25 Jan The formulae for investing success – Michael Yardney
As we try to make sense of the mixed messages about the property market, Michael Yardney gives us details of his formulae to work out where to invest and which properties are the best. Today he details his top down approach to select the best market.
Kevin: As you know, last week and for the next couple of weeks, we’re having a look around Australia at what the markets are going to look like in 2016 with a number of our experts. I’m fascinated to hear so many different views about where we’re headed. Obviously, the market, very, very fluid as it was in 2015. Michael Yardney joins me.
Michael, how do we make sense – or how do you make sense – of all of these mixed messages?
Michael: Kevin, the first way is to have a system so that therefore, you’re not getting sidetracked by all the news. But the next thing is to start with a macro approach of how the world’s going, then how Australia’s going, and then dig down to a micro approach of how segments of the markets are going and particular properties. I start with the big picture, Kevin.
Kevin: Walk us through that, Michael, because I think over this week and next week, certainly I want to dig a bit more into this to see how you actually determine that.
Michael: As you say, the market is going to be different and the economic factors affecting the market are different. We start with the big picture of how is the world economy going and how is Australia’s economy going? Because there are some stages of the property cycle and the world economic cycle that you may just sit on your hands. Sometimes the right thing to do is nothing, but I don’t think 2016 will be that year.
We look at how is the economy going? In Australia, we’re not going to do the best, but we’re still going to be the envy of most of the developed nations. Then we look at the states. We dig down to the right state and see one that is in the right state of its own property cycle.
Kevin, as we know, each state has its own property cycle. I don’t try to time the cycle completely, but I don’t want to buy right near the peak where you’re probably going to miss out on capital growth for a couple of years.
Kevin: Let’s look at the current state of the markets or the current state of the states. Are there any states that stand out for you? Obviously, there are the ones where you probably wouldn’t go – and maybe that’s Perth and Darwin.
Michael: Kevin, I think the property cycle is going to be driven by wages growth and economic growth. We know that in Sydney and Melbourne, the markets have been very strong, but over the long term, the way that property values can increase is by people being able to afford to pay more. That’s partly happened by lower interest rates, and it’s also happening in certain segments where jobs are being created and wages are going up.
I’m following those areas where service industries, in particular, are creating jobs in certain segments of our big capital cities. It’s very likely going to be Melbourne and Sydney this year, with Brisbane coming up a little bit, as well.
Then within that state, though, Kevin, I look at the right locations. I’m wanting the suburbs that have not just had long-past history of capital growth; just as important to me are suburbs where the demographics, the people, are able to afford, as I said a moment ago, and are prepared to pay a premium to live. I think that is going to occur more close to the water, close to the CBD, close to where the economic activity is, so we then drill down to suburbs.
You can actually see that Australian Bureau of Statistics provides suburb-by-suburb data from the census on disposable income and areas where disposable income increases more than average.
Then you really need “on the ground” information because in every suburb there are three or four locations, some better than others in the suburbs, some districts better than others. I’m not just talking about on main roads or close to shops, or schools, or commercial areas, but also why some streets slightly have more character, why one side of the street is worth more than others.
Then I dig into the right property. That’s my five-stranded approach that we can discuss at another time. Then, Kevin, it’s the price. I think it’s going to be important to get price right this year. You can’t overpay in a market that’s not growing very much like it did in the previous couple of years. Inflation and high price growth isn’t going to cover up mistakes in 2016.
Kevin: You mentioned there about the property, which brings in your five-stranded approach. I wonder if we could cover off on that next week because that’s an important part or the next building block in helping us understand what 2016 is going to be like. Michael?
Michael: I’d be happy to do that, Kevin.