{"id":7501,"date":"2016-03-25T12:00:15","date_gmt":"2016-03-25T01:00:15","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=7501"},"modified":"2016-03-25T12:00:15","modified_gmt":"2016-03-25T01:00:15","slug":"making-money-by-splitting-blocks-the-perfect-investment","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/making-money-by-splitting-blocks-the-perfect-investment\/","title":{"rendered":"Making money by splitting blocks + The \u2018perfect\u2019 investment"},"content":{"rendered":"

 
\nComing up on today\u2019s show we\u2019ll take a look at splitter blocks. We\u2019ve all seen them; beautiful big house blocks that have been split into two and sold off. Looks like an easy process, but is it? Is it actually a good way to make money? We get the lowdown from Jo Chivers<\/strong>.
\nI also speak to Graham Jarry<\/strong> who describes himself as a small full time developer. Graham has built a business out of splitting blocks and he tells us how and what to watch out for.
\nAfter two years of exceptional house price appreciation, Core Logic-Moody\u2019s<\/strong> Analytics Australian Forecast Home Value Index shows a slowdown in house price growth across\u00a0the country, underpinned by expectations of slower income growth. Tim Lawless from Core Logic RP Data joins me to discuss the report and the findings
\nOne thing is certain: there is no such thing as a perfect investment. If somebody tells you they have found \u201cthe perfect investment\u201d be very sceptical and ask lots of question, because chances are they\u2019re trying to sell you something you just shouldn\u2019t buy. Michael Yardney<\/strong><\/a> tells us what to look for in an investment including liquidity and appreciation \u2026\u2026 lots more too that you will hear from Michael in this show.
\nA study of more than 3,000 potential mortgage customers has found an alarming number of people are opting\u00a0for bigger loans with smaller deposits. The study was taken by comparison website RateCity and Sally Tindall<\/strong>, Money Editor for Rate City joins me to discuss the findings.
\nHow true is it that property doubles in value every 8 years? You have no doubt heard that and John Lindeman<\/strong> says it is a load of rubbish. Hear what he has to say.
\n <\/p>\n

Transcripts:<\/strong><\/h4>\n

Tim Lawless<\/h3>\n

Kevin<\/b>:\u00a0 After two years of exceptional house price appreciation, CoreLogic-Moody\u2019s Analytics Australian Forecast Home Value Index shows a slowdown in house-price growth across the country underpinned by expectations of slower income growth. Joining me now to discuss the report and some of the findings is Tim Lawless from CoreLogic RP Data.
\nTim, thanks for your time.
\nTim<\/b>:\u00a0 Thanks, Kevin, for having me on the show.
\nKevin<\/b>:\u00a0 It\u2019s a pleasure, mate. While there might be a bit of a short-term slowing, the report shows stability in the medium term. Is that correct?
\nTim<\/b>:\u00a0 That\u2019s right, and stability in the sense that as we see the housing market slow down in its pace with capital gains, we aren\u2019t likely to see any sustained declines across any of the capital cities. In fact, if we look at even the cities where growth has been the highest, in Sydney and Melbourne, by 2017, for example, those cities are likely to start seeing their annual growth rates more around the rate of inflation, around 1.5% to 2.5%.
\nKevin<\/b>:\u00a0 So, a bit more stability, you think, as opposed to those big increases?
\nTim<\/b>:\u00a0 That\u2019s right, and there are no surprises there after such strong capital gains. Look at Sydney. We\u2019ve seen values rise by nearly 75% since the beginning of 2009 at a time when household incomes aren\u2019t growing all that much, so it shouldn\u2019t come as any surprise to see the rate of growth moderating back to a more moderate or sustainable level.
\nKevin<\/b>:\u00a0 Yes, just talking about those phenomenal growths in the Sydney market, there has been talk recently that if it does slow a bit in Sydney \u2013 which you’re saying it\u2019s likely to \u2013 the regional outlook might look a little bit better. Would you go along with that?
\nTim<\/b>:\u00a0 Yes, absolutely. The regional markets, of course, are really diverse, so we\u2019re still seeing softness in the regional area associated with the mining and the resources sectors. We see the big wind down in infrastructure projects and spending in those markets.
\nBut the lifestyle markets in the secondary cities, like Newcastle and so forth, look at somewhere like Byron Bay or the Gold Coast, any of those markets are really showing quite a positive trend now. We wouldn\u2019t expect the same slowdown to be occurring in those markets partly because growth previously hasn\u2019t been anywhere near as strong as what it\u2019s been in Sydney, but also because we are seeing some improvement in the underlying fundamentals of demand.
\nKevin<\/b>:\u00a0 I\u2019ll ask you to give us an overview in just a moment about some of the cap cities and what the outlook is for those going forward, but just before we do, you mentioned mining regions. What does the report say about how they\u2019re faring?
\nTim<\/b>:\u00a0 Well, the forecast themselves don’t drill down specifically the mining areas, but there\u2019s plenty of other indicators that show the mining regions have certainly softened substantially. This is after a backdrop of leading up to 2012, 2013, some very significant capital gains largely driven by investment, so of course, areas like Moranbah and Mackay, urban WA areas like Pilbara, Karratha, and Port Hedland have all seen value falls of upwards of 20% to 30%, so steep declines.
\nBut there are some signs showing that these markets might be starting to level in their declines. No signs of any capital gains coming just yet, but potentially, the worst of conditions may have passed in those markets.
\nKevin<\/b>:\u00a0 Tim, let\u2019s talk about borrowing just for a moment because I know the report deals with that. Are we borrowing more for our properties, or are we getting better at saving for higher deposits?
\nTim<\/b>:\u00a0 Well, it\u2019s a bit of both. We are seeing households devoting more of their incomes towards housing, and that\u2019s a symptom of the strong capital gains we\u2019ve seen in the higher prices. There are some affordability challenges particularly in a market like Sydney, where even between say Sydney and Melbourne, there\u2019s a 33% difference, so a one-third difference in typical pricing. Between Sydney and Brisbane, it\u2019s more like two-thirds, despite the not much difference between household incomes.
\nBut in the same sense, we are seeing households also focusing on savings. We\u2019re still seeing the household savings ratio relatively high compared to where it used to be pre-GFC. Households are still saving roughly around 8% of their incomes. That\u2019s down from nearly 11% around 2009.
\nKevin<\/b>:\u00a0 Of course, we heard recently about the banks tightening their regulations on borrowings from investors. Has that had any impact that you can see?
\nTim<\/b>:\u00a0 It has had an impact. I think it\u2019s been quite a profound impact. You remember, APRA introduced their speed limits on the pace of investment growth back in December 2014. They aimed to limit the pace of an investment portfolio credit growth to 10% per annum.
\nIt took a long time for that to get down below 10%, even though, it wasn’t substantially above 10%. But based on the latest data, up to January, we\u2019ve seen the pace of investment lending slow down to just below 8% now, so potentially, we might start to see the banks loosening the purse strings just a little bit for investor lending thanks to the fact that they\u2019re down now well below that APRA speed limit.
\nKevin<\/b>:\u00a0 Let\u2019s stay with investors just for a moment. What do you think the outlook is for property investors as opposed to owner-occupiers?
\nTim<\/b>:\u00a0 Well, I wouldn\u2019t be surprised if we do continue to see a further moderation in the number of investors or the value of investor loans that are being committed to in the market. But keep in mind that we saw investments as a proportion of all new mortgages peak at about 55% in May last year, and that\u2019s since drifted down to about 45%.
\nThe long-run average, you generally expect investors to comprise about a third of all market activities, so it\u2019s still relatively elevated. I wouldn\u2019t be surprised if we do see the proportion of investors in the market drift a little bit lower \u2013 not just because of the premium on investor loans based on the higher capital requirements but also because the serviceability standards really are getting tighter from the lending sector.
\nBut another factor, of course, is just the natural cyclical effect of the market. We\u2019ve seen rental yields compress to record lows in Sydney and Melbourne, and of course, affordability barriers, particularly in Sydney also acting as some disincentive in that city.
\nKevin<\/b>:\u00a0 Tim, if we could just have a quick look around Australia at some of the cap city markets, what does the report say about how they\u2019ve been faring and what\u2019s ahead for them?
\nTim<\/b>:\u00a0 Well, we just touched on Sydney. Our forecast for Sydney by the end of 2016 is a growth rate probably around 2%, 2.5% average over the year.
\nWhereas, Melbourne is forecast to be much more resilient. It\u2019s currently tracking at about 11% growth per annum, and by the end of the year, we would expect that to drop down to around 7%, so still a relatively strong level of growth. But of course, by 2017, we\u2019re going to start to see the effect of higher supply levels and a lower level of jobs creation starting to pull that rate of growth back to the mid 1% mark, about 1.3% in our forecasts.
\nThere are some markets that we are forecasting to actually accelerate in their growth rates, though. Brisbane, for example, is likely to see growth by 2016 pick up to the mid 4%, and by 2017 by nearly 8% growth.
\nHobart, which has been a real underperformer, is now starting to show some really positive signs. We\u2019re expecting a growth rate of about 6.6% this year, and then lifting to about 7.5% by 2017. Hobart values are still roughly level with where they were back in 2009, so that\u2019s a turnaround that\u2019s been a long time coming.
\nBut of course, markets like Perth and Darwin that are well into their down phase, we\u2019re expecting values to fall further this year before starting to bottom out late this year, and then showing some rises through 2017. But of course, that\u2019s provisional on seeing commodity prices bottom out and then starting to rise in 2017, as well.
\nKevin<\/b>:\u00a0 Tim, a great outlook there for a number of those cap city markets. I want to thank you for giving us your time today to talk about that report. My guest has been Tim Lawless from CoreLogic RP Data.
\nTim, thanks for your time.
\nTim<\/b>:\u00a0 Thanks again, Kevin.
\n <\/p>\n

Jo Chivers<\/h3>\n

Kevin:<\/b>\u00a0 I don\u2019t know if you\u2019ve ever heard of the term \u201csplitter blocks,\u201d but obviously, as it sounds, it\u2019s where you get a block of land and you split it, whether it\u2019s in half or a subdivision of some kind, to maybe get another property on it or at least get another block of land off it. Someone who is the expert at doing this, Jo Chivers, who is a director of Property Bloom \u2013 they\u2019re a development project company \u2013 joins me.
\nGood day, Jo. Nice to be talking to you again.
\nJo:<\/b>\u00a0 Hi, Kevin. Nice to be talking to you again, too.
\nKevin:<\/b>\u00a0 I know that\u2019s a very simplistic way to describe it, but that\u2019s pretty much what it is, isn\u2019t it? A splitter block?
\nJo:<\/b>\u00a0 Yes, I think the term is probably used a lot more in Queensland. We refer to it as straight-out subdivisions. What it is basically is getting a block of land and cutting it in two. That\u2019s a very simple, small-lot subdivision.
\nKevin:<\/b>\u00a0 Typically, these were where a house was maybe sitting on two blocks, and that\u2019s almost like a no-brainer. That\u2019s where you can move the house over and get a separate block. Is that the most common form, Jo?
\nJo:<\/b>\u00a0 I know that\u2019s used a lot in Queensland, too, shifting a house over. If there are two titles already, that\u2019s a very simple way to do it because you already have your subdivision through. Commonly, what we look for is a house on a large block. It might be on 800 or 1000 square meters, but it\u2019s quicker and easier not to have to move the house if the house is located in a good position over to one side.
\nTypically, where we develop, mainly around the Hunter area, there are 1000 square meter blocks and the houses are nice and conveniently located over to the side. They\u2019re typically 20 meters deep by 50 meters long, and we can cut that in half without having to move the house, but there is still a lot of work to do when you\u2019re subdividing.
\nKevin:<\/b>\u00a0 Let\u2019s run through what some of that work is. I imagine you have to get all of the services there, as well.
\nJo:<\/b>\u00a0 Yes. That\u2019s the main thing. When we look for land that we want to subdivide, we\u2019re looking at where the services are located and particularly the slope of the block, the gradient of the block.
\nIf that block of land is sloping towards the rear and not towards the road, then that could be tricky if there is no drainage easement in place because you always have to look to where you\u2019re going to drain that newly created lot. We mostly want to drain it to the street. That\u2019s the easiest way. If it\u2019s sloping away from the land, we have a look to see if there are any drainage easements in place. If so, that\u2019s good; that\u2019s easy, too. We can drain to the rear.
\nTypically, in older the suburbs, or more established suburbs, there is not an easement available. In that case, you would then have to negotiate with neighbors to basically drain through their system and create an easement, which can be very tricky and take a long time. If the block is sloping backwards, we give that one a miss, move one, and look for one that is more suitable, sloping to the street.
\nWe also look for things like curb and guttering. If it\u2019s corner block, for instance, there\u2019s curb and guttering on one side and there perhaps isn\u2019t on the other. This is a red flag for us because usually, councils will want you to then put in that infrastructure. They\u2019ll want you to put in the curb and guttering on the side that\u2019s missing. That can cost you $30,000 to $50,000 depending on the length and how much work is involved there. That, again, is a no; we won\u2019t touch that one because it\u2019s not adding any intrinsic value to the subdivision.
\nThe other thing we look for is where the other services, such as water and electricity, are located because it\u2019s really important that you can actually get electricity to the newly created lot. You might find that the lot actually has an electricity pole right around the corner that is supplying electricity to the block, but then you may need to then install a new pole, for instance, which can be very costly, too.
\nService connections are very important to have a look at, and that is one of the first things that we obviously assess when we are looking for our sites.
\nKevin:<\/b>\u00a0 Would it be fair to say that one of the big mistakes that new people make in this area is that they simply don\u2019t know what they don\u2019t know? In other words, you\u2019ve been through a number of issues there that if someone wasn\u2019t experienced, they simply wouldn\u2019t even know what they\u2019re looking for, Jo.
\nJo:<\/b>\u00a0 That\u2019s right. It\u2019s so true to do your due diligence. It\u2019s really important that if you haven\u2019t done this before, then use the services of a project manager like ourselves, Property Bloom, or go to your local surveyor. Your local surveyor will have a wealth of information that they can share with you. They\u2019ll know what the council requirements are, as well.
\nThe next thing you need to understand is what your minimum lots size is \u2013 what the council will allow for the minimum lot size. You need to understand the zonings of the land where the land is located and you need to understand what the lot size is.
\nIf you have a 1000 square meter lot, for instance, you want to cut it in half and the minimum lot size is 500 square meters, then that\u2019s great; you can do that. But if it\u2019s more than that, then you may not be able to do that depending on the position where the house is. It\u2019s really important to have an understanding of what your minimum lot size is and the zonings of the land.
\nAgain, your local surveyor will be able to help you usually with those sorts of issues and also give you a really rough estimate of his costs \u2013 the surveyor\u2019s costs \u2013 but also of some of the civil work costs, like the sewer extension and extending the other services to the newly created lot.
\nStart with a few questions to council and then go to the local surveyor. It\u2019s really important that you do a lot of work upfront so that you do have a bit of an understanding of the process.
\nKevin:<\/b>\u00a0 If I could just pick up on a comment you just made there, you said, \u201cAsk a few questions of your council, then go and talk to the surveyor,\u201d and maybe even the certifier. How helpful have you found the council? Do you really need to go past the council, or can you get most of your answers from them?
\nJo:<\/b>\u00a0 The council should be very helpful. You can give them the address or the lot and the DP, the deposited plan number, the lot number and the plan number, and they\u2019ll be able to look it up on their system. They can tell you straightaway what the zoning is.
\nIn fact, in the sales contract, if there is a contract available, there should be a county planning certificate in there that will tell this information, as well. It will also tell you if it\u2019s flood-prone or if it\u2019s bushfire-prone. Those sorts of things, as well, are important to understand.
\nThe town planner, the duty planner at council should be able to answer quite a few of your questions, but they\u2019re not there to advise you and they really won\u2019t have an understanding of what the costs may be.
\nWhile you can get some information about the land from the council town planner, you do really then need to have the next step and talk to a surveyor or talk to a project manager who has also done this sort of work, and they\u2019ll be able to give you a ballpark figure to start with on the civil works \u2013 the driveway has to be put in as well for the newly created lot and also connection of the services.
\nKevin:<\/b>\u00a0 You\u2019re talking here about doing some due diligence. At what stage would you do this? Would you do it before you go to contract? If you\u2019re not \u2013 in other words, if you\u2019re putting a due diligence clause on your contract \u2013 how much time would you allow yourself, Jo?
\nJo:<\/b>\u00a0 Ideally, you want to have a good understanding before you even start looking for land because sometimes if something comes onto the market, it can move very quickly. If it\u2019s a large enough block to subdivide, then there will be other developers looking at it, so you really need to start with finding a location you want to be developing in or subdividing in and doing your due diligence on pricing.
\nIs there demand? If you\u2019re planning to sell off that newly created lot, is there demand for land in that area? Or are you going to build on that lot? If you\u2019re going to build on that, why not combine a DA for the building work and subdivision process in the one DA?
\nIt\u2019s all about doing that due diligence, understanding council guidelines, and then searching for your property because if a good one comes up, it probably will move quickly and you may find yourself getting caught up in the excitement of it all and ending up purchasing something that may be difficult to subdivide or costly.
\nKevin:<\/b>\u00a0 Very good advice. You can see there why you would use someone like Jo and her team at Property Bloom. They\u2019re development project managers. Just go to Property Bloom.
\nJo, thank you so much for your time.
\nJo:<\/b>\u00a0 You\u2019re welcome, Kevin. Thank you.
\n <\/p>\n

Michael Yardney<\/h3>\n

Kevin:<\/b>\u00a0 As the market continually changes, you have to continually be looking at your investments and I guess with all of the strife we\u2019re seeing around the world right now, there would be great temptations to change your strategy. Is it such a good idea? What should you be looking for in a good investment? Michael Yardney from Metropole Property Strategists joins me.
\nHi, Michael.
\nMichael:<\/b>\u00a0 Hello, Kevin.
\nKevin:<\/b>\u00a0 I\u2019d pose that question of you, Michael. What do you think we should be looking for in an investment?
\nMichael:<\/b>\u00a0 One thing that\u2019s certain, Kevin, is there\u2019s no such thing as a perfect investment. In fact, if somebody tells you that they\u2019ve found the perfect investment, be very skeptical and ask lots of questions because chances are they\u2019re trying to sell you something that maybe you shouldn\u2019t be buying.
\nKevin:<\/b>\u00a0 Michael, what should you look for in an investment?
\nMichael:<\/b>\u00a0 Kevin, when I look at my investments, I look at a number of factors. First of all, I look for liquidity \u2013 in other words, the ability to take my money out by either selling or borrowing against it. I look for easy management. I look for strong and stable rates of capital appreciation, so I want them to grow what I call wealth-producing rates of return. I look for properties that give me a steady cash flow, and I look for something that\u2019s going to give me a hedge against inflation, something that\u2019s going to increase faster than inflation, and also good tax benefits.
\nSo Kevin, I think most investors put money in a number of different things. They\u2019ve got some money in their super, in shares, in property, as well. So that\u2019s, I guess, the same criteria I would look at for any type of investment vehicle. When you look at the major categories of investment, you\u2019ll recognize that not many of them fit the bill of meeting all those criteria.
\nIn this new era, as the market is changing a bit, maybe the long-winded answer to your question is look for investments that are powerful and stable. By powerful, I mean I want investments that are going to act as a hedge against inflation, that are going to grow at wealth-producing rates of return, which means I can borrow against them.
\nI also look for stability, especially at this stage of the cycle, Kevin. Property values should grow steadily and surely rather than having the major fluctuations like one tends to get with share markets or properties that aren\u2019t in areas that have a large owner-occupier population creating a stability of continuing demand.
\nKevin:<\/b>\u00a0 I guess in fairness, Michael, just to balance the conversation, we might just have a quick look at what are the investment alternatives?
\nMichael:<\/b>\u00a0 Sure, Kevin. I think if you look at the alternatives, you can either invest in cash, putting your money in a bank as people used to do in the past. I remember, Kevin, getting 12% or 15% interest on my deposits years ago. Now you get 2% or 3%, so I don\u2019t think that\u2019s an alternative for people wanting to grow their wealth.
\nThere\u2019s shares, stocks, which give you a combination of dividends, so it gives you cash flow and also increased growth, but in my mind, the stock market has the liquidity, it means that you can actually sell quickly, but that foregoes the stability. In other words, you can get 10% or 15% fluctuations in values over days or even sometimes within the same day.
\nThen there\u2019s real estate, which, in my mind, doesn\u2019t have the liquidity but because it doesn\u2019t have the liquidity, it gives you the stability of not fluctuating too much in price.
\nThe other thing I like about residential real estate as an investment vehicle is it\u2019s the only investment market not dominated by investors. If you think about it, Kevin, 70% of people who own residential real estate are owner-occupiers, and they don\u2019t make the decisions the same way you and I do regarding what\u2019s going to happen to interest rates, what\u2019s going to happen to negative gearing, what happens if the economy goes down. They keep their houses in the long term.
\nI like investing in a property investment vehicle in residential real estate because, essentially, a market dominated by non-investors, that gives me stability.
\nKevin:<\/b>\u00a0 I guess the other thing, too, at property over shares is that with shares, you don\u2019t really have any control over the value of those shares, whereas with property, you do. You can add value.
\nMichael:<\/b>\u00a0 Correct, Kevin, and that\u2019s another reason why at this stage of the cycle, established residential real estate makes a better investment in my mind because you can add value while buying new properties, you\u2019re at least paying full price or maybe a premium.
\nI also like properties that are more what I\u2019d call \u201chow to\u201d rather than \u201cwhen to.\u201d \u201cWhen to\u201d investments, to me, mean you have to actually know the timing of them. You need to know when to buy, when to sell, timing is crucial for these investments. If you buy low and sell high, you\u2019ve done well; if you get your timing wrong, your money can be wiped out, and in my mind, that\u2019s shares, it\u2019s commodities, it\u2019s futures, they\u2019re when to investments.
\nAs I said, I\u2019d rather put my money to what I call \u201chow to\u201d investments, such as real estate, which increases steadily in value and doesn\u2019t have the wide fluctuations in price. While timing is still important with \u201chow to\u201d investments, it\u2019s nowhere near as important as how you buy them, how you add value.
\nSo \u201chow to\u201d investments are really liquid but they do produce real wealth, while most \u201cwhen to\u201d investments, like the stock market, only produce a handful of large winners and the majority of people getting in those tend to be losers. On the other hand, in my mind, residential real estate produced hundreds of thousands of wealthy people and only a handful of losers.
\nKevin:<\/b>\u00a0 Michael, earlier in our conversation, you were kind enough to tell us what you look for in an investment \u2013 just very quickly liquidity, I think easy management, strong stable rates, and capital appreciation, steady cash flow, a hedge against inflation, and you also said good tax benefits. They\u2019re six great things to look for. Are any of those negotiable, or do you look for all of them?
\nMichael:<\/b>\u00a0 You\u2019re never going to get all of them in the same investment, so more important to me at my stage of life is stability. I don\u2019t need hassles. I\u2019m not a speculator; I\u2019m an investor, so I want investments that are going to grow at wealth-producing rates of return, so I wouldn\u2019t compromise on the capital growth potential of my investments, Kevin.
\nKevin:<\/b>\u00a0 Yes, thank you, Michael. You answered that very well. Thank you, Michael Yardney from Metropole Property Strategists.
\nThanks again, Michael.
\nMichael:<\/b>\u00a0 My pleasure.
\n <\/p>\n

John Lindeman<\/h3>\n

Kevin:<\/b>\u00a0 We\u2019ve spoken many times about the growth in the Sydney market, and there are signs and a lot of people saying that it could just slow down. I wonder what\u2019s going to happen to regional areas. That\u2019s the topic I want to pick up on firstly with John Lindeman who joins me from PropertyPowerPartners.com.au.
\nJohn, thanks for your time this morning.
\nJohn:<\/b>\u00a0 It\u2019s a pleasure. Hello, everybody.
\nKevin:<\/b>\u00a0 John, what do you see for the regional areas if there is a bit of a slowdown in some of those cap city markets, particularly around Sydney?
\nJohn:<\/b>\u00a0 When we look at the stats, what we discover is that the more growth there is in a capital city, the more likelihood there is that it will ripple out to the regional areas and, in particular, in Sydney where prices have gone up by about 50% in the last three years.
\nThere is a huge amount of largess coming to the state government through stamp duty. What the government is doing is building infrastructure into the regional areas. That may well be for political purposes, but what it does for us is it ensures that there will be growth in the corridors.
\nWhat I mean by that is the Princess Highway going south, the Pacific Highway going north, and the Great Western Highway going west, all of which are being duplicated at huge expense. A lot of the people who were working in the mining boom areas are now working on duplication of the Pacific Highway.
\nKevin:<\/b>\u00a0 Taking you in another direction quickly now, there are a lot of generalizations about the property market \u2013 one is that there is only one property market in Australia. But there is the other one I want to pick up on, and that is that property doubles in value every eight years. I know you don\u2019t hold to that, but can we talk about that for a moment? Where did it come from anyway?
\nJohn:<\/b>\u00a0 I think it came from the \u201970s and \u201980s when property prices actually did do that. But I\u2019ve studied the movement of housing prices from 1901 all the way through to the present time, and it just doesn\u2019t do that. It moves very regularly. Sometimes there are periods of high growth and sometimes very low growth.
\nKevin:<\/b>\u00a0 What sort of annual growth rate would you need to achieve for it to double every eight years, say?
\nJohn:<\/b>\u00a0 You\u2019d need about 9% growth annually. We don\u2019t get that. In fact, when I looked at the stats, what I discovered was that the average rate of growth is doubling in price in about every 12 years, but it doesn\u2019t occur every 12 years. There have been periods where it\u2019s taken 30 years, other times when it\u2019s taken 5 years. The problem with the exponents of the property market cycle is you don\u2019t know what\u2019s about to come; all you can see is where you\u2019ve come from.
\nKevin:<\/b>\u00a0 Some of these generalizations really do make it complicated for people who want to invest in the market \u2013 like I said, there is only one market \u2013 and that\u2019s highlighted by the fact that there are different growth rates all around Australia really with property, aren\u2019t there?
\nJohn:<\/b>\u00a0 There are. Within capital cities, each suburb can perform very differently, and certainly, in regional areas, some will go up and others won\u2019t. But as a general rule, if you\u2019re looking at growth opportunities as we have in Sydney, there have been huge growth, <\/b>and that\u2019s likely to flow into the regional areas around Sydney.
\nKevin:<\/b>\u00a0 Housing growth doesn\u2019t necessarily depend on past performance, does it? What are some of the indicators that you look for? I guess it would be true to say, too, that there are some markets that will never, ever improve again.
\nJohn:<\/b>\u00a0 There are, unfortunately, quite a few of them. The main indicators are what the demand for housing is. If you can measure the demand, that is the number of people who want to move into an area, then you can estimate how it\u2019s going to affect housing prices.
\nLet\u2019s look, say, at the infrastructure boom that\u2019s appearing in New South Wales and the Pacific Highway. What that\u2019s doing, the duplication of that highway, which is over 1000 kilometers long, is generating thousands of jobs. These people are now renting in areas like Taree, Kempsey, Port Macquarie, Ballina, and so on.
\nThe number of people who are doing that is enough to increase the asking rents dramatically. Then what happens, of course, is investors move in and say, \u201cWe\u2019ll get some of the largess.\u201d After that \u2013 and this is what happened in towns like Moranbah \u2013 there was no residual demand. Once the mining boom was over, it was finished.
\nBut what we have here is that these areas will then become more attractive to tourists or retirees because they\u2019re easier to access. I can see long-term growth in areas north, west, and south of Sydney as a result of this huge expenditure of the highways duplications.
\nKevin:<\/b>\u00a0 Would it be fair to say that there are some areas where growth will always be dominant? That is, if you can identify those areas where there is that very strong balance between supply and demand, is that one of the key indicators for you?
\nJohn:<\/b>\u00a0 It is. As long as the demand keeps rising, then, of course, prices or rents will rise accordingly.
\nKevin:<\/b>\u00a0 In closing, what lessons have you learned recently from looking at the cycles?
\nJohn:<\/b>\u00a0 What it\u2019s taught me is that it\u2019s easy to see where you\u2019ve come from but it\u2019s really hard to know where you\u2019re going. An example of that is the mining towns in Queensland \u2013 Moranbah, Dysart, and Emerald \u2013 which were at the start of the decline when people were predicting that they were at the bottom and about to recover. A lot of investors hung on expecting the rising market to start occurring, but in fact, that was just the start of the huge, enormous, horrible slide.
\nI think that\u2019s the lesson about the cycle: you don\u2019t really know what\u2019s around the corner.
\nKevin:<\/b>\u00a0 Which makes commentary from people like John Lindeman so valuable and so, too, is his website. It\u2019s called PropertyPowerPartners.com.au. My guest has been John Lindeman.
\nJohn, thank you so much for your time and your insight, as usual.
\nJohn:<\/b>\u00a0 It\u2019s been a pleasure. Thank you.
\n <\/p>\n

Sally Tindall<\/h3>\n

Kevin:\u00a0 <\/b>A study of more than <\/b>3000 potential mortgage customers has found an alarming number of people are opting for bigger loans with smaller deposits. The study was taken by comparison website RateCity, and Sally Tindall, who is the Money Editor for RateCity joins me.
\nSally, this is somewhat of a disturbing report.
\nSally:<\/b>\u00a0 It is disturbing. We\u2019ve found that our customers using our site are really looking for the smallest deposit possible and they\u2019re looking to take out really large loans. We\u2019ve actually seen an increase over the last five years of 23% in loan size, but they\u2019re increasingly asking for smaller and smaller deposits, and that could be a reflection of the fact that interest rates are so low, so people feel that they\u2019re able to stretch themselves a little bit more and buy a bigger house, basically.
\nKevin:<\/b>\u00a0 Yes, somewhat scary. What do you think of the long-term impacts of this situation?
\nSally:<\/b>\u00a0 It\u2019s an incredibly risky strategy, and it\u2019s also a much more expensive way to borrow, because small deposits actually attract higher interest rates from the banks because it\u2019s risky for the banks to be lending to people with a small amount of equity in their loan, so the customers are really at loggerheads with the banks and they are going to be paying for it in terms of higher rates.
\nKevin:<\/b>\u00a0 Are the banks \u2013 do you think \u2013 getting a little bit too soft? Are they offering too many sweeteners?
\nSally:<\/b>\u00a0 Well, look, some banks are actually really cracking down on loan-to-value ratios and they\u2019re offering the rock bottom prices of under 4% to borrowers who have hefty deposits of anywhere up to 60%, if you can believe that. But there are some lenders out there that are happy to take on new borrowing at 5% deposit, and that\u2019s where the risks really occur.
\nWe don\u2019t want to see another iteration of the US subprime mortgage market collapsing, so the government regulator is really looking at these people who have got small deposits and so are the banks.
\nKevin:<\/b>\u00a0 This might be a hard one for you to answer, Sally, but I\u2019d really like your opinion on this. We are hearing reports that as a nation, we\u2019re becoming better savers. Do you think it\u2019s just that people have the savings but they\u2019re not prepared to put it into a deposit that they\u2019re opting, as you say, to head toward the lower-interest type loans?
\nSally:<\/b>\u00a0 Look, I think every person has a different reason for wanting a small deposit. It might be that they\u2019re trying to rush into the market before it escapes. It could be that they have some sort of family circumstances where they can only get a small deposit. So everyone is different.
\nWe are actually a nation that\u2019s very good at putting money into things like offset accounts, so we\u2019re quite savvy when it comes to that, but I do think it\u2019s a matter of people wanting to buy larger properties with bigger price tags attached, particularly in markets that are increasing in growth.
\nKevin:<\/b>\u00a0 Do the banks penalize borrowers with little or no deposit \u2013 in other words, with higher interest rates?
\nSally:<\/b>\u00a0 Absolutely, and they penalize them quite significantly. Look, we\u2019ve done a bit of research into this, as well, and we\u2019ve found that some of the lowest rates on our books \u2013 at 3.89% \u2013 are only available to people with a deposit of at least 20% but in some cases, up to 60%. What these banks are telling us is that they\u2019ll give you a good rate but only if you\u2019re a refinancer who\u2019s an owner-occupier and has really stable source of income.
\nKevin:<\/b>\u00a0 Well obviously, it\u2019s good business for the bank to get people on higher interest rates, but do you think at some point they\u2019re going to cut off their book for the low-deposit type borrowers?
\nSally:<\/b>\u00a0 They certainly might. If the global market continues to be in turmoil and the government regulator here in Australia continues to crack down on risky lending \u2013 which is ultimately what we\u2019re talking about \u2013 then absolutely; we could see the banks starting to say, \u201cNo, sorry. You\u2019re going to have to stump up with more than that.\u201d
\nKevin:<\/b>\u00a0 Is the banks\u2019 tightening of lending criteria for investors, is that showing any signs of having some impact?
\nSally:<\/b>\u00a0 It really is. We\u2019re seeing the biggest impact happen in the investor lending market. Back in July of last year, most of the banks introduced differential pricing for investors and owner-occupiers, and immediately we saw that investor lending has dropped dramatically. I think between June of 2015 and December of 2015, there was a massive $2.4 billion drop in investor lending, and so that market signal is working.
\nKevin:<\/b>\u00a0 Sally Tindall, Money Editor for RateCity. Thank you for your time, Sally.
\nSally:<\/b>\u00a0 Pleasure.
\n <\/p>\n

Graham Jarry<\/h3>\n

Kevin<\/b>:\u00a0 Hot on the heels of my chat earlier in the show with Jo Chivers about splitter blocks, we\u2019re going to share a success story with you now. I\u2019m talking to Graham Jarry, who describes himself as a small, full-time developer.
\nGraham, thanks for your time, and thanks for sharing your story with us this morning.
\nGraham<\/b>:\u00a0 My pleasure, Kevin.
\nKevin<\/b>:\u00a0 Now, we\u2019re going to talk specifically about splitter blocks. Tell me your story. I believe you bought a block, split it, and then sold half off. Was it that simple?
\nGraham<\/b>:\u00a0 I sold both off, actually. It is pretty straightforward once you\u2019ve done a couple. I was in and out from settlement-to-settlement in two and a half months.
\nKevin<\/b>:\u00a0 Is that the secret as far as you\u2019re concerned \u2013 that you\u2019ve done a few, you know what to expect?
\nGraham<\/b>:\u00a0 I did educate myself, but once you\u2019ve done a couple, yes, your costs are pretty well the same each time unless there\u2019s some curve ball thrown up with choosing the wrong spot or something like that.
\nKevin<\/b>:\u00a0 We might talk about a few of those as we continue to talk, but I want to take you back to the first one you ever did. Do you remember what that was, and where was it?
\nGraham<\/b>:\u00a0 Yes, it was out in Wynnum West.
\nKevin<\/b>:\u00a0 Wynnum West. That\u2019s in Brisbane, of course.
\nGraham<\/b>:\u00a0 In Brisbane, yes.
\nKevin<\/b>:\u00a0 Tell me about that one. Was it a difficult one, or did you go in with your eyes pretty well wide open?
\nGraham<\/b>:\u00a0 I went in with my eyes pretty well open. I\u2019d had some education on how to do it originally.
\nKevin<\/b>:\u00a0 What sort of education did you put yourself through?
\nGraham<\/b>:\u00a0 I went through a mentoring with a developer who was active in the market.
\nKevin<\/b>:\u00a0 Tell me about the pros and cons of actually splitting a block from your perspective, Graham. You\u2019re obviously able to do this now full-time.
\nGraham<\/b>:\u00a0 Yes, that\u2019s correct.
\nKevin<\/b>:\u00a0 Obviously, the pros for you are that it\u2019s giving you the lifestyle that you want and the income that you want, but are there any downsides to it?
\nGraham<\/b>:\u00a0 Look. If you pay too much, obviously, you\u2019re not going to be able to make profit out of it. I don\u2019t see many downsides. They\u2019re quick to do. There\u2019s a lot of big blocks around, people wanting to downsize, and that sort of thing. People don\u2019t want large yards these days, and so predominantly, they\u2019re 10 x 40 when you split them. 10 meters wide, 40 meters depth.
\nKevin<\/b>:\u00a0 Tell me about some of the pitfalls that you\u2019ve come across that you think maybe we can learn from, Graham.
\nGraham<\/b>:\u00a0 One thing was I had to put a stormwater in one out in Wynnum I did. The stormwater was for the rear blocks. The council wanted me to do that in case they subdivided the back two blocks at any point. The reason for that is with the narrow blocks, it would have been difficult to put stormwater through those blocks with the narrow blocks with the houses over once they were installed, I suppose. That was one that I wasn\u2019t expecting. That cost me an extra $10,000 nearly for that one.
\nKevin<\/b>:\u00a0 What are some of the other additional costs that are associated with splitting a block?
\nGraham<\/b>:\u00a0 If they\u2019re already on two lots, which is what I call a splitter block, you\u2019ve just got your costs. Because it\u2019s a business, you pay your stamp duty, legals, and we have to pay GST on the other end because it\u2019s a business. If someone was just doing a one off every now and then, they probably wouldn\u2019t have to pay GST. But as it\u2019s a business, we have to pay GST.
\nThe other costs are normally sewer and water. Sometimes if you\u2019re doing DA for it, the councils may say they want street trees, they may say they want footpaths, things that you just don\u2019t know sometimes. You need to have a contingency in it of a certain percentage to allow for those things when you\u2019re doing your research.
\nKevin<\/b>:\u00a0 How much contingency do you put in normally, percentage-wise?
\nGraham<\/b>:\u00a0 For a property around $500,000, I put in a contingency of about $10,000.
\nKevin<\/b>:\u00a0 Let me take you in another direction. You mentioned splitters being basically a block that\u2019s in two lots already. Would you ever look at getting a block that\u2019s not split in two? In other words, you have to go through the subdivision process, or is that too lengthy?
\nGraham<\/b>:\u00a0 No. I still do that, as well, because the double lots people look on the Internet and see, \u201cOh, the 405 now is worth $300,000; we want $600,000.\u201d They\u2019re wanting in price a lot of the time, so it won\u2019t work. So, yes, I definitely do do subdivisions, one into twos, one into threes, one into fours.
\nKevin<\/b>:\u00a0 Good lesson there that if you\u2019ve got a block that is possibly able to be subdivided, it doesn\u2019t necessarily follow that you have two lots of land that are worth what two vacant blocks are worth, because by the time you go through the subdivision, then getting all the services on, there are substantial costs involved there, Graham, isn\u2019t there?
\nGraham<\/b>:\u00a0 Yes, there is, and knowing where to go to get that done and to be able to get it done quick, because obviously, holding cost is another pitfall of people getting held up. If they\u2019re not sure what they\u2019re doing, the cost of interest on money and stuff like that can eat into it. The other pitfall really is being able to sell it quick.
\nKevin<\/b>:\u00a0 Well, I suppose good people like you always make things look quite simple. But the message there is always do your homework and make sure you understand what you\u2019re getting into.
\nGraham, thank you for sharing your experience with us today.
\nGraham<\/b>:\u00a0 It\u2019s been my pleasure, Kevin.<\/p>\n","protected":false},"excerpt":{"rendered":"

  Coming up on today\u2019s show we\u2019ll take a look at splitter blocks. We\u2019ve all seen them; beautiful big house blocks that have been split into two and sold off. Looks like an easy process, but is it? 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