03 Aug Where to get double-digit growth + Australasia’s most affordable capital city + Sydney rental market on edge
Highlights from this week:
- Getting property in the USA is the easy part
- Australasia’s most affordable capital city
- Sydney rental market on the verge of oversupply
- Suburbs for double-digit price growth
Australasia’s most affordable capital – Diwa Hopkins
Kevin: Easing house price pressures are proving some affordability relief for home buyers according to the HIA. Joining me to talk about this, HIA economist Diwa Hopkins.
Diwa, thanks for your time.
Diwa: Thank you for having me.
Kevin: Where are we seeing this? Is it right around Australia, or are there different patches?
Diwa: We’re seeing affordability improve in most capital cities. The most affordable capital city at the moment is actually Perth, and so this is a very different story compared to what was happening quite a number of years ago right at the height of the resources boom.
But what you’re seeing in Perth now is a situation where the fallout of the downturn in the resources boom is actually leading to falling prices. By that token, that has improved affordability for home buyers. So, that’s the city that’s most affordable.
Kevin: I’ll ask you in a moment how you do actually measure affordability, but let’s firstly talk about supply, because I imagine that’s something that the HIA would be monitoring fairly closely.
Kevin: How have you seen supply compared to demand?
Diwa: Over the past couple of years, Australia has seen really strong levels of new home building, and this level of supply coming on to the market has been a response to very strong population growth that previously was unmet by commensurate levels of building. That supply has started to respond to underlying demand. In turn, that has taken the heat out of a lot of price pressures that were building up in the market.
Kevin: Yes. Have you any evidence of a lot of stockpiling of sites by developers who have decided they want to pull back until the market does actually improve a bit or catch up?
Diwa: We can look at the overall balance of the market by looking at both purchase prices and also rental prices to get an overall sense of how balanced the market is. I’d say in the major capital cities, particularly Sydney and Melbourne, we get an impression that these markets are pretty well balanced.
So, you have this situation whereby especially in Sydney, over the long term, you had a combination of strong dwelling price growth as well as rental prices, so that, to us, suggests that you have this persistent under supply and only more recently have dwelling prices been coming back, whereas rental prices, on the other hand, have retained a fairly steady pace of increase. So, to us, that suggests that you have a pretty even match between supply and demand.
Kevin: I notice the affordability index, if it’s measured over the last 20 years, there are only a couple of capital city markets where the affordability index is actually lower than the 20-year average – those being Sydney, Melbourne, and Hobart. Overall, the average across all capital cities, the index is actually higher than the 20-year average.
Diwa: Yes, that’s right. What stands out in particular is Perth and that’s that price story coming through there. But yes, you’re right. What we’re seeing particularly in Sydney and Melbourne, for example, where affordability is lower than its 20-year average, is the effect of the previous very strong house price growth, and so we’re only just pulling back from previous very strong price growth.
Kevin: How do you measure affordability?
Diwa: We look at house prices and what the associated mortgage repayments would be at the current interest rate settings. We look at the earnings of each of the capital cities, and we consider an affordable repayment to be 30% of earnings. If mortgage repayments exceed 30%, then the corresponding affordability reading will be a threshold of 100, so we set that index to equal 100.
Kevin: The average across all the capital cities, according to your information, is 71.3. How does that measure? Is that acute or is it promising?
Diwa: Critically, it’s below an index reading of 100, so it tells us that under current price settings and interest rate settings, mortgage repayments are amounting to more than 30% of an average wage.
Kevin: I understand that, but there’s only one capital city in Australia where it’s actually over 100, and that’s Perth.
Diwa: That’s right. So, that’s why we have this overall average across capital cities where the reading on average is less than 100.
Kevin: How often is that 30% benchmark changed or altered? Or is it never altered?
Diwa: No, it’s never altered. It’s an industry-wide rule of thumb.
Kevin: A barometer.
Diwa: That’s right.
Kevin: I’ve been talking to Diwa Hopkins who is the HIA economist. Thank you very much for your time, Diwa.
Diwa: Pleasure. Thanks for having me.
Sydney rental market on verge of oversupply – Louis Christopher
Kevin: The Sydney rental market has recorded the highest vacancy rate in at least 13 years according to SQM Research. Joining me from SQM, Louis Christopher.
Louis: Hi there, Kevin.
Kevin: Louis, just looking at your report here, I think you’re saying that the Sydney rental vacancy rose to 2.8%. It’s getting very close to that 3% threshold that we’ve talked about in the past, isn’t it?
Louis: Yes, that’s right. And importantly, the trend is up. Vacancy rates have been rising, we think they’re going to continue to rise, and it is becoming increasingly a tenant’s market in Sydney. And certainly, in some areas, particularly in Sydney’s northwest and the Hills district, the lower north shore and Sydney’s eastern suburbs, we’re recording rental vacancy rates well above 2.8%.
I think the highest rental vacancy rate we have for any individual locality in Sydney is Kellyville running at about 7.1%.
Kevin: Wow. To keep this in perspective, it’s almost 20,000 rental properties that are vacant. How accurate is that figure? I know I’m asking you who generated the report, but we hear a lot of properties that aren’t necessarily reported as being vacant that are vacant. Could it be higher than that, Louis?
Louis: This is a measure of properties advertised as available for rent. There are definitely properties out there that are unoccupied and not being advertised for rent. That segment of the market is very hard to measure, and we take the view that, okay, they may well be unoccupied, but if they’re not available for a tenant to rent, they’re not on the market, they shouldn’t arguably be counted as being a property that’s available for rent and vacant.
Whatever your view is on that – and people have various views on those types of properties – we’re simply measuring those properties that were advertised over the course of June and have been on the market for at least three weeks and longer.
Kevin: Yes, so these are available rental properties. I guess that’s the differentiator, isn’t it?
Louis: That’s the differentiator. That is correct.
Kevin: I see in your report that Hobart is one of the hottest rental markets in Australia. That’s all to do with the boom that’s happening down there, do you think?
Louis: That’s right. We have the vacancy rate at just 0.7%. There are just 220 properties vacant and available for rent in Hobart. Keep in mind, of course, Hobart is a relatively smaller town when we compare that city versus, say, Brisbane or Sydney. Nevertheless, it’s very tight. It’s a landlord’s market. Rents have been rising at above 8% per annum now for the last two years. Now, of course, they’ve come from a very low base.
And the reason why we’re seeing such a tight rental market in Hobart is a two-fold reason. Number one, since about 2015, the Hobart economy has been doing really well. That’s as a result of a good state government there doing the right things by the Hobart community in terms of the economy, as well as a lower Australian dollar compared to what we had back in 2012.
And Hobart is one of those economies where when you see a lower Australian dollar, it generally thrives. That, plus the fact that even while the vacancy rate has been getting tighter in Hobart since about 2015, property developers haven’t been coming to town. They have not been building.
And I’ve been speaking to property builders as to why: “Why are you not taking advantage of this opportunity?” The answers I get back are it’s just too costly to actually build there right now and developers being concerned that they may not get the financing to buy in Hobart.
But it actually does really boil down to cost. I had one developer say to me “I literally would have to ship in a lot of the raw materials from the mainland to get the development going.” And that certainly adds to the cost.
I think, though, that when you look at the most recent numbers, developers are starting to take the risk and build in Hobart, so our view is that over the next two years, we’re likely to see vacancy rates starting to rise again.
Kevin: It’s interesting when you look at the vacancy rates in your report and then you look at what’s happening with those weekly rents. You can really see it coming through, change week on week with drops in Canberra, Sydney, also in Adelaide, Hobart, and some in Melbourne in houses. Then you look at what’s happened year on year: there’s a fairly dramatic drop year on year out of Sydney, which is what you’ve indicated.
Louis: Yes, that’s right. You have to be a little bit careful about looking at rents on a week-by-week or month-by-month basis even, because there can be seasonality in those numbers for the rents. But the 12-month change really can tell the story.
As you’ve rightly pointed out, we’re now recording a fall in rents in Sydney of about 2% for houses over the past 12 months, whereas when we looked at Hobart, rents are up by 8.5% for houses and 10.4% for units. So, quite a variation occurring there, but more in line with what we’re seeing with the vacancy rates.
Kevin: Houses in Canberra have improved well year on year at 13% on last year. How much of that has to do with supply and demand? Because I know there are a lot of properties taken off the market in Canberra with that Mr. Fluffy debacle, weren’t there?
Louis: Yes, that’s correct. We have a current vacancy rate in Canberra of just 0.9%, so it is really tight, and hence the reason why we’re recording houses up for rent by 13%.
I generally found with the Canberra housing market that it’s fairly closely correlated with federal government spending and elections. And as you come up to an election, for example, the government starts spending more money on consultants as an example, and those consultants generally will come to Canberra and live in Canberra while servicing the federal government, and that has an impact upon the housing market.
And whenever you see a situation where the federal government is cutting spending – and they normally do that, for example, after an election in the first year – that can have a negative impact upon the Canberra housing market.
Kevin: Louis, great talking to you, mate, thank you, and a tremendous report. Louis Christopher from SQMResearch.com.au. Thanks for your time, mate.
Louis: Thank you, Kevin.
Time to sack your property manager? – Sarah Megginson
Kevin: As you would no doubt be aware, issue number 134 of Your Investment Property is out on the streets now. There is a separate podcast coming out as well that will give you a lot more detail about that. But there’s a story inside this edition that I wanted to talk about specifically with Sarah Megginson who is the editor for Your Investment Property magazine.
Sarah, thanks very much for your time.
Sarah: Thanks for having me, Kev.
Kevin: I’m just curious about this article about knowing when it’s time to fire your property manager. What are the signs? What are the signals?
Sarah: We put this story together based on some feedback from readers. We often have stories about how to build your portfolio, but once you’ve got your properties, you also need to be able to manage them – and that’s what this story was kind of born from.
It’s the idea that once you pass your property over to your property manager, you can’t just set and forget; you do need to stay quite actively involved because some of them can be less experienced than others. They can be – how would you put it politely? – less proficient than others, and it can really end up costing you thousands of dollars if you don’t get them into line.
Kevin: That can happen after a period of time too. There might be an initial flurry where a BDM or business development manager has brought your property on to the rent roll, therefore they’ll be paying particular care and attention to it in the first month or two, and then the service starts to fall away.
What are you recommending in terms of someone monitoring it? Should there be something in the clause to say if they’re not happy, they can terminate?
Sarah: Yes, absolutely. This is often part of the standard contracts that you fill out. You’ll have a clause in there or a period in there that you can give them notice to not be your property manager any more. But it’s really about being clear about your expectations up front.
And I know, personally, some of the issues have come about when there’s been a change of property manager. The person who I was dealing with was giving a great level of service and that changed when we got the new property manager who just didn’t approach things in the same way, didn’t keep me in the loop, they did repairs without approvals and that type of thing.
I think if there’s a change of property manager within the agency you’re using, then make sure you have a conversation with them so that they’re on the same page as you.
And then in the article, we go through a number of different scenarios of “If this is happening then it’s a bit of a red flag and it’s time to either have a conversation with them or consider moving to someone else.”
Kevin: Yes, and therein lies the problem because when you give notice to an agent you’re going to make the move, one, you have to know the time period, but then you’re in that land of never-never. When you give them the notice, they’re not going to take really good care of you, unfortunately.
But you know, there is a solution to this and I’ve recommended this to a number of people. And that is that when you give notice, you can actually take the property away immediately, give it to the new property manager as long as the original property manager is paid their fee.
Let’s say, for instance, that you’ve got a 30-day notice period. Then make sure they get the commission for that 30-day period, and you’ll find that the agency you’re taking it too will agree to that because they’re getting a new management.
Sarah: Yes, exactly. It’s not always about the actual dollar value. It can cost you a lot more in problems down the track if you haven’t got this all sorted out. There’s so much emotion involved in investing. It’s a very people-driven business, so you have to address these things on a case-by-case basis.
Kevin: Yes, you do. Remember there’s always a solution. It’s a great article. It’s inside the current edition of Your Investment Property. It’s out right now. It is actually the September edition even though it’s coming out in August. It just shows how far ahead of the game you guys are. Issue number 134: “How to fire your PM and to know what the signs and signals are”.
Sarah, thanks for your time.
Sarah: You’re welcome. Thanks, Kev.
Double-digit growth suburbs – Simon Pressley
Kevin: You’d be excused for thinking that the property market in Australia is all doom and gloom. We’re hearing about reductions in price, the Sydney market falling, and so on, but you’re going to be really surprised to hear a report that we’ll be talking about in this interview that’s come out that reveals that double-digit price growth has been produced in one in every eight locations across Australia. You heard right: one in every eight locations.
This is not a great surprise to the people who put the research together. One of our supporters and people we feature regularly in this show because they know what they’re talking about, Propertylogy’s Simon Pressley joins me.
Simon: G’day, Kevin. Always good to chat.
Kevin: In your chat with me before this interview, you mentioned that it’s not really a surprise to you because you are focused very much on this ongoing, aren’t you?
Simon: Yes. In any calendar year really, the official data today, one in eight locations across Australia, double-digit price growth as we said, but that’s probably lower than normal, in all honesty.
But why we’re sharing this data is because I think so much of the broader property media hovers around whatever is happening in Sydney or Melbourne at any given time, good or bad, and because our two big cities, their growth cycles are now behind us. I think a lot of the Australian public thinks that is a reflection of what’s happening right across the country, but it’s definitely not.
Kevin: Is this largely in regional markets, or are there some cap city markets or suburbs that have improved well into double-digits?
Simon: There’s double-digit growth in some capital cities and some regions, but overwhelmingly, Kevin, regions are the winners. And on this show several times over the last couple of years, we have been deliberately trying to share with people lots of information about regional Australia because we’ve felt for a couple of years that the best opportunities are going to be not in all regions, but if you know what you’re looking for, that’s where the real growth we felt was going to be.
45 out of the 67 locations in Australia that had double-digit price growth over the last 12 months were in regional locations, so that still means there were 18 capital city locations with double-digit price growth. But 45 out of 67 in regional Australia, and we expect that trend to continue for a good few years.
Kevin: What about state by state, Simon? Were there any states that really stood out?
Simon: The biggest beneficiary was Victoria. It had 28 locations with double-digit price growth, and 16 of those are in greater Melbourne. These locations, Kevin, we broke Australia up into each city council. So, there are 550 city councils in Australia and 67 of those had double-digit price growth last year, 28 in Victoria, and of those, 16 were in greater Melbourne.
And no surprise to us that most of those greater Melbourne locations were on the outskirts of greater Melbourne where housing is more affordable.
Kevin: There’s a special blog on Propertyology’s feature channel on RET. We’ll put a link to the article inside this commentary down below in the transcript section.
What about some of the other states around Australia, Simon?
Simon: New South Wales had 27 locations of double-digit price growth, and 24 of those were in regional New South Wales – 24 out of 27. South Australia featured quite well: four locations there, and three of those were in regional South Australia.
Tasmania: we’ve known for a good couple of years that Hobart is our hottest market. There were four parts of Hobart with double-digit price growth, but also three locations in regional Tasmania with double-digit price growth.
Western Australia only had the one: interestingly, Karratha. Median house price increased by 13.5%. We know Karratha had a nasty decline when the mining boom came to an end. And we’ve known for a couple of years that mining in general has been showing some solid recovery. Western Australia has seen it.
Nothing in Queensland, unfortunately, Kevin. It continues to disappoint us, capital city and throughout regional Queensland for too many years, to be frank.
Kevin: Well, you know, in defense of Queensland, I think one thing about the Queensland market is it continually just improves at a fairly moderate rate. I think around maybe 6%, which is still quite reasonable. We don’t get the highs and lows.
You probably don’t agree with that, Simon, but that’s my view.
Simon: Disappointing. It’s always had a lot of potential, strong fundamentals. The state lacks confidence, it lacks significant investment in infrastructure, and until those two things combine, the buyer public won’t have the confidence required for some decent returns as investors.
Kevin: Fair enough. One of the big drivers behind this, of course, is employment. And we see employment come for different reasons, like tourism, health, agriculture, infrastructure, and so on. What were the standouts for you?
Simon: We talk about property economics on this show all the time, don’t we, Kevin? The real thing… We’ve always had this fascination with the Asian Century. It’s what caused the mining boom. It’s what caused Sydney and Melbourne’s boom. It’s what’s been the catalyst for Hobart’s remarkable turnaround, and it’s also what’s unfolding throughout parts of regional Australia.
The Asian Century is a massive phenomenon where 2.5 billion people over a short period of time are going from poverty to middle class, and how that affects Australia’s property markets is the different industry sectors that expand and create more jobs, which leads to confidence, salaries, people migrating from one location to another.
One or another causes pressure to rise on property or pressure to fall on property, and regional Australia is a big beneficiary.
Kevin: Always great talking to you, Simon Pressley. And don’t forget: use this link to that blog article on Propertyology’s featured channel on Real Estate Talk.
Simon Pressley, thank you so much for your time.
Simon: Thanks, Kevin. Talk again soon.
Getting USA property is the easy part – Bushy Martin
Kevin: My guest this time in the show is a man we’ve had in the show in the past. I learned something about him I didn’t know in the lead up to this interview, and that’s the topic of this conversation, and that’s about investing in the U.S.A. Bushy Martin joins me. Bushy is from KnowHow and is also the author behind The Freedom Formula, which we’ve spoken about in the show.
G’day, Bushy. How are you doing?
Bushy: Hi, Kevin. Great to see you again, mate, and I really appreciate the opportunity to have a chat.
Kevin: Pleasure. I want to talk to you about this because I didn’t know that you’d invested in the States, in property in America. Is this a recent thing?
Bushy: No, we’ve had them for a few years now, Kevin. We always look at where the opportunities are, and after the GFC, obviously, property in the States fell through the floor in terms of value. So, we had a good look at it for a couple of years, and we had a lot of our investors knocking on our door saying “We’ve got to buy in the States, we’ve got to buy in the States.”
And we said “Hold your horses, let’s just settle it down. We’ll be the guinea pigs, we’ll jump on a plane, we’ll go over and we’ll suss it all out. We’ll look at the investment principles over there, we’ll make sure the process works, we’ll have a look at the quality of the people on the ground, and then lastly, we’ll look at the property and we’ll dive in and buy a few properties and see how they go. And if it shapes up all right, then and only then will we suggest that other people follow us on the route.” That was about 2011, I guess.
Kevin: Yes, you have a few years under your belt now. How has it been in hindsight?
Bushy: There’s a massive difference between how it looked on paper and how it presented initially. Getting the properties was actually the easy part, Kevin, and when you looked at the numbers, they stacked up really well.
It was chump change to get into the properties. We bought a couple of properties for between $30,000 and $50,000 in U.S. dollars. At the time we bought them, the Australian dollar was $1.05, so that was pretty good buying. The rental yields were massive, between 21% and 30% on paper. You’re not paying stamp duty. There are a whole bunch of things that look really good.
But I must say buying the properties was the easy part. The actual experience beyond that has been interesting to say the least.
Kevin: Experience in what? Getting it ready to rent, or getting it rented and keeping it rented?
Bushy: Yes, exactly right. I think the biggest challenge we’ve had is our expectations around the level of professionalism from people in the property industry.
Kevin: These are like letting agents?
Bushy: Yes, absolutely. We treat property as an elite team sport, Kevin, so we make sure that we eyeball and identify good players on the ground. We’re talking buyer’s agents, we’re talking building inspectors, we’re talking accountants, lawyers, and most importantly, the property managers. And the area that’s really let us down has been the property management.
We’re used to very good quality property management here in Australia, but the standards and levels over there are a long way short. So, very average tenants, extended periods of vacancy, very lax in terms of rental collection. It’s a very reactive exercise over there versus the proactive approach that we see here in Australia.
The other thing that caught us a little bit is the extremes of weather have really upped the ante in relation to maintenance costs. Burst hot water pipes are a regular exercise, replacing them and all of that. Flooding of basements that you wouldn’t expect, just because of the extreme seasonal changes. There are a whole bunch of things there that we wouldn’t have envisaged.
We certainly put contingency on things, but we certainly didn’t anticipate that sort of poor level.
Kevin: Yes. In the other show that we do, Real Estate Uncut, which is shortened to RE Uncut, that’s aimed straight at real estate agents, and I know through that show, Bushy, that there are a number of operators out of Australia who are now living in America and training agents over there how to manage property – or how we do it in this part of the world.
I do think that we are the leaders in that area. I think our levels of service are quite exceptional.
Bushy: Absolutely 100% agree, Kevin. After experiencing both, we are poles apart. In fact, I think we set the standard internationally. I guess we always picture America as the pinnacle of everything, just the way it’s presented, but our experience with that has been very different. There’s a massive difference between the walk and the talk in the States, Kevin. Big on promise and a bit average on delivery, I would have to say.
Kevin: That is changing, though, isn’t it?
Bushy: Yes, it is changing. It’s certainly improving quite a bit. In fact, after two years with the properties, we flew back unannounced, inspected the properties, changed the keys, sacked everyone and started again.
And we even added in an independent project manager who we paid an hourly rate for to make sure that what we’re being told is the truth and we had some independent eyes and ears on the ground to do some inspections and to give us the truth on exactly what was going on. So, when you add all those costs in, it suddenly doesn’t look anywhere near as good as what it needs to be.
I guess the other thing, too, is we’ve been fortunate in that we bought pretty much at the bottom of the market, and the intention was to buy at the bottom and then all we had to do was improve to the point where it equaled its long-term average and you’d effectively doubled the value of your property. But you’d be hard pressed to do that now. There’s actually very little capital growth in the States generally. If anyone is looking to invest in the States, I would only focus on a cashflow strategy.
The other challenge with it, Kevin, is to buy the property in the States, you must have an American bank account, and you can only get an American bank account if you’re physically there in person to be able to sign the documentation. So, you can’t buy remotely; you have to jump on a plane and go over and do it. When you add those costs into the equation, then suddenly, the real yields are a lot lower than what the expectations are.
Kevin: Yes. Mate, you promised me the good, the bad, and the ugly. We’re out of time. I think we’ve seen pretty much what it is. There’s a note of caution about it always. Always check it out for yourself.
My guest has been Bushy Martin from KnowHow. What’s the website if anyone wants to reach out to you?
Bushy: Thanks, Kevin. It’s http://www.khgroup.com.au.
Kevin: And of course, that wonderful book called The Freedom Formula. All the details are on that website, no doubt. I’d be disappointed if they weren’t, Bushy.
Bushy: They’re all there, and I really appreciate the opportunity to have a chat with you.
Kevin: Yes, it’s a great book. I’ve still got it. It’s one of those books that you’d keep on the coffee table, I can guarantee you. It’s a great book, tremendous read, and looks pretty good too, I have to say. You scrub up all right.
Bushy: It’s amazing what they can do with Photoshop, Kevin.
Kevin: Fair enough, mate. Good on you. Okay, Bushy, thanks for your time, mate. That website, again, is http://www.khgroup.com.au. Thanks, Bushy. Talk again soon, mate.
Bushy: Thanks, Kevin.