20 Feb Is the Sydney Market Oversupplied | How our mind sabotages investment success | Renovations | What drives investor lending?
Did you know that as property investors we can sometimes be our own worst enemy?
It’s not because of the decisions we make, the opportunities we consider or the investments we miss out on, but rather, it’s due to the way we think. Michael Yardney says it’s the way our brains sneakily convince us to make decisions that aren’t always in our best interests.
Would higher interest rates on investment loans cool the investor market and what exactly drives investment lending? Two questions I put to Andrew Mirams.
Hear about Jane Slack Smith’s simple renovation strategy used by savvy investors to build a multi-million dollar property portfolio and I will tell you about a free Webinar that I have done with Jane and how you can secure your place at the session with our compliments.
Bryce Holdaway from Sky TV’s Location, Location, Location joins us to talk about how he is seeing more investors going further afield to find the best properties and how you can get comfortable with that strategy.
Jay asks a question about a block of units he is building and how he can claim the usual investor deductions while having good asset protection from any litigation. Ken Raiss from Chan and Naylor answers that question.
John Edwards from On The House says that Governments could be creating oversupply and in fact there is evidence that the Sydney market is already oversupplied. John also speaks out about negative gearing.
Kevin: It’s very easy to say that investors are driven to borrow more money when interest rates are low, but what really does drive investment lending? Let’s find out with Andrew Mirams from Intuitive Finance.
Andrew, the question for you today is what does drive investment lending?
Andrew: There’s a whole range of options, of course, Kevin. At the moment, we’re sitting at record low interest rates, and the banks are out there very actively competing for business. Those people who are savvy investors are saying, “Money’s cheap.” You have first- or second-time investors. Money is so cheap at the minute that the reality is it’s not costing you a lot of your cash flow to actually hold that property. Low interest rates are one really good driver.
Another of the drivers I see in the market at the moment is the markets have been very strong over the last couple of years. Sydney has come off another really strong year. Melbourne has performed strongly. Brisbane is starting to grow. Perth. I think the only capitol that didn’t perform in 2014 was Canberra. The property market is actually good. When things are going well, it’s a little bit easier to convince people to borrow to buy that investment property.
The third thing I think that we’re now becoming very aware of is the population growth. Australia is growing at a rate of about 400,000 a year, which is basically adding a Canberra to Australia every year. All those people have to live somewhere. With people moving into towns and cities, they all have to live somewhere. If they don’t have the money to buy, investors have to pick up that balance.
Kevin: Certainly the last two you gave us there – prices and population growth – are two drivers you can associate directly with property. I guess interest rates, when you borrow, it depends on what you put it into – whether you put it into properties or shares.
I’m just interested to know if you think that interest rate movements, particularly higher interest rates, would actually cool the investor property market.
Andrew: I don’t think so. In fact, before deregulation, actually to buy an investment property you paid 1% or 1½% more on what you would for a home loan. People still ask that question quite regularly. “If I tell them it’s an investment loan, won’t they change me more?” The reality is it’s a very competitive marketplace out there and your investment loans are viewed just the same as a home loan.
Banks need to borrow money to make money. Would it slow it down? I don’t think so because your investors are going to say, “Well, that’s a cost of doing business.” If you put it up, they’re going to look elsewhere. There’s going to be someone else. Like I said, competition is going to drive that.
I think there’s a lot of speculation around what APRA is going to do at the moment. Their real concern about the investor market is the higher LVRs and people who are getting in or going in because money is cheap and really borrowing to the hilt and going 95%. I think that’s the real concern.
When rates were 10%, 12%, and 18% back in the days when we can probably remember and people laugh at now. It goes up ¼% now and people cry. Ask someone who was paying a home loan at 18%.
Kevin: I’ll put my hand up.
Andrew: Yes, absolutely. We all were. I’m not sure that interest rates will dictate that. It’s going to be all the other drivers in the market, I think.
Kevin: If you look at it, too, the other way and say higher interest rates actually discourage young people from buying properties; they would probably prefer to rent, which means you’re going to mean more rental properties, which probably actually is a bit more of a carrot for investors, I would have thought.
Andrew: Absolutely. It could potentially grow it, you’re right. If your first-home buyers and those upgraders can’t afford to upgrade and buy, an upgrader might say, “We’re living in a nice part of Melbourne; we want to go to the Bayside” or something like that or you want to go for a lifestyle change, you might not be able to afford the property in that area so you will rent. That’s going to drive potentially your investor market even stronger, and it’s going to drive those people out.
Kevin: Andrew Mirams is from Intuitive Finance. Make sure you check out Andrew’s channel too on Real Estate Talk. There’s a new article or video that you put up there about whether you should fix or float your rate. That’s a whole new topic for us, but if you want to find out about that, go and have a look at the featured channel for Andrew Mirams on Real Estate Talk.
Andrew, thanks for your time.
Andrew: My pleasure, Kevin. Have a good day.
Kevin: One of the things I love talking about on the show is renovation. It can be an easy path to being successful in real estate and making a lot of money, but there are also a lot of traps and a lot of things that you should be aware of.
I’ve been talking off and on, for quite some time now, to Jane Slack-Smith from YourPropertySuccess.com.au, who joins me now. Good day, Jane.
Jane: Hey, Kevin.
Kevin: Good to have you back on the show. To continue that story, I’ve realized that there is so much involved, more than we can cover in some interviews in Real Estate Talk, so we’ve put together a special webinar event. How long will it run for, Jane?
Jane: It’s going to go for about an hour and a half. To be honest, you can’t cover everything in an hour and a half, but we’re going to give it a really good shot.
Kevin: Yes, good stuff. It’s an absolutely free webinar. We want you to come along and join us. The website to register for it – I’ll give it to you a couple of times here in the interview – is FreeRenoEvent.com.au. There’s a lot more detail there for you about what it’s all about.
But, Jane, you wrote an entire book on how with just two properties and one renovation you came out with a million dollars. Is that still possible?
Jane: Absolutely, and I think it’s even more possible now with the current lending environment and the fact that people have had a lot of built-up equity in their properties, as well.
The really important thing when I wrote the book initially was you don’t need hundreds of properties to actually get to your wealth goals. Just with two properties and one renovation, you can put a million dollars in the bank, and that can give you some real freedom of choice to do what you want when you want to do it.
Kevin: Well, in this webinar that’s coming up, you’re going to obviously be giving us a lot of tips about how to do that?
Jane: Absolutely. I talk to people all the time about renovation, and renovation as an active strategy, and looking at strategic renovations rather than just finding an old house and thinking, “Well, you could do with a bit of a coat of paint. I’m going to make some money.”
To really make a profit in renovation, you need to be strategic and you really need to have a plan. I find that a lot of people have a lack of clarity about what the roadmap is for them to actually turn a property into a money-making venture.
Kevin: Renovation is a fairly active strategy, Jane, isn’t it?
Jane: Absolutely. It’s hands on, and it really starts before the renovation. I find a lot of people do make mistakes in renovating and thinking they can make money. It comes down to really identifying the right property in the right area. We spend a lot of time looking at that, so all that hard work in actually doing the renovation pays off.
Kevin: In the webinar that we’ll be doing – and we’ll give you that web address again in a moment – are you going to be helping us identify the best renovation type properties?
Jane: Absolutely. I think it’s really important to understand what properties have potential and what are the characteristics that give that potential. We’ll go through a lot of that. We’ll go through some real examples and some ideas about where you can actually spend some money to add perceived value, which is what we really need to do in renovations. We’re not looking at spending money on things that aren’t going to get us a return.
Kevin: Give me the date for the webinar.
Jane: Sure. It’s Tuesday the 3rd of March at 8:00 p.m. Eastern Standard Daylight Saving Time. That web address is FreeRenoEvent.com.au, and I’ll be taking questions, as well, at the end.
Kevin: Fantastic. There are limited seats, so make sure you get in early. As Jane said, Tuesday, 3rd of March. That website to register is FreeRenoEvent.com.au. It’s absolutely free. We’re going to give you an hour and a half’s worth of brilliant content from the lady who wrote the book on renovation, Jane Slack-Smith.
Jane, I want to thank you for being here, and I look forward to catching up with you. It’s a live event, too, isn’t it? Absolutely live.
Jane: Absolutely. Look, I can’t wait. Get people to bring their questions along, because I’ll be there to answer the questions. Renovation is an active strategy. People can make money. Between the two of us, we’ll come up with some really good answers.
Kevin: Looking forward to it, because I love talking to you about renovations. It’s one of my favorite subjects.
That website, again, is FreeRenoEvent.com.au. Join us on the 3rd of March. It’s absolutely free.
Jane, I look forward to catching up with you then.
Jane: I’ll speak to you then. Bye, Kevin.
Kevin: I’m going to continue the series of Michael Yardney in the show today. Last week, we started talking about the psychology of success, and we went through a few biases, Michael, which really resonated with me quite remarkably. I’m looking forward to seeing what we have today.
Before we get into it again, just explain to us briefly what it’s about.
Michael: We tend to think we’re rational human beings, however what I shared with you last week was that some of us are prone to what psychologists call cognitive biases that make us think and act irrationally. It affects our investment decisions because of these biases. We discussed a couple last week, and let’s talk about a couple more today.
Kevin: Please do. Let’s start.
Michael: One of the things that we’ve often spoken about on this show is that one should actually review the performance of your property portfolio. There’s a bias psychologists talk about called awareness bias.
How are your property investments going? Are you happy with the results you’re getting? There’s a chance that even if you’re not doing so well, you may not even recognize it. In fact, it’s been shown that the poorest performers in all arenas of life tend to be the least aware of their own incompetence.
Psychologists put a lovely name to it and call it the Dunning-Kruger effect. It means that you lack the capacity to see how you’re performing yourself. I guess it’s one of the reasons you actually need an outside mentor or somebody to help you, isn’t it, Kevin?
Kevin: That’s what I was going to suggest to you. That is the obvious solution – to have someone who is brutally honest with you and can point those things out to you.
Michael: Exactly, because all of this is happening at an unconscious level, Kevin.
Another bias we tend to have is positivity bias. Many people view residential real estate positively. They think it’s a great asset class to grow their wealth, and they continue to do so even if their investments don’t do too well.
In face of lack of capital growth, I’ve seen investors still say, “It’s going to turn out one day.” The problem with this is that when all the signs point to a dud investment, it’s likely that it is one, but positivity bias stands in the way of an investor taking action to rectify the situation.
Kevin: It’s very dangerous, Michael.
Michael: It is, isn’t it? You’re actually losing your own money. Overconfidence is a real risk for property investors. One of the best things an investor can do is admit, “I was wrong. It didn’t work this time.”
Kevin: You know, with positivity bias, if you are reviewing your portfolio, it could be a gross waste of time if you’re not willing to accept that something is wrong.
Michael: That’s right, but we don’t realize that we’re all prone to little bits of this in various elements of our life, aren’t we, Kevin?
Kevin: What about the opposite? Negativity bias?
Michael: That happens too; you’re right, Kevin. Just as some investors are overly positive, there’s a tendency to put more emphasis on negative experiences in some people, rather than the positive.
People with this bias feel the bad is stronger than the good, and they perceive threats more than opportunities in a given situation. Psychologists actually argue that this is an evolutionary thing. It’s better to mistake a rock for a bear, than a bear for a rock, they would say.
To keep our ancestors alive Mother Nature evolved a brain that routinely tricked us into making three mistakes. It used to overestimate threats, it used to underestimate opportunities, and it underestimated our resources for dealing with threats and opportunities.
This is a great way to pass on genes and to be genetically strong and have a bigger, stronger population, but it’s a lousy way to promote the quality of life or grow your wealth.
Kevin: What’s the difference between being negative and being conservative?
Michael: The thing is that some people see the glass half full and others see the glass half empty. While the pessimists and optimists keep arguing about which way the market is going, the optimists are just going out and making money.
The fact is we’re always going to have pessimists around us telling us why not to invest and reminding you of all the things that can go wrong. But the reality is that real estate is a cyclical investment. You can minimize your risks and maximize your upside by educating yourself, becoming financially fluent, following a proven strategy, and getting a good team around you.
Kevin: Indeed, and what’s the bottom line?
Michael: We all want to think that we’re rational and these biases are things that afflict other people, however our brains are designed with blind spots that tend to trick us and delude us. That’s why so many of us are not only bad with money, but we tend to make the same mistakes over and over again.
We’re blind to our blindness, so we should at least be aware of it and work with other people who can see our blind spots. That’s what a mentor does, Kevin.
Kevin: Wonderful stuff. Thank you so much, Michael, for taking us through the psychology of success. Michael Yardney is from Metropole Property Strategists.
Michael: My pleasure, Kevin.
Kevin: I’m welcoming back to the show Ken Raiss from Chan and Naylor.
We have a question from Jay: “I’m currently building a block of townhouses on a piece of land that’s in my name. I’d like to avoid having these new units still owned by me in my own name upon completion. What are the costs and processes in transferring these into a trust before the titles are registered? I do plan to keep them and rent them out.”
Ken, over to you.
Ken: Unfortunately, the transfer of title will incur both stamp duty and tax. The level of tax will depend on the period of time since you purchased the land. If you owned the land for more than twelve months since contract exchange, then you can get a 50% reduction in the capital gains tax.
You just have to be careful, of course, that in most states, trusts get treated slightly differently for land tax purposes, compared to individuals. If there are reasons such as asset protection or estate planning that you need to get the properties out of your name and into a trust, then I would be doing it sooner rather than later, when the value of the project is at its lowest. Because stamp duty is based on end value, the ATO would deem the tax between your costs of construction and purchase versus the market value at the date of transfer.
The other thing you have to be careful of, of course, is if you’ve got loans you have to go talk to the bank. They would need to approve it because there is a change of title.
Kevin: The bottom line for Jay is the sooner you do it, the better, and there will be some tax implications along the way, Ken?
Ken: Correct, both tax and stamp duty.
Kevin: Alright, there you go, Jay. Keep those questions coming in, too. You can send them in through the website, and we’ll always have one of our experts answer it, as we did in this case.
Ken Raiss is from Chan and Naylor. Ken, thank you so much for your time.
Ken: Thank you, Kevin, and thanks for that question, Jay.
Kevin: Bryce Holdaway joins me once again. Bryce, of course, is co-host of Location, Location, Location Australia and is from Empower Wealth, as well.
Bryce, I want to talk to you, this time, about trends. What are you and Ben noticing in terms of trends in the property market in Australia?
Bryce: The biggest trend that I’m seeing is that people are becoming more and more comfortable with not investing in their backyard and, in particular, investing interstate.
The fact that investors have done pretty well in the Melbourne and Sydney markets of late is seeing them equity-wise doing really well on paper, and so they’re shifting their focus to a couple of things.
One, looking for opportunities to retire the debt and look for a yield play. But two, also seeing that Australia doesn’t operate as one big market and seeing that if they’re a borderless investor and open their mind up to investing interstate, they’re going to have the best chance of moving their money into the market that’s going to give them the best chance of having the upward part of the cycle.
I think the fact that there’s better data and there’s better analysis out there to give you more confidence in investing interstate, but what I am finding is people still have a little bit of reluctance. They get right to the edge, but they have a little bit of reluctance about stepping over the line. I guess industries like buyer’s agents come in to help with that.
Kevin: Yes. It’s always much easier when you’re buying in a patch you know, which is the area that you’ve probably traditionally bought in. But a number of the investors that I talk to, they’re very brave, and as you said, there is so much information available now that you can really do a lot of preparation before you even travel to the market.
That raises another question, Bryce. Do you think you should travel to the market and see the property before you buy?
Bryce: If you’re doing it yourself, absolutely.
I always say that buying real estate on the Internet is a bit like checking out your friends on Facebook. They only put the good stuff up. They never tell you about when they’re having a bad day. It’s a bit like that with real estate. You should really check it out if you’re buying it without the help of a professional.
But I’m jumping on a plane more than ever to go into interstate markets and check them out, and run the ruler over opportunities. With a buyer’s agent, I think we’re using data analysis, but I think that is a bit of a double-edged sword, as well.
Not only is there more information out there that people can reach easily, but it actually makes it harder to digest and form it into some form of view on what you should actually do. In essence, there’s a little bit of paralysis by analysis.
Bryce: I guess people still need their hand held, but I’m finding, in general, they’re more open to interstate buying than ever before.
Kevin: At what point do they need their hand held? Is it the investigation stage, or is it the purchasing stage? I was just wondering there as you were talking whether or not it’s frustrating for you if someone comes to use you as a buyer’s agent, they’ve done a huge amount of homework themselves, and they’ve made a decision about what they want to buy and where. Is that frustrating for you?
Bryce: It can be. I get the privilege of having a professional view of seeing the rear-vision mirror on hundreds of portfolios, and I see the decisions that people make.
I always think that when you’re investing, you’re going to pay in one of four ways. You’re either going to buy the wrong asset, you’re going to procrastinate, you’re going to over-pay, or you’re going to prepay for a professional service. It’s one of those four things.
People get to the point where they have a bit of an understanding about where they should buy, but what I find is even if I’m talking to someone who’s got their research spot on, they’ve got the suburbs spot on, they’ve got the actual asset selection spot on, they just lack the confidence of being able to step over the line and do something.
I think amongst a whole range of things that buyers agents can do, essentially, they’re holding the hand, helping them walk over the line, put their name on a contract, and actually buy a property.
Time is usually a very good friend if you’re buying a property in an investment-grade suburb. I always think if you buy an average property in a good suburb, it’s better than buying a good property in an average suburb, because the location will do most of the heavy lifting for you.
Finding that location is often the hard part. There are 15,000-plus suburbs in this country.
Kevin: Bryce Holdaway, great talking to you, mate. Bryce, of course, is the co-host of Location, Location, Location Australia and is from Empower Wealth.
Bryce, thanks for your time.
Bryce: Good on you, Kev. Thanks.
Kevin: In a report from Onthehouse.com.au is a sign that we should have seen coming, and that is just how unaffordable Sydney property prices are right now.
Consulting analyst for Onthehouse John Edwards joins me. John, this probably wouldn’t have been a big surprise for you, but it certainly looks as if it’s out of the reach of first-home buyers in the Sydney market.
John: Yes. It wasn’t a surprise because I’ve been watching it, but the bottom line for people is that housing in Sydney, particularly houses, have now just passed $900,000 for the median value of a house. When you look at how much money people have left after tax after they’ve met their mortgage repayments, they have about $780 a week. That’s not going to do very much if you have to educate your kids, and buy clothes, and have a holiday. Even with a 0.5% reduction in interest rates, that’s still going to be under $800 a week for people to spend.
Housing in Sydney is out of reach of the first-home buyer.
Kevin: One of the big dangers for first-home buyers, too, is that they’re lured into the market with low interest rates that we have now, and then obviously, at some stage, they are going to go up. If it’s unaffordable now, it’s almost going to break the bank.
John: I think there’s a bigger problem than that, frankly, and I issued a warning on this today. When I look at all of the markets across Australia, what I note is that population growth is falling. If we look at New South Wales, we can see that the growth to the five-year median, the number of people that are now coming is 4,000 less than what it has been on average over the last five years per quarter.
What governments are doing is trying to stimulate the economy by boosting housing market activity. But in boosting the housing market activity, what they’re going to do, given the falling population, is create oversupply. Wouldn’t you know it, New South Wales has already got an oversupply, and by my calculations there are about 10,000 dwellings that are surplus to need based on what’s currently happening.
We’re looking down the barrel of some issues here unless people are very careful about what they’re doing.
Kevin: In your report, you looked around at other states and cities around Australia. Which would you say is probably the standout for being one of the best performers going forward this year?
John: Going forward, I had all my money on Brisbane, because everything in Queensland was doing really well and was looking like as if government had it sorted. They knew what they needed to do to maintain employment. It was all looking pretty good, and when I look at the trends, the growth that was going on in Queensland was pointing to increased rates of growth in the housing market.
The unit market, like in New South Wales, is over-supplied – probably no surprise with that. The over-supply there is not as bad as New South Wales, but we’re still looking in the thousands. That was the market that I thought was going to do well, and that’s where I would have had my money, but now I’m not sure, because I’m not sure what the new government is going to be able to do.
I haven’t been able to see anything that points to exactly what their policies are, how they’re going to stimulate the economy, and how they’re going generate growth and jobs. We have to recognize that as the resource projects come to an end, and the crude oil prices fall, that this is going to have an impact on gas exploration and the gas industry.
Kevin: I guess only time will tell on that front, too. One other thing I’d like to touch base with you on, John, is a report that I saw you’ve released about the hype around negative gearing and whether or not it’s necessary. What were your findings there?
John: In essence, negative gearing should stay. It would be wrong to remove negative gearing because it would be a distortion. There is no other asset sector in Australia that you can’t negatively gear on.
The problem we’ve got is that basically the government – via the Tax Office – isn’t enforcing the legislation that it has. I think the majority of people don’t realize is that what you can’t do is borrow money on the basis that you just have no intention of ever gaining a profit other than through capital gains from the ownership of that asset.
You have to be able to show that at some point in time you are going to be throwing off taxable income. I don’t think people totally understand that, and because of that, it’s actually getting out of hand. It’s time for government to actually let everybody know – through the Tax Office – what the rules are. Then we wouldn’t have a problem.
Kevin: There’s a great report you can get that was written by John that deals with this. That’s just at Onthehouse, John?
John: Yes it is, but the easiest thing to do is go to Residex.com.au. On there, you’ll be able to get a copy of that report when you buy other products.
Kevin: We all know that name, because that’s the company you founded. John Edwards has been my guest, and we talked about a number of things there.
John, thank you so much for your time.
John: My pleasure.