Sydney prices not so hot – Peter Koulizos

Less than four per cent of property investment experts believe Sydney offers solid prospects in 2018, according to a new survey by the Property Investment Professionals of Australia.  Peter Koulizos from PIPA reveals where the smart money is going this year.
Kevin:  Less than 4% of property investment experts believe that Sydney offers solid prospects for 2018. That’s according to a new survey. The Property Investment Professionals of Australia – better known as PIPA –  their 2018 member survey found that that was the result. Joining me to talk about that is the man who heads up PIPA, Peter Koulizos.
Peter, were you surprised by that?
Peter:  I found it very interesting, Kevin, because most of our members who replied to the survey are from Sydney, so they have probably experienced first-hand the huge increase in property prices that Sydney has had and then the subsequent drop in rental yields, and they just feel that Sydney is probably over-priced at the minute and there are better prospects further afield.
Kevin:  We will look at the areas where investors are likely to focus, Peter. But as you point out, rental yields are critical for investors, heavily influencing their decision.
Kevin:  Certainly, the rental yield is going to help pay the bills, and if you don’t have a good rental yield, you’re going to struggle to pay the interest component let alone council rates, water rates, repairs, and maintenance.
Kevin:  Correct me if I’m wrong, I think it was some PIPA research that unearthed the fact that the Sydney property market really was only playing catchup for the last five years.
Peter:  That’s right, Kevin. Really, Sydney hasn’t done much at all. In the last 15 years, it’s been the worst performing capital city. But in the last five years, it’s been the best performing capital city. As you said, it’s just been playing catch-up, and it certainly has done that, because Sydney property prices have gone up much more in proportion to their rent. So, for investors, the yields are quite low.
Kevin:  Out of the survey, Peter, what did you find were the biggest concerns for property investors?
Peter:  The professionals in the industry, their biggest concern was the tightening of lending criteria. APRA has had a very big influence on property and the lending of money for property, in particular for investors. Generally speaking, investors need a greater deposit than owner-occupiers, investors pay a higher interest rate than owner-occupiers, investors typically would be the ones who take out interest-only loans compared to owner-occupiers, and interest only loans have higher interest rates than owner-occupier loans.
So, it’s that arena that the professionals in the property investment industry are concerned about, because it’s like using a huge sledgehammer to fix up a small problem that could be fixed up with a very delicate hammer, but it’s just affected all property investors.
Whether you’ve been investing in Sydney or not – which is where the main problem was according to APRA – it’s just affected all investors all over the country.
Kevin:  As you say, it was a bit like taking a sledgehammer to bash in a pin.
Peter:  That’s right.
Kevin:  How do property investors feel about higher interest rates? Do they think they’re on the horizon?
Peter:  A number of property experts think that interest rates will increase this year. Even I don’t think that they’re going to go any further down, so the best they can do is stay where they are. But assuming the U.S. economy picks up – which it is – the global economy also picks up, which means the Australian economy will pick up, and interest rates will have to go up.
Not much – we’re certainly not going back to the bad old days of late last century where they were double, digit, but we may see a 0.25% increase in interest rate rises by the end of the year.
Kevin:  Let’s get back to where property investors are likely to spend their money. What did you find out? What do they believe are the prospects for 2018?
Peter:  They think the best prospects for 2018 are the same as they were for 2017, which was Brisbane. Almost half of our members responded that Brisbane was the best place to invest in in 2018.
That doesn’t mean that if you invest this year, by the end of the year, you’ll make a motser; that just means this is a good year to buy in Brisbane. And in the future, whether that’s one, two or five years, you should do very, very well.
Kevin:  It’s interesting, because I think in that research that I mentioned earlier from PIPA about the Sydney market, if you look around at the improvers over that 15-year period, which was the period of that study, I think the Brisbane market showed an improvement of about 160% – I’m going from memory now – which I think was pretty much in line with the weighted average of the capital cities.
Peter:  That’s right. Over the last 15 years, Brisbane has performed very well, and I think one of the reasons our members think that Brisbane is going to do well in the future is because Brisbane needs to play catch-up, because Brisbane – like Adelaide – has virtually done nothing since the Global Financial Crisis, which is now almost ten years ago.
I think the catalyst for this interest in Brisbane is the inter-state migration, which typically happens at this time of the property cycle, which is when Sydney property prices are at their highest, the price difference between houses and Brisbane and Sydney is at its greatest.
So, the people in Sydney or New South Wales who are 50, 55, or more and they’re not living in their first home – so their home is typically above the median priced home; let’s call it $1.5 million – they could buy a house in Brisbane or South East Queensland for about $500,000 or $600,000 and be left with a substantial amount of money, which if they can’t retire on can certainly semi-retire on.
Kevin:  Or they could buy two, Peter, couldn’t they?
Peter:  That’s right, two for the price of one. That’s right, Kevin.
Kevin:  The point you made there about the Brisbane market and possibly having to play catch-up, I think that’s one of the strengths of that Brisbane market is the fact that it’s just a steady improver. There’s nothing wrong with that kind of growth rate if it’s over a consistent period of time.
Peter:  Yes, that’s a very safe way to go. Unlike Sydney investors – who would be very reticent to buy now because property prices are going backwards and who knows how long they’re going to go backwards for – people in Brisbane are fairly confident that this time next year, their house will be worth more, and this time in two years’ time, it’ll be worth even more again. So, it’s slow and steady as she goes in Brisbane.
Kevin:  That kind of growth rate does actually indicate that the property will double in value every eight to ten years.
Peter:  That’s correct.
Kevin:  So, I think if you’re happy to be a steady investor, that’s why the Brisbane market is so good.
Peter:  Yes, that’s right. It certainly provides a lot of reliability, and investors can sleep well at night, which is a very important factor for them to consider.
Kevin:  It’s always good talking to you. Peter Koulitzos. Peter is from PIPA, the Property Investment Professionals of Australia. Thank you for your time, Peter.
Peter:  Thank you, Kevin.

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