for them about getting their foot onto the ladder for the first time?
Melissa: It’s all about save, save, save, isn’t it? It’s all about head down bum up, getting in there, assessing your budget and trying to save as much as you can just to get into the property market.
Myself, I talk to my clients about learning to crawl before you walk. A lot of clients come in and they want to buy $600,000 first homes yet they fit in an affordability range of $400,000. So it’s about first-home buyers adjusting their expectations, saving really hard for that deposit, because once you save once and you get that deposit once, it’s a flow-on effect. You sell, you upgrade, you sell, you upgrade. You don’t need to re-save again. But for the people who can’t do a family pledge loan or a parental guarantee loan, it’s all about saving.
Kevin: Yes, and getting your foot onto the ladder for the first time is the hardest part, but once you’re there you can use things like gearing and so on, which is another subject altogether. The hard part is just getting there for the first time. So whatever you’ve got to do, you’ve got to do it. Once you’re there, you’ve got your start really, Melissa, don’t you?
Melissa: Yes, you do. You really do. It’s all about getting your foot in the door. And for first home-buyers, Kevin, a lot of that is then adjusting their expectation.
Kevin: Absolutely. Melissa, we’re out of time but thank you so much. It’s been great talking to you.
Melissa Gielnik is Director of MFAA and Managing Director of Smart Lending. Some great advice there for first-home buyers. All the best to you, Melissa. Thanks for your time.
Melissa: Thanks, Kevin.
Is Negative Gearing safe now? – Simon Buckingham
Kevin: Well, the election is over, and you’d wonder if all of the pressure is off negative gearing now, because we have the right color in the government, I guess it’s fair to say. But the clock could still be ticking. There may still be changes for negative gearing on the horizon. Joining me to talk about this is Simon Buckingham from Results Mentoring.
Simon, thank you for your time.
Simon: It’s a pleasure, Kevin.
Kevin: Is negative gearing safe now?
Simon: I’ve seen some interesting articles that suggest that we can all rest easy as property investors and that we can be assured that the rules have not changed and won’t change. But I think, if anything, what we should take from the election is a bit of a wake-up call that negative gearing is anything but safe. The election result was pretty close, wasn’t it?
Simon: If it had gone the other way, we could have been facing some fairly radical changes to what we’re used to in terms of negative gearing. I think elections being what they are, we might be really looking at just a brief respite before negative gearing is back on the political agenda.
Kevin: I guess the message here is “Beware complacency.” What would you suggest sophisticated property investors should be doing?
Simon: If we’re not complacent – and we should never be complacent as sophisticated property investors – we should really be trying to get ahead of the game. The key to succeeding in property is to be the first, get in there first, whether it’s the first into an area that’s about to take off or any other strategy.
If we think that there’s every possibility that negative gearing comes back into the spotlight, we should be thinking ahead and saying, “Well, what would I do if negative gearing was not available as an investment strategy?”
At a bare minimum, I think any smart investor should always be reviewing the current and anticipated performance of every existing property in their portfolio. I’d suggest that if you’re avoiding complacency and looking to maximize your investments, you ought to be doing this every six months, anyway.
One of the things in doing that is to then identify any properties where the impact on your cash flows would be severe if negative gearing benefits were reduced or removed. Take a look at how dependent you are on negative gearing to manage your cash flows at the moment.
If you are holding properties where you simply couldn’t take the impact of a reduction in your negative gearing benefits or an elimination of those negative gearing benefits, then they’re the ones that you need to look at very seriously in terms of how you deal with those properties in the interim, between now and the next election, when negative gearing might become an issue again.
If you see any properties that are really under-performing, then if they’re under-performing now, they’re only going to get worse if changes are made to negative gearing and to your CGT benefits, because then you’ll be even worse off on those properties.
If those under-performing properties rely primarily on things like negative gearing benefits just to scrape them through, you need to take a hard a look at those and ask yourself why you’re holding those properties to begin with.
Kevin: Yes. I guess you should really educate yourself, too. Negative gearing and positive gearing is really an outcome, isn’t it? You should be making the decision about what type of investor you are, as well, Simon.
Simon: Exactly right. Are you investing for tax concessions, or are you investing to make money? “How are you going to profit from your investments?” is the question that you should be asking yourself before you go into any property and in terms of any properties you’re holding as well. “Why did I buy this property? What do I hope to get out of it financially, and by when? How is it helping me to achieve that?”
You want to look at other ways of making money. If you’re solely reliant on any one strategy – whether it’s negative gearing or anything else – then you’re vulnerable. We’ve just seen that in the election. There would have been a lot of people who have relied upon negative gearing and might have been hoping to rely on negative gearing to the future. If the election had gone another way and there had been changes, they would suddenly have been cast adrift, uncertain of how they would invest moving forwards.
If you’re educated on different property investing strategies, you’re then in a better position to adapt to changes in the market, to changes in tax rules, to changes in legislation, and not be fearful of what the future holds. You can just look for the new opportunities that arise when the market changes or when the law changes.
Kevin: Very well said, and very good advice, too, from Simon Buckingham from Results Mentoring.
Simon, always great talking to you, mate. Thank you very much for your time.
Simon: Thank you, Kevin.
What happened to the great Australian dream? – Michael Yardney
Kevin: What we know as the Great Australian Dream may not be a reality anymore, well certainly not in the years and decades to come. There’s been a new study that’s been published, and I want to talk to Michael Yardney about it.
Good morning, Michael. Thanks for your time.
Michael: Hi Kevin.
Kevin: Michael, this is called the HILDA Report. Tell me about it. How did it come about, and what are some of the findings?
Michael: Professor Roger Wilkins from the University of Melbourne’s Institute has been following about 17,000 Australians, Kevin, for the last 15 years, and he’s giving us a picture of what’s happening to the nation about households, about their finances, about their employment, about family life and health, and I guess what we’re particularly interested in today is what it means to their wealth, what it means to home ownership, and the gap that’s widening between the older wealthier people and the younger generations who are having some struggles.
Kevin: The report showed, I think, that there was a decline in the number of owner-occupiers over that period.
Michael: Over the time, there has been an increasing decline in owner-occupiers, and the report is predicting that by 2017 – and if my sums aren’t wrong, Kevin, that’s next year – there’s going to actually be about a 50% home-ownership rate around Australia. So half of Australians won’t be owning their own home but they’ll be in rental properties, Kevin, and in general, it’s the younger generations.
Kevin: Already we’re starting to hear people say, “Oh, this just underlines the fact that housing in Australia is becoming unaffordable.” There are two factors here, Michael. One is affordability, certainly, and the other one is the generation. Do they really want to own a property?
Michael: Kevin, that’s a really good point because the Generation Y’s are very different from when you and I were in that age group. They’re not putting down their roots as soon. They’re not as comfortable taking long-term jobs as soon as we used to. They have traveling aspirations and they’re moving around a lot. Often they’re going to become what we like to call renting investors. They rent where they want to live but can’t afford necessarily to, and then a lot of them are still buying investment properties.
One of the other parts of the study showed how many people are buying investment properties, and that’s increasing. But yes, you’re right, Kevin, the younger generations are not setting their roots into the ground as early in their lives as the older generations did before them.
Kevin: Yes, and just to underscore that point, Michael, I think there’d be no doubt that we’d have to say if there was an unaffordable state anywhere, it would be New south Wales or Sydney because of the great price growth we’ve seen there. But I notice in the report that it says that decline in home ownership was greatest in Victoria followed by New South Wales. Once again, I just wonder how much of this can be put down to affordability.
Michael: It’s not purely affordability. Another factor, of course, is the aspirations of younger people and the sort of property they want as their first home. I know when you and I started off, we were happy with a small apartment and you had cardboard boxes for furniture. A lot of younger people are not comfortable unless they have a media room and all the stainless-steel appliances and the things that their parents took 30 or 40 years to achieve.
But they are buying property. They’re getting on the property ladder, recognizing that it is a way of creating wealth and maybe the investment property will lead them later on to have a home, Kevin.
Kevin: Yes. What about housing grants, first-home owner grants and so on? It would be interesting to look at the number of people who qualified for those as opposed to those over 65 who are maybe going on and getting another investment property as opposed to a first home, Michael.
Michael: Kevin, what the study showed was that after the GFC, there was a bigger drop in first-home owners, and you’re right; it actually had to do with the dropping of first-home owner grants for established properties and pointing them to new properties. But in general, young people don’t always want to live in the outer suburbs; they want to be where the action is, closer in. And they don’t want to live in those big high-rise monolith blocks. So it’s actually stopped them buying a lot of the properties they want.
Interestingly, the study showed that 70% of first-home owners would prefer to buy an established property, and if they’re not getting a first-home owner grant for that, they’re buying investment properties instead.
Kevin: That gap between the young and old in terms of wealth, this would be highlighting that, Michael, wouldn’t it?
Michael: Kevin, the study showed that the wealthiest households were couples over 65, who’ve experienced a real increase in their wealth – almost 70% increase in their wealth – since 2002 when the study started, and it has a lot to do with their higher rate of home ownership, their higher level of superannuation, and the fact that a lot of them also own one or two investment properties. So a lot of Australia’s wealth is in real property, Kevin.
Kevin: Michael, it comes down to choices, doesn’t it? I think a lot of younger people are making the choice and saying, “This isn’t all that important. Right now, I’d much rather have a better lifestyle, a bit of disposable income, live where I want to live, and maybe do a bit of travel.” And quite frankly, when you look at what happens overseas, there’s nothing really wrong with that.
Michael: Kevin, 100% right. It’s the value you put on various things, and there’s a lot of sense in the argument that the young people are putting. And overseas, this is the way it works. People are renters all their lives. If you lived in London or New York in Manhattan, you wouldn’t expect to be able to buy a home. In Melbourne and Sydney in particular, international-sized cities, international-valued cities, as well. Our demographics, how we live where we want to live, how we choose to live, is changing. This is being reflected in home ownership rates.
Kevin: Yes, indeed. Always great talking to you, Michael Yardney. Thank you so much for your time.
Michael: My pleasure, Kevin.
Get up close and personal with Pete Wargent – Pete Wargent
Kevin: Pete, how did you first get involved in property investment?
Pete: It’s quite a long story. My wife got into property way back in 1997. She bought her first house as a 21-year-old. I was still a renter myself. She had retained her property as an investment property. We met in 2004, so it was around that time that she explained to me the incredible growth that she had experienced over the seven years of ownership. Obviously, compared to my own experiences of being a renter, we then looked at getting into property investment. At first we just started out by using a deposit that we had saved and then after that we actually refinanced the existing property. That’s where we started out.
Kevin: It’s amazing that your wife was actually the one that took you on the journey that’s become almost a life mission for you. Tell me, how did you get into your second property from there when you were together with your wife?
Pete: The first place I bought I actually bought in my own name. I think back at that stage it was a fairly new relationship, and I think both of us felt that it was probably a good idea for me to get my own foot on the ladder, so the first property was using my own funds. If you remember back at that time, pre financial crisis, it was actually relatively small deposits needed in any case. In fact, it’s funny looking back because I remember the mortgage broker saying I could borrow up to seven or eight times my salary, which was more than I could even contemplate borrowing. I capped myself to a reasonable limit and I bought myself my first investment property in Bondi.
Kevin: That was your first one in Bondi. Tell me about it. Was it a unit? A house?
Pete: It was a unit. 100 square meters. A nice easy walk to the train station at Bondi Junction, and also a reasonable walk down to the beach.
Kevin: Do you still own that property?
Pete: Yes, I do. In fact, we’ve never sold any of the properties we’ve bought. One of the things I learnt from reading other property investment books is that the biggest regret that people often have is selling properties for a seemingly tempting profit, but then down the track only discovering that they were worth more. So we’ve actually, to date, not sold a single one.
Kevin: That is part of your strategy. That was going to be my next question. Just expand on your strategy for me, if you could.
Pete: In terms of what I do for my business, we actually work for investment funds. They obviously have a lot a capital available, so their strategy tends to be much more focused around large scale renovations and quite premium end property. With the individual property investor, obviously funds tend to be less abundant, so on a smaller scale we tend to buy somewhere with the potential for a little bit of value to be added – potentially a new bathroom, new kitchen, repainting and carpeting. We tend to buy somewhere that can be let immediately, so over the forthcoming couple of years we can do a slow renovation and add a bit of value that way.
The most important part of the whole strategy is to make sure you buy the right property in the first place for long term growth, and then there shouldn’t be any need to sell down the track.
Kevin: That was going to be my next question. Have you ever sold anything out your portfolio? Have you ever had the need to?
Pete: No, not to date. We own a number of properties in the UK, and a lot of people were saying in 2008 that the bottom would fall out of the market. But that’s where buying well comes into the equation. We have properties in London. In fact, all of the properties found in Britain are within an easy commute of the city, so there was no real downturn to speak of. In fact, in London prices have just kept increasing, so I have no need to sell in the UK.
Over in Australia we have a number of properties around Sydney, and likewise prices just continued to increase through 2013. We do actually have one property outside of Sydney, but that is a relatively recent purchase. There has been no need to sell on any of those.
Kevin: Where is that one outside of Sydney?
Pete: Down in Geelong.
Kevin: What is the best property deal you have ever done?
Pete: Given the strategy that we take, which is very much focused around long-term buy-and-hold, by default the properties that we’ve owned for the longest have been the ones that have shown the greatest growth. The fastest growth was a property that my wife bought back in England. I remember she tells me that she only paid around £72,000 for it. She had it revalued after seven or eight years at around £250,000. Some pretty unbelievable growth in the UK around that time period.
Over in Australia, back in 2007 at a time when there was panic related to the financial crisis, we bought just close to the Sydney harbor side down at Piermont. We paid $582,000 for a 100 square meter unit down on the harbor there. The current value of that is around $880,000, so some pretty good capital growth there, too.
Kevin: What’s the most important thing, or things, that you’ve learnt about successful property investment over the years?
Pete: In terms of successful property investing I think it’s important, especially in Australia where we have got high transaction costs, to take a long term view. A lot of people who look towards property investment are looking to sell in the first two to three years. Given that when you acquire you’ve got stamp duty, potentially sizable legal fees to deal with and other transaction costs, I think the shorter the time horizon the harder it is to make a success of property investment. Therefore I think a longer term view is quite important.
Kevin: Do you have anyone that you network with, or used to in the early days who helped you, apart from your wife? Is there anyone you network with? Is there a group?
Pete: Not a specific group, but I spend as much time as I can trying to network with people both within property and also in share investing. That means I have a very large range of contacts across both industries. I try to network as frequently as I can because you can always learn more.
Kevin: Pete, as a successful property investor yourself, what is the most common question you get asked?
Pete: The most common question I’ve experienced in property throughout the last decade is almost always “Will there be a property price crash?” First-time investors often are very nervous about that, of buying at the wrong time. Even experienced investors can frequently get spooked by the media running reports talking about potentially very large crashes. Famously, back in Sydney in 2008 there was talk about a 40% crash and so on. I think what people need to understand is there is always the potential for a correction. Indeed, we’ve had three downturns in Sydney since 2003.
Ultimately, wages are continuing to grow, household incomes are growing. So while there will always be downturns, if you buy well then you can hold for the long term and come out ahead over the longer term.
Kevin: Would you say that one of the most common mistakes that investors make is that they don’t take a long term view?
Pete: I think short-term thinking is one of the key mistakes that people make. Also a lack of research. Property investment is a bit different to the share markets where you might be buying and selling quite frequently. You don’t get that many rolls of the dice in property, or most people don’t. I think a lack of research is a common mistake for people in the early days. I think a third thing is just not crunching the numbers. Ultimately an investment has to make sense from a financial point of view, both in terms of the cash flow on an annual basis and also the long term capital growth. I think those are the three most common mistakes I come across.
Kevin: When it comes to cash flow and capital growth, have you got a preference or do you try and achieve both in your properties?
Pete: When I was starting out both my wife and I were full-time employees, and we were higher income tax payers. I think due to that we were very much focused on capital growth. I think it is commonly understood by people that it is capital growth that tends to create the greater wealth because the capital value can compound and grow in a tax deferred manner.
I think as we shifted away from full-time work, first to contract work and then later to owning a business, we did come to understand that cash flow has a role to play. Investing in too many properties with a negative cash flow can become a burden. Certainly when we look to buy today, the last three or four properties have either been cash flow neutral or positive.
Kevin: Pete, apart from your own book, what books would you recommend someone should pick up if they want to know a bit more about property investing?
Pete: I get asked this question very often and, as you say, the answer I usually give is to recommend my own! But if I was to pick one book that gives a broad overview for beginners and also for advanced investors, it would be Michael Yardney’s book, which is called “How to Grow a Multi-Million Dollar Property Portfolio – in your spare time.”
Kevin: Going back to one of your earlier comments about how you got started with your wife being a guiding light, did that require a change in mindset for you surrounding wealth and setting up a portfolio?
Pete: Yes, 100%. When I first came into the workforce as a trainee chartered accountant I’d always worked on the assumption that a high salary was the most generally accepted route to wealth. It’s an easy trap to fall into, but over in London we had a period of 50% income tax. Australia was a not a million miles away at 46.5%.
It was a change in mindset that enabled me to understand that ultimately although a salary income is useful in terms of building an investment portfolio, it’s ultimately the investment portfolio itself that helps you to create wealth. I think also over time I came to understand that it is possible to replace a salary income with a business income, but it’s just something that takes a bit of time. It takes a bit of a leap of faith, as well, to make that move away from reliance on a paycheck.
Kevin: One thing I’ve noticed about property investors like yourself is you’re very motivated and you stay extremely focused. There are times there are lots of knocks that we get no matter what we do in life. How do you stay motivated? How do you stay focused on your end goal?
Pete: Probably 95% of the time I’m a very motivated person. But just like anyone else I have moments where I lose focus or become demotivated. The secret to being a successful investor – and probably the most important character trait out of all the character traits – is being able to get back on the horse. Most successful investors have one common strand and that is that they will always learn from mistakes and move forward.
The good news for property investors is that property tends to be quite a forgiving asset class over the long term. Even through periods where you may be demotivated, the property you own doesn’t know that. That’s why there was an old saying, you make more from property while you’re asleep because you’re not sitting around worrying how the market is performing; it just gets on and does its own thing.
Kevin: Pete, have you got a mentor or someone you turn to for inspiration?
Pete: Yes, I do. I wouldn’t say I have any one individual mentor. In the last ten years I’ve read hundreds of books on investment. But also from a slightly wider perspective I’ve read books by Anthony Robbins. I’ve always found those incredibly motivating. No matter how despondent or negative you might feel when you pick up his books, you can always come away feeling more positive.
As I mentioned, in the property sphere I tend to look towards Michael Yardney’s books. I’ve read a vast array of books. Probably the best book on the Australian share market I’ve read was by Peter Thornhill, a guy that I’ve met with personally as well. I tend to find that even with the worst books I tend learn something from. One of the things I’ve committed to is a never ending learning curve.
Kevin: Just following on from that, do you practice personal development? Is that a program that you have?
Pete: I don’t subscribe to any one individual program, but certainly one of the things that I’ve done that has become almost an obsession for me over the last ten years is just a commitment to reading. Every week I’ll read at least one or two books. It’s something which I’ve found that has become a passion for me, and I hope that it’s something that I never lose. There’s always more to learn out there. I think that although the basics of investing remain the same and the fundamentals do, over time the specifics do change to some extent. Therefore, it’s always important to keep learning.
Kevin: Do you read to learn or read to relax? What are you reading right now?
Pete: A bit of both. I’m currently reading three books. It might not be everyone’s cup of tea, but I’m reading about the economics of planning and housing.
Kevin: You’re right, Peter. That probably isn’t everyone’s classic[?] reading!
Pete: I know, but these are things that I’ve found interesting over time. They don’t represent books that are trying to sell a particular message, as such. They seem to be more on the academic level. It’s something that I find interesting as Australia expands from a population of only 23 million or so today. We’re looking to expand to 40 million in population over the next few decades. The Australia of tomorrow is going to look very different to the one that we are used to today. I think it’s important for people to try and understand how we can best plan for that and also how it’s going to impact the way we live, because it will have a huge difference.
Kevin: Is there a significant quote or mission statement that you live by?
Pete: There probably should be. I think for me there was definitely something missing in my life when I was working full-time. I’ve come to realize that the key it should all come back to is to try and be happy and fulfilled, and find some value in living. There’s no point in chasing a higher salary if you’re doing a job that doesn’t inspire you.
Kevin: Well said. What does success mean to you?
Pete: As I alluded to, I think the only real measurement of success is happiness. Obviously finance and investments play a part in that, but ultimately if you aren’t happy there’s only a limited value in wealth. I think there was a famous quote by John Paul Getty who said he would give away all of his billions if he could only hold onto one happy marriage. I think there’s a lot to be said for that. Ultimately, a lot of people spend a lot of time worrying about money and finances, but if they’re not happy there is not much point.
Kevin: On that point, I think most people aspire to achieve something or to be successful. What do you think actually holds them back from that success, or the success that they desire?
Pete: It’s the old saying that people tend to massively overestimate what they can achieve in a year, but they chronically underestimate what they can achieve in a lifetime. It’s compounding growth and people underestimate what they can achieve over the longer term.
I’ll give you a good example. Very often I hear people say today that Sydney is far too expensive and therefore there is no point in trying to save a deposit, because they’ll never be able to and so on; and therefore would be much better served living for today. This overlooks the point that there’s more investment in the world than simply property in Sydney. For one thing, you can invest in real estate in other states or regional Australia, but also the share markets. If it’s your thing. There’s gold and silver. There’s any number of places that people can invest. I think people quite often take too shortsighted a view.
Kevin: Do you think that it is that most people want success but they try to find excuses not to achieve it?
Pete: I think there’s an element of that. When you’re looking towards the qualities or attributes that people need if they want to achieve success, there are probably some common attributes that you would find in all successful investors. They tend to always work hard at what they do. They tend to be very eager to learn. They will tend to also find like minds and network with similarly minded people.
There are a couple more things too. People who are successful tend to take responsibility for results rather than let life happen to them; and they will resolve, therefore, to always take action and never give up.
Kevin: What can people do to stay on track, especially when times get tough? We’ve been through a pretty tough time now and a lot of people would have lost focus, maybe lost a bit of motivation. What can you do to stay on track at a tough time like that?
Pete: I think we touched on some of the ideas before and motivational books can be great. This is where, potentially, support groups can help. Some clubs are obviously better than others, but just being able to network with like-minded people can be a very big plus for people through times of adversity. If there’s one think you can be certain of as an investor, you’ll have some good times and you’ll have some tough times. I think when things aren’t going so well, then a support group can be something worth looking at.
Kevin: To finish off, Pete, what’s the most important piece of property advice you’ve ever been given?
Pete: The best advice I’ve ever been given, without question, is to buy well and never sell. The number of times over the years when we’ve been through various property booms in Britain and Sydney, people say, “You should cash in and sell.” Then three or four years down the track we’re back in another boom period. So I think without question that has been the best advice I’ve received.
Kevin: Peter, I want thank you for giving us your time.
Pete: Pleasure, Kevin.
40 Regional areas set to boom – Simon Presley
Kevin: As I said at the start of the show, one of the things that investors love to do is get ahead of the race. There’s been a really interesting report that’s been published that I want to talk about now, published by Propertyology, about what Baby Boomers are doing. We know there’s a huge number of them, but it’s interesting to note that they could be just looking at some of the regional areas around Australia.
Let’s talk more about this. The author of the report, Simon Pressley from Propertyology, joins me.
Simon, thanks again for your time.
Simon: Always a pleasure, Kevin.
Kevin: Sad and almost poor Baby Boomers are going to reignite that regional property market? I’ll ask you to tell us where those areas are, firstly. But how did you reach this conclusion, Simon?
Simon: It’s logic, I think. What we do know is that the Baby Boomer generation – those born between 1946 and 1964 – is 4.5 million people, or 20% of our national population. We’re talking about a big segment of the population, and a large percentage of them don’t have sufficient retirement savings.
Obviously, they’re all going to exit the workforce at different times, but as they do and they’re confronted with what options they have to fund a better lifestyle, in a lot of cases they will say, “I’m attracted to downsizing my family home and relocating to somewhere that’s a lot more affordable.” That will open up all sorts of opportunities throughout regional Australia.
Kevin: Yes. Many of these Baby Boomers only enjoyed some of the superannuation contribution benefits toward the end of their working life, so they have a fairly limited amount of saving, I would imagine.
Simon: Absolutely. Now, it’s really, really hard to get official data out of governments on this. I’m sure it’s there in Treasury somewhere. Official data – so last census, 2011 – there were 3 million Australians who were 65 years or older, and 2.5 million are receiving an age pension. That’s a big number.
Kevin: That gives us a bit of an insight then as to how big that number really is overall, isn’t it?
Simon: Absolutely. Now, an age pension, what is it? For a couple, it’s about $31,000 per year. The odds are most of the Baby Boomers, their current combined household income before they exit the workforce in a lot of cases will be a lot more than $31,000.
The thought of significantly decreasing their lifestyle won’t be appealing, and when they work through “What options have I got?” because obviously it’s too late to invest at that stage, some might say – I’ll paint a scenario – “I have an $800,000 family home, four bedrooms. The kids have moved out. Hmm, what if I sold that to a $400,000 property and freed up this extra cash? That can supplement my pension.
“But then where can I buy that $400,000 property where I’m still going to be counting on living a lifestyle?” A capital city? Probably not going to tick the boxes. But different parts of regional Australia might.
Kevin: Some of the areas that you’ve identified – and I want to quickly run through them now, if we may – they’re pretty attractive areas. If you look in New South Wales, I think you’ve picked Coffs Harbour and Port Macquarie at the top of the list there.
Simon: That’s right. Some of these places, those who’ve lived most of their life in a capital city might have been to these places for holiday. In Western Australia, beautiful places like Busselton, Bunbury, Albany, Geraldton. There’s certainly nothing wrong with lifestyles there, and typical houses are worth between, say, $300,000 and $450,000.
New South Wales, as you said, Kevin, Coffs Harbour, Port Macquarie, they’re probably the more expensive options in regional New South Wales. But you have places inland, beautiful places like Orange, Bathurst, Dubbo. For those who don’t have to have a costal change but prefer the tree change, there are places like that.
Queensland is littered with places up and down the coast – from Cairns, Townsville, Hervey Bay, Sunshine Coast, and Gold Coast. Still a little bit expensive, but relatively very affordable, compared to, say, Sydney and Melbourne.
Kevin: Just in Queensland, Toowoomba is one of the areas you did pick.
Simon: Yes. Demand for accommodation comes in different formats. Often, as property market analysists, we’re referring to things to do within an economy that’s going to create more jobs, and that will always be applicable. But here’s another form of demand, and that’s in the form of extra demand for accommodation from Baby Boomers relocating from a bigger city to a smaller regional city.
Kevin: Let’s not miss out on Tasmania: Hobart, Launceston, Devonport, and Burnie. Of course, Tasmania overall is still a very, very affordable state, isn’t it?
Simon: The most affordable state in Australia. Tasmania at large, not just Hobart, is already well renowned as a very, very popular retirement place. Beautiful golf courses, best restaurants, cafés, alcoholic beverage, makes the best premium in the world, and exceptionally affordable accommodations. This is why Tasmania’s average household age is already above the national average – because lots of people in the Baby Boomer generation have already said, “We went to retire there.”
Kevin: Here’s a bit of trivia for you, Simon. Off the subject, but did you know that Brisbane was actually a cheaper capital city than Hobart back in 1975?
Simon: Is that right?
Kevin: It is right. I was quite amazed. In fact, Brisbane was the cheapest capital city in all of Australia in 1975.
Simon: That might be reflective of how old Brisbane is. In the context of other capital cities, Brisbane is a baby, really. Hobart is actually Australia’s second-oldest city, outside of Melbourne.
Kevin: Just to wrap up, if we could, tell me about capital growth in some of these regional areas compared to the cap cities over the last, say, 10 or 15 years.
Simon: There can be a misconception that capital cities have experienced higher capital growth than regional ones. It’s a gross generalization, really. If you took snapshot windows of five-year blocks, there will be times when we can say capital cities did better than regions; maybe other times, we say the regions smashed the capital cities.
But over the last 15 years, if we look at the average annual rate of growth, most of the best-performing locations throughout Australia are regional locations, not capital cities. Then when you add to that the better rental yields that regions typically offer, the total return on investment has historically been better in regions than capital cities.
Kevin: Always great talking to you, Simon Pressley, from Propertyology, Propertology.com.au. Simon, of course, has been three times the winner of REIA and REIQ Buyer’s Agent of the Year Award.
Congratulations for that, Simon, and also thanks for joining us today on the show.
Simon: Always a pleasure. Talk to you next time, Kevin.