Barely a day goes by without another warning from some property pessimist, columnist or overseas economist about a looming price collapse. So let’s get things straight up front – there is no property bubble in Australia – at least not yet! And there is another point Michael Yardney wants to get straight as well and he does so in today’s show. Hear what he has to say.
Also in today’s show Shannon Davis answers my question of whether all improvements add value and return to a property, Ben Kingsley tells us about the signs he looks for to detect a turning market and Bryce Holdaway, explains the 4 ways a property investor will pay.
The days of a physical title for a property are finished. Since late last year, sellers and buyers or their representatives meet on line and transact by electronically signing document. No physical meeting happens anymore. The Banks will now electronically sign the Mortgage documents on behalf of Borrowers. So what about ID fraud? Garth Brown joins us to explain how it works.
And Rachel Barnes helps you with some negotiation tips.
Kevin: One of the things I find that a lot of investors do is spend a lot of time trying to pick the market – that is, trying to pick which markets are going to go and which markets are going to slow – and also those who try and determine where the market is turning from a seller’s market to a buyer’s market and vice versa. It’s one of those fascinating conversations. I’m going to have it now with Ben Kingsley, who’s the CEO and founder of Empower Wealth.
I don’t know about you, Ben, but one of the common questions I get asked is are we in a seller’s market or are we in a buyer’s market?
Ben: Yes, that’s a great question. This is fundamental research basically. All of us as investors want to try to time the market when we can. I’m still very much an advocate of time in the market as the ultimate – a long-term investor will enjoy the peaks and troughs of a cycle – but in terms of trying to time the market, there is a science to it, and there are things you can look at.
Kevin: Let’s have a look at what they might be. What would you suggest?
Ben: If we’re in a seller’s market but we’re trying to determine whether it’s going to a buyer’s market, the early indicators for the big city markets – where options are involved – are usually a slowing down of clearance rates. Where we’re starting to see the appetite of the buyer is not as strong, so we’re starting to see properties passing, they’re the early indications.
When we’re looking at other markets where options aren’t the most prevalent way of selling – we’re actually talking about Brisbane, Adelaide, Perth, these types of markets – the indicators are days on market and stock on market. Once we start seeing the trend where the days on market is starting to push out, we can start to see that it’s now becoming either a balanced or a buyer’s market. They’re the best indicators.
Kevin: Days on market, of course, from the point of listing to the point of sale?
Ben: Correct. That’s right. Ultimately that’s the only way we can track it, because we’re relying on the data from the likes of Domain to provide that information that we can capture, and then we’re seeing how many days the property has been on the market. Then the stock of market is obviously the concentration of that particular stock in that localized area. Usually we like to think of it as a local government area; just to isolate it to one suburb, there’s not enough data to make a trend or see the analysis work for us.
Kevin: What is the turning point in days on market from where buyers have control to where sellers have control?
Ben: That’s a wonderful question, Kevin. I think it’s different in each market. In some cases, if I’m researching a new market, I’ll actually talk to a couple of local agents in the area. The rule of thumb – roughly – is between 45 to 60 days. Certainly, 45 days, we’ve been up for sale for six weeks. We’re now getting feedback from our agent in terms of are we meeting the market with our price point, and is there’s ongoing inquiry? It’s been up on the website for a while. It’s not getting the same open-for-inspection and interest that it was. That’s what I would look at in a city market.
Regionally, it can be even longer. In some regional centers that indicator can be 120 days, because in reality, unless there’s some major economic activity that’s attracting new arrivals to the area for employment opportunities, we normally see that properties in those areas take a while to sell.
Kevin: Ben, I want to thank you very much for your time. It’s been a great insight there as to the indicators to look for, and certainly days-on-market is one of those.
Just before we go, I just want to make one comment to see if you agree with this about auctions and how much of an influence that has had over days on market, where we see agents who want to take the property all the way through to auction, like a 30- or a 40-day campaign. That’s certainly going to have an impact on days on market.
Ben: It is. Usually, in a really hot market, four weeks is enough for the marketing campaign. In most markets, we usually rely on four to six weeks from a selling cycle. That’s enough time to get the board up, get it listed, open it up four times and maybe a couple of evenings. Then if we have enough interest there, what we’re going to see is you’d be crazy as a vendor not to take it to market – because that’s when you get the emotional result, which is usually an outperform result, as opposed to a private treaty sale, where usually the expectation of the buyer is the price is made and then it’s a discount off that selling price.
Kevin: Great talking to you, Ben Kingsley, CEO and founder of Empower Wealth. Thanks, mate.
Ben: Thanks, Kevin.
Kevin: When it comes to buying and selling properties, we get used to the delays around settlement time or get very nervous as we head up toward settlement because of the possible delays with making the transaction happen. This sometimes can revolve around titles, but the days of physical titles may well and truly be finished. Joining me to explain a little bit more about this is Garth Brown from Brown & Brown Conveyancers.
Garth, thanks once again for your time.
Garth: Thanks Kevin.
Kevin: Titles – these are going to be done digitally from now one, are they?
Garth: Yes. What has happened recently, since October last year, the actual physical titles will be done away with as the new electronic settlements come on board, which has started in New South Wales and is presently being rolled out to Victoria and to the rest of the country by the end of this year.
The physical titles were mainly brought about to prevent fraud, but interestingly, it has actually created more fraud. This is one of the reasons why an actual physical title will be done away with and you’ll actually be registered on a computer register. There won’t be any physical title any more.
Kevin: When we talk about physical title, you’re talking about a title deed – a document – that’s being done away with.
Garth: It’s that cardboard physical title, yes.
Kevin: Some people still like to have those to say, “This is the title; I now own this,” but we’re in the digital age, having to get used to letting go of such documents, aren’t we?
Garth: Yes, definitely. Settlements are moving very fast toward going to an Internet space, where monies will be transferred and interacting with banks and other conveyancing firms. Everything will be done that way rather than turning up with physical documents. This is where delays can happen, because a document is missing from another party so the settlement can’t go ahead.
All of these procedures, even two weeks out from settlement, are all run through to make sure that the correct title references are located, the banks are all invited to come to that space two weeks in advance, and the funds that are required and where they have to be transferred to. this is all now available through PEXA. It’s a wonderful tool, because the delays in settlement will be very minimal now.
Kevin: You mentioned PEXA. That is actually what the platform is called. One thing that worries me, Garth, we talk about a lack of fraud, but we’re hearing about so much online fraud now. How are we going to make sure this is not going to get even worse?
Garth: That’s a good point. One of the pivotal points that PEXA was able to overcome is that all vendors and purchasers will now be identified through a 100-point checklist. Basically, they’re going to the Australia Post, having their photo taken and all the other supporting documentation to verify as to who they are. There is also another provider where they’ll actually go to the house and do the identity checks, as well. That is another way that can be done.
Fraud prevention is a big thing in this new system, PEXA. This is one way that PEXA is overcoming this, because if that identification is not in place and verified by the government and then stored electronically through the PEXA system, then the transaction will not go ahead.
Kevin: As you mentioned about going to the post office, having photos taken and 100 points of identification, are there any other things that we, as consumers, will notice as we move further into PEXA?
Garth: Yes. You’ll notice that when it comes to signing mortgage documents, the bank will now be signing those mortgage documents. There won’t be this delay where documents are sent out to the client, they’re finally signed and then they’re sent back into the bank ,and the bank is trying to find them.
That is all being done away with. The bank will be signing the mortgage documents on your behalf, and they’ll be electronically liaising with your conveyancer and with the other parties of settlement. These delays will be gone.
Kevin: Is it likely we’ll see shorter settlements on some properties?
Garth: That’s a good question you raise. It could become shorter, definitely with these hurdles starting to be removed that can stop a settlement. That could likely be a possibility for the future.
Kevin: I guess only time will tell. Garth, I want to thank you for bringing this to our attention and once again, being our expert on the ground with this one. I appreciate your time. Garth Brown from Brown & Brown Conveyancers.
Thank you for your time, Garth.
Garth: Thanks Kevin.
Kevin: I saw an interesting post on the Real Estate Talk just recently – a video from Michael Yardney about putting the Australian property bubble into perspective. I want to go a little bit deeper into that today.
Thanks for joining me, Michael.
Michael: My pleasure, Kevin.
Kevin: Michael, what is a property bubble?
Michael: Good question, because so many people are talking about it. Interestingly, high prices don’t mean a bubble. A bubble is defined by a rapid rise in property prices where prices are way above their long-term fundamentals, and it’s usually related to highly geared, highly leveraged speculators entering the market for short-term gain.
Kevin: What happened to property prices last year?
Michael: When you look back, other than in Sydney, the property market was pretty tame. Sydney did particularly well over the last year, but Melbourne and Brisbane only had 5.5% and almost 3% growth. The other cities really didn’t grow much more than inflation. That is not bubble territory, Kevin.
Kevin: What about the property prices in this cycle?
Michael: If we go back to the post-Global Financial Crisis market, it bottomed in the second quarter of 2012, so now we’ve had about three years of capital growth. The Sydney market has done particularly well. It’s grown close to 40%. Melbourne market properties have gone up about 25%. Darwin did well, but has been slow the last little while.
Other than Sydney, house price growth hasn’t been spectacular. The market is moving its way through but not into property bubble territory.
Kevin: Is it all about low interest rates, Michael?
Michael: People say that, don’t they? They say it’s low interest rates that has encouraged everybody. But if you think about it, low interest rates are all over Australia. Clearly, cities other than Sydney and Melbourne have enjoyed the same low interest rates, yet their markets haven’t been firing.
To me, it’s more about the local market factors: the strength or weakness of the local economy, consumer confidence or lack thereof as in some states, employment levels and job security – there is a bit of issue with that at the moment – and of course, the local property supply and demand factors. A lot more than interest rates, Kevin.
Kevin: What about high levels of debt and mortgage stress?
Michael: Yes, people are talking about that and saying, “Look how much debt people are taking on.” But recently in its Financial Stability Review, the Reserve Bank found that low interest rates have made servicing of household debts much easier. The level of household financial stress in Australia, interestingly, is declining.
In other words, there is actually less mortgage stress than there has been for a long, long time and there is only a really small percentage – just under 4% – of the total population whose mortgage payments equate to more than 30% of their income. They are the only ones who may get themselves into trouble if and when interest rates rise.
Kevin: Michael, when did the Australian property market last crash?
Michael: If you look back according to John Edwards from Residex, it was in the 1890s, before Federation. The answer is we’ve actually never had a crash in the modern era with a modern economic system and a modern banking system.
Property prices slump. They slow down. They even drop in certain segments of the market. In regional Australia and more in the mining towns, they have crashed because they had a bubble. But if you’re talking capital city markets, Kevin, not in a couple of lifetimes.
Kevin: Michael, accepting what you say about the lack of a bubble, what could cause our property markets to collapse?
Michael: It has happened in the past and it has happened overseas, so why could it happen here? It could happen if we had such high unemployment that people would have to be forced to sell their homes and nobody could afford to buy them. That is what causes a crash, where you just give away your properties and there is nobody there to buy them. That is different to the orderly, slowly lowering of values or flat market values.
The other thing that could cause it is terribly high interest rates, which could cause a raft of homeowners to default on their mortgage. That is unlikely, as well. A recession may, but it’s unlikely because a recession lasts for one or two quarters and then moves on. You would really actually have to have a depression, and that’s not on the radar, or in selective segments of the market, an oversupply – like is happening in some segments or in certain regional towns, particularly the mining towns. Again, that is not on the cards in our big capital cities.
Kevin: In summary, what is ahead?
Michael: Each state is going to be affected by its local supply and demand and economic factors for the rest of 2015. New South Wales is likely to be the top performer because it has a strong and very diverse economy. Queensland’s economy is now being helped by the falling dollar, and that’s helping the export and the tourist markets. Victoria’s economy is set for a bit of a decline because we are really a manufacturing state here, but strong population growth is helping drive the Melbourne property markets.
Western Australia’s economy is hurting a bit as the mining/building boom is now fading. South Australia’s economy is finally showing some early signs of revival, but it’s going to be gradual and, I think, a very lengthy process. Tasmania’s economy is likely to underperform, and the Northern Territory’s resources-based economy is really still creaking.
We’ve got some good things happening but we’ve also got some challenges ahead. I think we’re going to have some very fragmented markets, meaning you have to do careful homework and lots of due diligence.
Kevin: As always, Michael, it’s great talking to you. Michael Yardney from Metropole Property Strategists.
Thanks for your time, Michael.
Michael: My pleasure, Kevin.
Kevin: Joining me once again, a regular guest on the show, a partner in EmpowerWealth.com.au and also the co-host of that great show on Foxtel, Location, Location, Location Australia, Bryce Holdaway.
Good day, Bryce.
Bryce: Hello, Kevin. How are you?
Kevin: Good. Always good to be talking to you. I’m very, very interested in this topic we have today, and that is the four ways that a property investor will pay. Tell me what you mean.
Bryce: I think it’s a good summary. I was at a lunch recently with Cameron Kusher where he was talking about the property market and obviously, with a big focus on Sydney.
Kevin: Cameron Kusher, of course, from RP Data?
Bryce: CoreLogic RP Data. They have this report where they said anyone who sells a property for less than what they originally paid for it, a very large percentage of those were actually property investors rather than owner-occupiers. My ears pricked up.
I thought it’s interesting because I’ve seen investors over a 16-year professional career as well as a personal property investor myself, and I think that there are four ways that someone is going to pay, and that is through experience and having seen them go through the process.
The first one, for me, is picking the wrong asset. Just because a property is maxed for an investment stock, it doesn’t necessarily mean that it’s investment-grade stock. I’ve seen so many times when people just buy an investment property because they can rather than buying the right asset that will give them a better performance over time. My first way that they’ll pay is by buying the wrong asset.
The second way is through procrastination. You probably know it yourself, Kevin, how many people come up to you and say, “I’ve been meaning to do this for the last 18 months, but I haven’t gotten around to it.” The problem with that is that the market’s not going to wait for them.
Kevin: Good point, mate. What’s next?
Bryce: The third one for me is they’ll pay too much. That’s the biggest fear, as you know, that most people have, and as a professional buyer’s agent, one of the common things that people come to me and get my help for is to make sure that they’re buying the right asset but also paying at least fair market value for the property. In my view, I see too many people up against real estate agents who negotiate all day, every day, as part of the job.
Kevin: I guess there are two things there. Don’t get involved emotionally, and also make sure you do your research and set your limit price.
Bryce: Yes, I think so. Quite often, you’re getting most of your information from the real estate agent, and if they’re doing their job correctly, they’re trying to get the best deal for their client, which is the seller. So quite often you need to be able to be confident in doing your independent comparable sales research, but that’s not easy if you don’t have access to all the resources.
Kevin: Exactly. And the fourth one?
Bryce: For me, professional advice. I’m on the fee-for-service side of the ledger, where as a buyer’s agent, we charge a fee for service. At face value, we can appear to be more expensive, given that on the other side, the free side of the equation, you have a real estate agent who’ll give you free advice – but they’re getting paid by the seller – or someone who’s selling brand-new stuff, whether it’s a house and land package or an off-the-plan apartment. They’re getting paid by the developer and often quite handsomely, so they can give some free advice, as well.
But in my view, you should be taking advice from someone who doesn’t have a vested interest in the outcome and is therefore working in the best interests of you, the buyer.
In my view, it’s one of those four things: wrong asset, procrastination, pay too much, or professional advice.
Kevin: Always good talking to you. Bryce Holdaway from Location, Location, Location Australia and also a partner in Empower Wealth. As Bryce said there, they are buyer’s agents.
Bryce, good talking to you, mate. We’ll catch up again soon.
Bryce: Likewise. Thanks, Kevin.
Kevin: When you own a property, you may need to sell it. How do you go about doing that? A lot of people would think, “I’ll just appoint the agent and the agent will do all the negotiation for me,” but along the way, you’ll have to become a negotiator, as well, because you will end up negotiating with the agent. That is not only to get the sale right; it’s actually to get the appointment of the correct agent, as well.
Rachel Barnes has a website called Investor Friendly Agents working with agents to work better with investors.
Rachel, what are some of the tips you can give us as to how sellers can become better negotiators and work better with agents?
Rachel: I think firstly, you need to be prepared. That is one of the key things. Even before you talk to an agent, you need to have done your homework. Firstly, you need to know what your target market is, because they’re the people that you – either yourself or through the agent – are going to be negotiating with.
If it’s a three-bedroom house and you’re looking at a family, then that is what you’re going to focus on. If it’s a two-bedroom unit, maybe an investor. The more you know about your end buyer, the better you’re going to be in a position to negotiate, because negotiation gets down to building the benefits for the person on the other side of the transaction. That is really what you have to look at.
Kevin: Negotiation is a very important part of the process. We should never be afraid to do it; it’s just part of the process. Therefore, you should just become more skilled at it, Rachel?
Rachel: Absolutely. It’s a bit like you did at school or university, where you actually do some role play. I always suggest that you have somebody who is the devil’s advocate, who is either playing the agent or the potential purchaser, and you going through with them.
What you have to do is give them all the benefits. You have to overcome objections before they even get to that stage so that by the time you’ve talked to them, they have nothing that they need to know about, they can make a decision – yes or no – to your property. Being prepared with role play and having the confidence to do that, I think, is the key thing for you.
Kevin: The next step?
Rachel: The next thing I would say would be making sure that you know exactly what you’re looking for. When I talk to agents, the things that I [2:01 inaudible] is you’re dealing with a buyer or seller.
Remember that it’s not just price that counts. If I’m looking to sell a property, it’s not just the price I’m looking at; I’m also going to consider the conditions that I might be willing to accept. There might be a really good price if I’m going to be having a quick, unconditional sale.
But on the other side, if somebody wants to have some conditions in there – like they want to get in there to renovate, or they want to have a longer due diligence period, or anything like that – then I’m going to be looking at what other ways I can offer a benefit to a buyer that is still going to be okay for me and give me what I want and some reimbursement for that longer span. Remember that it’s not just price; it’s also going to be conditions.
And being prepared with the final result. Don’t go in thinking, “I would hope for this but I’m not sure.” You need to have done your due diligence. How much can you expect? Who is the buyer going to be for your property, so that you know what benefits to promote to them? Know what your fallback position is, but I would never tell the agent what your bottom price is going to be.
Kevin: No, that’s the golden rule, isn’t it? I like also what you said there about negotiation is not always about price. It’s about so many other things, isn’t it, Rachel?
Rachel: It is. Sometimes agents can be a concern because they only think about price and getting that sale through quickly, but it can be that you could make more money if you just wait a little bit longer with another condition that might be in there.
I would also suggest that if you’re going to be employing an agent, that if they negotiate on their commission straight up, then it’s going to be the right agent for you. Even when you’re looking to negotiate with the agent, again, I wouldn’t be looking at price, and if they bring down their commission first up, then they’re not going to be an agent that is going to be up to hold your price either.
Kevin: Some people ask why. It is all about if they can’t even negotiate their own commission, how good are they going to be at negotiating yours? A lot of people believe that knocking the agent down is the smart thing to do. I’ve always thought it was the worst thing to do.
Rachel: I’m with you, Kevin. It sounds like a good idea, and yes, it sounds very logical, but if you want your agent to be working for you and not just selling your property based on price – again, he or she would be looking at the bottom price then to get it through quickly – that’s not what you want to get the best out of your property, your investment, or your home.
Kevin: Absolutely. Rachel Barnes from Investment Friendly Agents.
Thank you so much for your time, Rachel.
Rachel: Always a pleasure, Kevin. Thank you.
Kevin: I often wonder – as you probably do, too – whether any kind of improvement can improve the value and return on your investment property. Is that the case? Let’s find out. Shannon Davis is from Metropole Property Strategists and runs the Queensland operation.
Shannon, would that be right? Any improvement is going to improve the value and return on an investment property?
Shannon: I don’t think the case is that simple, Kevin. I think many renovators and people trying to add value get it wrong in many cases. I think the biggest crime probably is just over-capitalization.
Kevin: What are going to be the best bangs for buck in your opinion?
Shannon: If we’re adding for rental yield, modernizing and adding modern conveniences to the property will add to your rent definitely – things like air conditioning, dishwashers, electric remote controls. All of those things will add yield to a comparison property that doesn’t have that. I would also add built-in wardrobes to that list of improvements. But if you are setting your house up for renovating for sale, it’s a different strategy again.
Kevin: Okay, let’s look at that separately. Getting back to the point you made there about putting in dishwashers and so on, if I were to do that and say it were to breakdown, am I therefore required to replace that?
Shannon: Yes, it is. If the property has been advertised with that feature, then the onus is on the owner to replace that. Look at extended warranties if you can as the best value for money, because a lot of appliance repairmen actually charge a call-out fee and sometimes by the time the call-out fee and the part are added, it doesn’t make sense for the investor to get it repaired.
Kevin: Is there a big difference between doing up a property to get the best return from a tenant in a house as compared to a unit? I guess they are two different types of things. In a house, you would expect to get a family, but in a unit, you’d probably expect to get maybe a couple of students or a couple of singles.
Shannon: Yes. I think having that demographic knowledge is really important so that you are doing the right things for the right type of people who are likely to be in that property. For instance, in an apartment, maybe a gourmet kitchen isn’t the best use of resources. People will be living smaller and busier, and maybe that’s not what the demographic will be requiring. But in a house, if you had a kitchen without bench space and pantry space, then that would be a big drag on the property, whereas in an apartment, it wouldn’t be so much.
Kevin: Some of the simple things like thinking about a family moving into a home that I might own that I want to rent out, if I do something like putting in fencing all around which will make it secure for the kids but also allow them to have a pet and then also making it a pet-friendly rental – does that make much of a difference?
Shannon: Yes, definitely. I think the biggest crime for a house is having it unfenced, because as you mentioned, the demographic is likely to have children and/or pets, and both of those will give peace of mind if it’s fully fenced. They are the most difficult properties to rent out when they’re unfenced and unsecured.
Kevin: Another question for you, another one of my pet hates is rental properties with pools. What is your opinion of that?
Shannon: I think they’re mostly avoidable. I think the top-end, the executive type rentals, most of those people do require a pool if it can be fully serviced, but if it’s a medium or average type rental, I wouldn’t be deciding on for the extra ongoing costs and I’d be looking for investment properties without.
Kevin: The bottom line if you’re going to be improving a property to give you a better return is think about the type of tenant who will be attracted to it and then what are the things that would turn them on.
Shannon, I want to thank you for your time. Shannon Davis from Metropole Properties in Brisbane. Thanks, mate.
Shannon: No worries, Kevin. Any time.