22 May Why low interest rates are NOT so good | Why so negative on negative gearing? | Auction tips | Where most renovators go wrong plus more
We all wait patiently every month to see what the Reserve Board will do with rates and the media goes into a frenzy with news about what any movement up or down will mean. Well in this week’s show Jane Slack-Smith thinks is about time we realised that low interest rates are not a good thing.
One topic guaranteed to cause a strong reaction in the media is negative gearing. Many people with only a hazy idea of what it actually is, blame it for virtually everything from locking first home buyers out of the market, to causing high property prices, to ugly greedy investors rorting the tax system and driving the national Budget into deficit. Today Michael Yardney puts it into perspective for us in the show.
Patrick Bright joins us with some timely tips on buying at auction and, in particular, ways to make sure you don’t pay too much and Cate Bakos tells us, from an agents perspective, where most DIY renovators go wrong.
The number of Gen Y’s who own multiple properties is now on par with Baby Boomers and here is another startling revelation – they are buying them at a younger age. So how are they doing it? Jennifer Duke has the answers and she tells us more about what was revealed in the research.
Carolyn Boyd from Domain has been looking into the suggestion that buying a property in a good school zone will increase the growth potential of your investment and there’s more tips and advice as well.
Kevin: A question that comes my way quite often is when buyers are buying a property, if they buy in one of those areas that has good schooling, whether or not that actually adds a premium price. There is good evidence that that is in fact the case, and I know that Carolyn Boyd from Domain has been doing a little bit of research on this.
Carolyn: Hi, Kevin.
Kevin: A number of agents I’ve spoken to say that there are people who will pay a premium, but it is very general?
Carolyn: Look, I don’t think it applies to every school zone, but I would say every city in Australia, particularly where schools have zoning – not every school is zoned, but where there is zoning – this would certainly apply as there will be pockets in every single city where families will be prepared to pay more to get into that school zone.
Kevin: As you say, Carolyn, there’s not zoning in every cap city, is there?
Carolyn: No, and you might even find in some capital cities, some schools will be zoned and some won’t, depending on demand for those schools and also depending on the size of the school and the number of classrooms available. But certainly those zoned ones – there’s always a few, isn’t there, Kevin, wherever you live – where people really want to get into that school, particularly primary schools, because I think in general, people often prefer to send their children to a public primary school, and you do see more children go off into those private schools for high school.
It’s interesting. I have asked agents, “What is the premium? What will people pay extra to get into that zone?” The answer is sometimes it’s not a question of what they’ll pay extra; it’s a question of they’ll buy that house or they won’t. If it’s in the zone, they’ll buy it; if it’s out of the zone, they’re not interested.
Kevin: There are, in fact, some cool schools that offer special curriculum, as well, and that, I guess, adds to it. It seems to me as if it’s not very widespread and it’s not something that should be borne in mind if you’re looking at speculating in property, really.
Carolyn: No, and I think the thing is some of the premium prices will already be priced in to those school zones. People are already paying that money to get in, so you’re going along to purchase the house where you’re already competing against those families, and you might find you’re better off not to buy in the zone or potentially pick a school that you think is up and coming.
But that’s hard to pick, isn’t it, because often schools are in demand because of the school leadership at the time. Perhaps that particular principal is doing a great job or people think they’re doing a great job. Perhaps they have had a spike in their NAPLAN results, the testing that year three, five, and seven students do, that is reported on the My School websites, and parents do look at that. It’s a number of factors that make these schools in demand.
Kevin: I guess it’s something that mainly owner-occupiers would take into consideration, not so much investors, because for investors, as you rightly point out, a lot of the premium is already in the property and they’re probably not going to be prepared to pay for it.
Carolyn: That is true. Just one thing from an investment perspective. What it probably does do if you’re buying the type of home that a family would rent, it may mean that it might be a bit easier for you to find tenants within those zones, because many families are quite prepared to go and rent in that zone to get their kids into the school, so that’s something to look at.
But you look at that through the vacancy rates. Is the vacancy rate in this suburb better than the other suburb? You go back to the numbers to have a look at that.
Kevin: Indeed, you do. It always goes back to the numbers, doesn’t it, Carolyn?
Carolyn: It does, yes.
Kevin: Carolyn Boyd there from Domain.com.au. Thanks for your time, Carolyn. Catch up again soon.
Carolyn: Thanks, Kevin.
Kevin: Always around budget time, there’s lots of talk about negative gearing – whether or not it should be there, and if it’s all about greedy investors getting richer. Let’s get another perspective on this, because there has been a lot of discussion this year about it. Joining me to discuss this is Michael Yardney from Metropole Property Strategists.
Michael, welcome to the show. Firstly, I thought it might be handy for you to give us a bit of an overview about what negative gearing really is.
Michael: Thanks, Kevin. A property is negatively geared when the cost of owning it – in other words, the interest on the loan, the bank charges, the maintenance, repairs, and depreciation – exceeds the income you’re getting. A property itself isn’t a negatively or positively geared property; it really is a function of how you finance it.
The concern for some people is if you are negatively geared, you can actually write it off other income. Some would argue that less-fortunate taxpayers therefore help property investors meet the costs of them running their property investment business.
Kevin: We talk about that you should approach property investing like a business. If that is the case, why would you go into business to lose money?
Michael: Well, you don’t. And if you do go into a property investment with the main aim of getting tax benefits and depreciation, you’re likely to make a mistake. You’re right, Kevin. Generally, it’s done because property investors hope that the income loss will be more than offset by the capital gains when they eventually refinance or eventually sell the property. In Australia, of course, that’s not taxed, so there is clearly a tax benefit if you own the right sort of investment property.
Kevin: One of the major criticisms of negative gearing is it’s the richer getting richer, but you and I know that that’s not necessarily the case, don’t we?
Michael: When you look at the tax office statistics of who negatively gears, the vast majority – more than 80% of them – are ordinary Australian taxpayers, what some people would call battlers, people who have actually taken the trouble to save a deposit, to invest, to take a risk to secure their financial future. It’s not ugly, rich investors who do that.
Kevin: What surprises me, Michael, is that there are some very educated people who are very critical about negative gearing without necessarily taking into account the fact that investors are actually providing a very valuable service.
Michael: Kevin, when we grew up, a lot of the public housing in Australia was provided by the government, as it is in other countries overseas. In particular, in Melbourne and Sydney, you’ll see Soviet-style concrete high-rise towers where people used to have to live because that’s all the government could afford.
But today, just like private hospitals, schools, and public transport is shared between the private sector and the public sector, so is public housing, and that’s what ordinary investors like you and I are doing. We’re providing a service. We are running a business in the process of providing that service, and we’re just looking for the same tax incentives that anyone else who runs a business gets from the government.
Kevin: Ken Raiss is a good friend of ours, of course, from Chan & Naylor. He was very adamant about his criticism of any fiddling with negative gearing and what impact it would have on rental prices.
Michael: Ken Raiss is only one of the many who remember way back in the 1980s when negative gearing was removed and rents went up. There are other factors involved in that, as well. I know there’s a lobby out there – usually those who’ve missed out on the recent property boom or who can’t get into property at the moment – saying, “Just get rid of negative gearing, and that’s going to solve all the problems.” That’s a simplistic argument in my view. I agree that it’s likely in the short term to raise rents, because as an investor, I have to get my return somehow or other.
Kevin: Yes, indeed. In that case, Michael, does negative gearing actually push property prices up?
Michael: Negative gearing allows investors to buy property and get into the property market. I’m not sure that it actually pushes up values of it, because it’s really meant to be the cream, just the little bit that makes it doable.
What pushes up property values is the fact that still, in general, 70% of properties bought in Australia are owner-occupiers. They’re the ones who investors have to compete against. They’re the ones who are pushing up property values. The argument that properties are unaffordable is probably a moot one, in my opinion, because other than New South Wales, where currently about 50% of people buying are investors, most properties are still bought by homeowners.
Kevin: You’ll have a view on this, no doubt, so let us know through the website if you’d like. We’d love you to join the conversation. Just send a comment into us. It’s very easy to do that; it’s on the homepage. If you have any questions or comments for Michael Yardney or any of our experts on the show, we’d love to hear from you.
Michael Yardney is from Metropole Property Strategists. Michael, once again, thank you so much for your time.
Michael: My pleasure, Kevin.
Kevin: The number of Gen-Ys who own multiple properties is now on par with the Baby Boomers. According to the Domain Consumer Insight Study, 16% of Gen-Ys own two or more properties, compared to 17% of Baby Boomers or Gen-Xs.
Jennifer Duke is the Domain review editor. She joins me. Hi, Jennifer.
Jennifer: Hi. Good to chat.
Kevin: Was this a bit of a surprise for you, this result?
Jennifer: I was really surprised by the results of the survey. I thought it was pretty astounding, actually, especially when we’ve seen our parents’ generations very, very into property. I didn’t realize that it had come through Gen-Y so much.
Kevin: Yes. It shows a real sign of confidence in the market, too. The study also shows that younger generations are infiltrating the market at an earlier age, as well. How young are they starting out, and how does it compare with Gen-X and Baby Boomers?
Jennifer: What’s quite interesting is that the Baby Boomers are getting into the market around 45 years old, and then Gen-Xs are getting in 35, and now Gen-Ys are buying at 25. They’re getting in almost 20 years earlier than their Baby Boomer counterparts.
Kevin: Do you think it has a lot to do with their parents encouraging them to do it? I know with our kids, they got in very, very early, too, because we were encouraging them from our experience.
Jennifer: Definitely. I think, as well, seeing the benefit of compounding growth. Your parents have seen that go through the boom, and they say, “Boy, I wish I’d done it ten years earlier.” I heard my parents say that. I’m 24, and I have a property. You hear that while you’re growing up, and I think that your parents’ influence is definitely very strong.
Kevin: Yes, I guess a lot of the Gen-Ys have seen their parents’ wealth in their property, and they want to do the same thing. What are the other reasons for this confidence on behalf of Gen-Ys?
Jennifer: I think at the moment, obviously, low interest rates does play a big part in that, but I also think that it’s a general culture, as well. People are seeing prices increase so quickly that they want to be involved. Property culture is strong. The media, obviously, has never been stronger around property, and it’s just taken off. I don’t think it’s slowed down at all.
Kevin: What percentage of Australians have actually got an investment property?
Jennifer: It’s one in five at the moment. The majority of them just have one investment. I was chatting with someone earlier today who was telling me that the number of people having two is increasing, so that’s quite interesting.
Kevin: What also is interesting, I find, is in my generation, we bought a house for a reason, and that was to buy a home for the family, whereas this current generation seem to want it for investment purposes. In other words, they’re quite willing to continue to rent at home and buy an investment property.
Jennifer: Definitely. I know many of my friends rent and have investments further away, maybe in areas that they wouldn’t want to live in. We rent in Victoria; we have a property in Sydney – me and my partner – but we also just bought a block of land for our retirement way in the future.
It depends where you’re coming from, but I think most people want to retain their lifestyle. They want that café culture, the ability to close up shop and go traveling, and you can’t always do that when you own your own home, but you can do that when you have an investment and a tenant in there.
Kevin: You and your partner are right onto it, Jennifer, that’s for sure. Just in closing, I wonder if you can tell us – I don’t know if the survey went into this – how confident are investors about the future?
Jennifer: Two-thirds of Australians in the survey said that they considered it a good investment. I think what’s quite interesting is that a lot of people expect that there may be some sort of a downturn coming – it’s been a really hot market – but at the same time, over the long term, it pans out, and people think even if the next few years are a little bit rough, in ten years’ time, it will iron itself out and go up again.
I’m not really sure where I stand on it, but I think that property is a good asset to have.
Kevin: It’s great talking to you, Jennifer. Congratulations on what you’re doing, too. I think it’s a great report from Domain. It’s called the Consumer Insight Study. It is out now.
I’ve been talking to Jennifer Duke, who is the Domain review editor. I thank you so much for your time, Jennifer.
Jennifer: Thank you for having me.
Kevin: When you do a renovation project, it’s always good to get some feedback about what are the good points and what are the things that are really going to turn the buyers on. I’m going to give you some advice on that now. It’ll come from Cate Bakos, who is a buyer’s agent from Melbourne. You can contact her through the website CateBakos.com.au.
Good day, Cate.
Cate: Hi, Kevin. How are you going?
Kevin: Wonderful. As you take people through some of these renovated properties, what do you see as the big turnoff for buyers, and where do renovators go wrong?
Cate: Sometimes renovators might take it upon themselves to put in some fixtures and fittings that aren’t suited to the target tenant, and I’ve mentioned the target tenant before on the show. They might be pitching the finish above and beyond where the target tenant sees value and not conserving some of their budget for good additions that might be of value to the tenant.
For example, putting in a beautifully finished kitchen with granite benchtops and then overlooking some decent heating. That can certainly be one mistake that they can make. But there are some others, as well, and I’m happy to chat about those.
Kevin: One of the ones that strikes me quite often is that they just don’t put their professional finish on them. It might be a nice paintjob, beautiful colors, and the house might be nicely decorated, but it’s just the finishing touches, particularly with paint, that seem to stick out.
Cate: That’s so true. There’s nothing worse than a really shabby job, and most buyers can see through that. That can range from just tardy finishing touches such as bad paintjobs, maybe not patching properly so that surfaces are uneven, or having fixtures and fittings like lights or handles that aren’t put on nicely when it would have just taken a little bit of care to get it right and not make the buyer wonder what else is wrong with the property.
Kevin: What I think is a real shame about this, too, is that sometimes those little finishing touches, they look as if the job was done in a shoddy fashion, but unfortunately they’re probably only finishing touches, but it is taken as a reflection on the entire job.
Cate: That’s so true. In some cases, you can get some nice finishing touches but the buyer can tell that the really essential parts of the job weren’t done properly. One of the key ones that I find is uneven flooring. Then they’ve laid tiles and painted beautifully, but everyone knows that if the property needs restumping, all of that work will disappear into the ether.
Kevin: What about for someone who is taking on a project and they may not be necessarily familiar with the area? What advice would you give them about who should they talk to, to find out what tenants are really going to want?
Cate: They should always talk to their local property manager or find one who they feel particularly comfortable with and find to be trustworthy and know their stuff. If a property manager can indicate what sort of rental you can achieve with a particular finish or what sort of tenant will respond well and maybe stay for a long time, then it is worth considering putting in a finish like that. But without chatting to someone, you might make some additions that aren’t valued or you might – worse still – overcapitalize or not get any effect out of the effort and the money that you’ve spent.
Kevin: The other thing I really love about what you just said, too, Cate, is getting a property manager involved in those early stages may just help you get a tenant that’s almost champing at the bit to get in there the moment you finish the renovation.
Cate: That’s so true. I recently had a client who did a fantastic renovation and had the property managing guiding her through the process. She was able to take tenants through when they got towards the very end of the project, and she actually had a tenant in waiting, which is as good as it gets when you’re looking at a small-scale renovation project.
Kevin: Cate, always great talking to you. Thank you so much for your time.
Cate: Thanks, Kevin.
Kevin: We say happy birthday today to Jane Slack-Smith, ten years with Investors Choice Mortgages. Congratulations, Jane. That’s a great track record.
Jane: Thank you. Yes, it’s been an incredible journey, and one that I’ve thoroughly enjoyed.
Kevin: Jane is, of course, no stranger to our audience, because we talked to Jane only a matter of a couple of weeks ago about the ultimate guide to renovations. You’re a very skilled lady – into renovation, into home mortgages.
I’m just keen to know from you, Jane, about the current low interest rate environment. Is that such a good thing for the property market?
Jane: Kevin, there are some good aspects and there are some bad aspects. If we concentrate on the good first of all, then obviously, our repayments could be going down and often you actually have to ring your bank and ask them to reduce your repayments or they’ll keep them at the same amount, which a lot of people don’t know.
We’re seeing a lot of competition. We have fixed rates below 4%, we have variable rates below 5%. Banks are offering incredible discounts we’re getting for our clients from what is the market rate, so it’s a really great time to relook at your current mortgages.
The really good thing is if you look at the RD Data report recently, over 40% of people’s properties are worth double what they bought them for. A lot of people are sitting on a lot of equity, their best borrowing capacity now more than ever because the rates are so low and how banks assess them.
From a good point of view as a property person, I guess pulling out some equity and getting ready for the next trend or the next opportunities is a really good thing.
Kevin: I guess a lot of people would be thinking that just because the interest rates are reduced and the banks bring them down, that they’re naturally going to flow that through to your loan, but that’s not the case. You actually have to go to them and say “Hey,” and renegotiate.
Jane: Your repayments are often set. A lot of people have a set repayment per month, and unless you actually ask them to reduce them, then they’re not going to be reduced. But some people have that automatic option built in.
But I guess one of the things when you think about your home is, as well, is that it’s nice to actually get a few repayments or a bit of in redraw ahead. We’re actually seeing Australians who are building more equity in their home and more redrawing in their loan accounts that is putting them in a better savings position, as well.
Kevin: It’s a great low-interest environment, of course, for anyone who has borrowed money, but it’s always an indicator that the economy is not ticking along all that well when the interest rates have to be that low, though, Jane?
Jane: Absolutely. The Reserve Bank is looking at the entire market. We’re looking at iron ore prices, we’re looking at coming off the mining boom, and it’s not just the Sydney property market that’s driving what the RBA’s decisions are. As a great, big look at Australia, things aren’t all that good, and that’s why the RBA is trying to stimulate the economy. So we have to be mindful of that, as well.
I guess from the negative point of view, a lot of the banks are being very cautious and we have ASIC and APRA telling them to be very mindful of how they’re lending out money. I’m finding that banking assessments are getting a lot tougher. We’re finding that banks are – and we’re seeing policy changes now every week – lending over 90% loan-to-value ratio.
Some lenders now require you to have a principal-and-interest loan, or if you’re lending to access equity from your property with an over 80% loan-to-value ratio, they want explanations. With the new way that credit checks are being done, the positive reporting, banks have a lot more information about you. They’re getting a bit tougher on their assessments, as well.
Kevin: Jane, congratulations. Thanks for joining us today, and ten years with Investors Choice Mortgages: that’s a great track record. Great to have you on the show, too. Thank you so much for your time, Jane.
Jane: Thanks a lot, Kevin.
Kevin: We talk about it from time to time, but buying at auction is both exciting and also can be a very good way to buy a property; it’s certainly a good way to sell one. What are some of the tips if you are going to an auction this weekend, and you’re a bit concerned that you may pay a little bit too much?
Let’s talk to Patrick Bright from EPS Property Search; they’re buyer’s agents in Sydney. I guess this is something you do quite often, Patrick, is it?
Patrick: Yes, it is.
Kevin: I’ve asked you to put together some tips for our listeners on what they should be doing if they’re in fact going to go and buy. What would you suggest?
Patrick: If you’re going to go buy at auction, the first thing to do is essentially work out your finances so you know what your preapproval limit is and obviously don’t go above that, so you’re not looking at properties that you can’t afford. Then you have to look at the value of the property and assess the value, so you can make an informed decision.
You shouldn’t go to an auction thinking that other people that have done research and if you just pay $1000 or $5000 more than they do, then you have a good deal. A lot of people do go to an auction thinking that, and if you have a couple of unaware, uninformed buyers outbidding each other, that’s where silly prices can be paid.
Kevin: Just talking about the price for a minute, Patrick, you mentioned about doing your homework and so on. How much notice can you take of what an agent tells you? We’ve heard a lot about price ranging and low-balling and so on. What would be your advice there?
Patrick: Yes, it happens. The problem with under-quoting particularly in the Sydney and Melbourne markets… I think now, with the changes of law in Queensland, that you’ll probably eradicate the under-quoting problem; you’re forced now to do research, whereas in Sydney and Melbourne, people are a bit lazy, and they take the agent’s guidance. Sometimes you just don’t know whether you have to add 5%, 10%, 20%, or 30% – and I’ve seen many agents under-quote by more – so you need to do your research.
You really have to treat every property like it hasn’t got a price and do your own research, so you’re not influenced by that – as in led up the garden path by paying too much – or coming to the auction without enough money in your back pocket to be a serious contender.
Kevin: Do you think it’s a good idea to have a professional valuation done?
Patrick: They can certainly help. If you want to get a valuation done, that will certainly help take a bit of emotion out of it. But you also have to understand that in a rising market you’re going to have to add some money to that valuation, because the valuer is going to be pricing that up based on historical sales over the past few months, maybe even three to six months back. In a rising market, where we’ve seen markets sometimes lifting by 3% to 5% in a quarter, you’re going to have to factor that in.
Kevin: As a buyer at an auction, you’re going into a scenario where the odds are pretty well stacked against you, aren’t they? The agent is working for the seller; you’d assume, too, the auctioneer is also working for the seller. So you really do have to do your homework and know that you’re on a firm footing when you start to bid.
Patrick: Very good point, Kevin. You are essentially on your own when you’re going into buying any property, because unless you have a buyer’s agent or an advocate representing you, you are essentially on your own. Everyone else in the transaction is working for the seller’s best interest, so you certainly have to have your wits about you.
Kevin: It’s certainly made the buyer’s agent a lot more important in this scenario. As we’ve come to realize, agents can’t work on both sides; they technically have to work for the seller. No wonder that buyer’s agents have become so popular.
Patrick: Yes, they are becoming more popular. I think it’s becoming more normalized. It’s been around in the US for 30-plus years. In Europe, it’s quite common. It’s been in Australia probably about 15 years now, and it’s starting to really catch on, in particular over the last five years.
It makes sense. You don’t have a lawyer representing the buyer and the seller in the same transaction, so why would you have an agent representing the buyer and the seller in the same transaction? It does make sense.
Just as a good, quality sales agent can have a great influence on the sale of a property over and above what other sales agents or even the vendor would get themselves, the same thing can happen with a buyer’s agent. If you get a good buyer’s agent, they can certainly have an influence on the outcome for you.
Kevin: If you talk to an American agent, to them it’s totally foreign that they would actually work on behalf of both parties, and I wonder therefore why traditional agents tend to want to hang on to both sides of the transactions. Do you think it’s because it gives them a little bit more control of the negotiation?
Patrick: Yes, some sales agents don’t like buyer’s agents because they can’t control them as much and they don’t have as much influence over them. I know that does frustrate some. But at the end of the day, a lot of the sales agents do use it. I’ve helped three sales agents in the last six months buy their homes. I get a lot of them as clients, because they can see the value that we add when we’re buying from them, and they think, “Gee, I would like to have that on my side. I’m working most weekends selling stuff, so I barely have time to look myself anyway.”
Kevin: It’s crazy when you think of it, because agents do actually earn their commission out of the seller, not out of the buyer, so you’d think they’d be more than willing to give up that side of the business that actually earns them no money.
Patrick: Yes. At the end of the day, they either deal with two parties – as in managing the buyer and managing the seller – to try and get the transaction together, or they actually just focus on working with their sellers. I think the experienced agents – the majority of them – are certainly in favor of working with a professional on the other side. They’re very happy to do it. But as I said, there are some out there who are a bit fearful about it because they don’t like not being able to pull the wool over buyers’ eyes.
Kevin: It’s certainly a changing environment, that’s for sure. Mate, we’re out of time, but I want to thank you for giving us your time.
Patrick Bright, who is a buyer’s agent. He’s from EPS Property Search; they’re based in Sydney. Thanks for your time; we’ll catch you again soon.
Patrick: Pleasure. Thanks, Kevin.