Cate Bakos tells us why all rate increases are not bad news.
We hear from Damien Collins in Western Australia why you should not just follow the sheep but instead blaze your own investment trail or at least follow the path less travelled.
There are mounting signs that Australia’s housing market may be moving through the peak of the cycle. Michael Yardney outlines the factors that are hinting at a market peak.
There has been a lot of discussion about the impact of foreign buyers on the Australian market, well the brains behind the most respected website catering to that market has some interesting insights and we ask our finance expert, Andrew Mirams, if size really matters to the banks.
Rounding out our show this week an interesting story about developers buying their own stock and why that should be a concern to you and I.
Kevin: It’s important to make sure that any property investment you make provides capital growth and consistent, attractive rental yields. That’s according to Andrew Mirams from Intuitive Finance, who joins us.
Good day, Andrew.
Andrew: Good day, Kevin. Thanks for having me.
Kevin: That’s a pleasure, mate. Are you telling me that to the banks, size does matter?
Andrew: Absolutely. I guess the key in today’s market with the amount of new property investment and the new projects coming onto the market, this probably does affect more of the newer projects than the old or existing properties, but absolutely, square meterage of a property definitely does matter.
As a rule, generally, at 50+ square meters, it’s viewed as a pretty standard deal. Under that, down to 40 square meters, we can certainly finance. Anything under that becomes really, really difficult just based on the pure size.
Kevin: Yes, , I remember when the benchmark was 50 and it was difficult to get lend on anything under 50 square meters. But once you get down to 40 and even under, it’s almost like a motel room really, isn’t it?
Andrew: It is basically a studio. Yes, it’s basically a bed and everything all in the same room. There’s not a whole lot there. The reason they don’t like it is because of the marketability. There is a very small market for those properties. Obviously, the bigger units – a one- or two-bedroom unit, and then you move up to your houses – there’s a much bigger concentration of people wanting to buy those.
A studio apartment or a student accommodation – which generally attract these smaller sized properties – are very segmented and very specific. The bank will always look at their worst-case scenario and what’s their exit clause should the client not be able to meet their repayments. There’s just a small market, and small apartments tend to be very difficult to be able to sell should they have to.
Kevin: One of the attractions, of course, for those small apartments will be the price, making it very, very affordable, but then you have to look past that and, as you pointed out, how marketable are they? Is that, in two senses, basically, whether you can resell it or even whether you can let it?
Andrew: Absolutely. Letting, they generally get a pretty reasonable return – they’re smaller units – but the issue, yes, is the salability and things like that. With the smaller units, the smaller type style, you’re right, they attract an entry level. But often, those entry level people don’t have their full 20% deposit and need to mortgage insure it. The mortgage insurers just won’t go near anything under 40 square meters, and often we have issues at anything less than 50 square meters if people are looking to borrow more than the 80%.
Kevin: Yes, generally, those smaller apartments are used for either student accommodation or serviced apartments, and the income from those is not really all that good. Also, the costs of running them – the management fees because they’re cleaned so regularly and turned over so much – Andrew, that’s another consideration.
Andrew: Absolutely. They also have management in there so you’re paying for people to maintain the properties. Often, there will be lifts and other style of things that all are high maintenance. It might be a small apartment that gets an okay rental but with your overheads and things like that, that has a definite knock on it and affects the price and its saleability and why the banks don’t really like them too much.
Kevin: There you go: property size and use does matter to the banks. That good advice coming from Andrew Mirams at Intuitive Finance.
Andrew, thanks again for your time.
Andrew: My pleasure, Kevin.
Kevin: Well, we’re hearing all the time – aren’t we? – about rate rises. If it’s not the RBA, it’s the banks going individually. But there is a silver lining behind every cloud. That’s according to Cate Bakos from Cate Bakos Property, buyer’s agent in Melbourne.
Good day, Cate.
Cate: Hi Kevin. How are you going?
Kevin: Wonderful. I read your blog and I think you are exactly right. Tell me the thinking behind this when you say that rate rises are not all bad news.
Cate: First and foremost, we have rate rises for a reason. A lot of people are pretty sensitive about the idea of banks having a money grab and trying to seize high profits, but we originally found that we had rates going up in response to the banks being forced to hold capital.
Obviously, we do want our banks to remain strong, but the rational decision behind enforcing this change was because the RBA and APRA, in particular, were quite concerned about our property market heating up. We’ve had a lot of investment activity, and at the time that they made the decision to make a change, we had some record numbers of investment lines out there.
That was certainly having an affect in the marketplace, not just for first-home buyers but we saw some dramatically increasing values in lots of markets and some of our homebuyers who were missing out at auction were complaining that investors were driving some of the markets up, and I don’t contest that.
Kevin: You make a very good point there when you talk about the health of the banking industry. The last thing we’d want is to have happen in Australia what happened in America.
Cate: Absolutely. We had really strong banks right throughout the GFC, and I think we have to recognize that while we have some big lenders that are writing some enormous profits, we have a really healthy banking atmosphere out there. I think unless you’ve experienced some of the hardship that those who have had banks collapse overseas have experienced, we really need to pay some respect to how the lenders in Australia have handled our tougher times.
Kevin: That’s certainly a sensible look at what’s going on with the banks, increasing interest rates, and so on, but now let’s have a look at the opportunities that you rightly point out are there.
Cate: Yes, I think that we’ve gotten a little bit carried away with being sensitive to rate increases when, in fact, the real negative effects that investors have experienced in the last few months have actually been restrictions on what they can borrow. For lots of investors, it’s been restrictions on being able to borrow altogether. The opportunity for an investor who has equity or is an experienced, sophisticated investor who has lines of credit already established is that they can go out into a market where they have less investor competition now.
As we know, some of the great sayings out there exist. “Be greedy when others are fearful and fearful when others are greedy.” It’s a saying that I particularly like because if you are positioned to pounce into the market at the right time and avoid some really strong competition, you can sometimes have a fantastic buy under those conditions.
Kevin: Yes. Of course, with what is happening with the banks, there will be a number of people who are getting a little bit scared, and as you say, that creates those opportunities for savvy investors, Cate.
Cate: That’s right. Absolutely true.
Kevin: Cate, thanks very much for your time. Cate Bakos, of course, is a buyer’s agent from Melbourne, Cate Bakos Property.
Cate, thanks for your time.
Cate: Thank you so much, Kevin.
Kevin: There’s a lot of news about what the market is up to. We’re seeing reports of downturn in the Sydney market. Auction clearance rates are certainly falling in both Sydney and Melbourne, which are the two benchmark areas, of course. So, what is going on?
Michael Yardney from Metropole Property Strategists. Michael, how are you reading all of these signs out of the market at present?
Michael: There are lots of messages aren’t there, Kevin?
Clearly we’ve reached the mature of the stage of the property cycle, and the growth that Melbourne and Sydney proeprty markets experienced over the last couple of years – double-digit growth – was unsustainable in the long term.
The markets in Melbourne and Sydney have gone from fifth gear to maybe third or fourth gear. They’re not in reverse.
The rest of Australia’s markets are fragmented, and we can have a talk about each of them as we go on. It’s going to be different next year than it was this year, Kevin.
Kevin: It’s never the same, Michael. What sort of research are you using to help you determine this? What are you reading?
Michael: What we’re looking at is a combination of things.
Some are lagging indicators – things that have happened in the past – and some are forward or leading indicators – things that will give us an indication of what’s happening in the future.
One of the things you mentioned was auction clearance rates. They’re particularly interesting in Melbourne and Sydney where there’s quite a depth to the auction markets.
They seem to have peaked around April/May this year when in Sydney, auction clearance rates were consistently in the 80s, and in Melbourne, they were in the 70s. Now they’ve gone down to what I think people would consider a normal market than a booming market, but it is a sign that the exuberance in the market is slowing. Kevin, that’s a good thing.
Kevin: I saw a report recently that listings are on the increase, as well. Is that having an impact?
Michael: It’s a combination of the time of the year when more people think they should be putting their properties on the market because they’ve heard that spring is the best time to sell.
I’m not sure I agree with that. The other thing in these high-performing markets is that people see the houses around them going up in value, so a lot of people considering getting in, taking advantage of that, and moving up – upgrading their homes.
I think there is a sense in Sydney that the market may be nearing its peak. Yes, there’s lots more properties on the market in Sydney – there’s actually 4% more than there was this time last year, close to 5% more – as more people are trying to get in before it’s a little bit too late.
Interestingly, in other markets that are not performing as strongly, there’s 20% less properties for sale in Perth, 12% less in Darwin, and 5% less in Brisbane, which is one of the reasons those markets are not performing the same as the Sydney markets.
Kevin: I don’t want to necessarily sidetrack you from our conversation, Michael, but you made a comment there about spring not necessarily being the time to sell. You don’t think that’s the case?
Michael: A lot of people do, but as we just saw in the Sydney market, there are lots more properties for sale. If you’re a purchaser that gives you more choices, and if you’re a vendor or seller, in fact, you probably have more competition.
I wouldn’t be necessarily trying to time the best time to sell my property on the market, Kevin. I’d be doing it when it suits me.
Kevin: That’s good advice. Back to our topic, investment demand is moderating; does that have a lot to do with the tougher lending criteria?
Michael: Yes, it has. Before we get onto that, if I could also mention that when we look at listings and how many properties, we also look at another statistic that you can get from websites like CoreLogic RP Data that show the month of supply on the market. In other words, how long it would take the average properties to sell.
If that’s rising, as it currently is in Sydney, it would be a suggestion that the market isn’t as strong, there isn’t as much depth to it. But in Sydney, it’s taking two and a half months to sell the average property.
If you go to Perth, Kevin, it’s seven months, and much the same in Darwin.
So the research we’re doing is looking at listings, how many people are in the market, and how long it’s taken to sell. Then, as you said, investor demand is moderating. APRA’s tightening of the screws is working, and investors are finding it a little bit harder to get finance.
Definitely one of the things that we’re suggesting is saying that we’re reaching the peak. By the peak, it doesn’t mean now it’s going to fall over the edge and keep dropping; it means it’s not going to rise as fast in the future.
Kevin: What’s going to happen to rents, Michael?
Michael: Interestingly, despite all the new properties and apartments being built, rental vacancy rates haven’t gone up much.
It’s been keeping in sync with the supply of properties. But rents have been on the low side for a while now. In fact, according to CoreLogic, our rental growth has been the lowest it has been for about 20 years.
I think that’s going to start pulling some other investors out of the market, those chasing yields, because it’s going to be harder for them to service their loans because rental yields are low considering that properties have gone up in value but rents haven’t.
Kevin: Bottom line, Michael?
Michael: Bottom line is you can’t just buy any property.
The property markets are moving through one stage to the next. They are fragmented as each state is in its own stage of the cycle. Do your homework carefully. It’s still a good time to buy, but don’t count on as strong capital growth next year as we have over the last couple of years.
Kevin: Michael, good talking to you. Thank you for your time.
Michael Yardney from Metropole Property Strategists. Don’t forgot Michael’s blog site: PropertyUpdate.com.au
Michael: My pleasure, Kevin.
Kevin: At a time when there are stark differences in the performance of various property markets around Australia, investors need to remain very level-headed. Many people, in fact, are too easily swayed and they just simply follow what everyone else is doing – a bit like herd mentality.
Damian Collins from Momentum Wealth in WA joins us.
Damian: Hi Kevin. How are you going?
Kevin: Good mate. Do you see this quite often, people just willing to follow what everyone else is doing instead of trying to plot their own course?
Damian: Definitely, we do see that, Kevin. It’s been a human trait that’s been around for a long, long time, and I don’t see it changing anytime soon. What we’re seeing, as you would know, in Sydney and Melbourne over the last 12 months, 18 months, particularly in Sydney, is when everyone else is getting in, the rest of the herd jump in.
You see on the other side of the scale, good buying opportunities in other locations and because no one else is buying, people think it must not be a good time. We’ve end up seeing the weight of money go perhaps into overheated markets. We saw it in the Pilbara in Western Australia years ago when people were paying $1.3 million for properties, and now sadly some of those are worth less than half that and their rents are down 70%.
Kevin: Yes. It’s a bit like comfort in numbers, but there must be a strategy to all of this. How can we overcome that and be sure that we’re moving in the right direction, Damian?
Damian: Really, you have to go back to fundamentals and not look at what’s happening in the paper and what’s happening next week. It’s looking over a five- or ten-year horizon. There’s always the thing I refer to as mean reversion. It basically means if a market outperforms too long and too much in too short a time, it inevitably comes back to the norm.
We’ve seen that before. When Sydney had its last big run up in 2001 to 2003, for the seven years thereafter, it barely did capital growth at the rate of inflation. We also saw the same in the Perth market – overshot 2003 to 2007, then had a long period there where it underperformed. The Pilbara, as I was saying before, a similar sort of thing.
Mean reversion: property can still grow strongly, but if it has a big period of short-term outperformance, it comes back. You have to look and say, “Where’s the market been?” If it’s had a big, strong run-up already, the likelihood is that it’s far less likely to do that in the near future rather than the more likely. Yet most people think “It’s gone up so much so quickly; it’s going to keep doing it.” Well, it doesn’t work that way.
Kevin: The market is cyclical, of course, but you certainly have to become a student of it. I think that’s even more so nowadays, Damian. I remember 10 to 20 years ago, investing in property and it was pretty forgiving, really. If you made a mistake, you could always pick it up somewhere else, but nowadays the losses can be quite enormous, as you mentioned earlier.
Damian: Definitely, Kevin. We’re not in that environment that we were in the 1980s and even into the 1990s where your inflation was much higher, wage growth was much higher. Property prices would inevitably go up 8% and sometimes more on average per year.
The likelihood of all properties going up 8% per annum into perpetuity is far less likely just because our wage growth is 3% and inflation is at two and a bit percent now. People just can’t keep paying that 8% growth rate. What you’ll see is, I think, average property prices in most cities be close to that 4% to 5%, but within those cities, you still might find pockets and individual properties that do towards that 7% or 8%.
But you’re exactly right. The market’s not forgiving anymore. It’s not always going to continue to outperform and grow strongly, so it’s really about property selection, due diligence, homework, and finding that location that’s got the best potentials for the next five to ten years.
Kevin: I think it can be all summed up in a line I think you used in a blog sometime ago: “Don’t be a sheep; be a shepherd.”
Damian: Yes, definitely. Unfortunately, you’ll find 90% of investors follow the herd and are the sheep. It’s not just the property market, Kevin. I’ve seen it in the share markets. Warren Buffet – one of the most successful investors in the world – buys counter-cyclically.
That’s how you make good money in property. You still have to have an area that has good long-term fundamentals – don’t just buy because it’s cheap – but if you buy the right area at the right time in the cycle, there is plenty of profit still to be made.
Kevin: Damian, thanks so much for your time, mate.
Damian: Pleasure, Kevin.
Kevin: Inside the latest Australian Property Investor magazine, there’s a great story written by Kieran Clair called “Keep and Reap.” Basically, it deals with small developers potentially keeping some of the stock for themselves.
Jo Chivers, who is the CEO of project management company Property Bloom, has a view on this.
Good day, Jo. How are you doing?
Jo: Hi, Kevin. I’m well, thank you. I love that title: “Keep and Reap.” I think it’s fantastic. It says it all, really.
Kevin: Yes, it does. I’ll get you to explain it in a little bit more detail, but basically, it’s where a developer can develop a complex and then maybe hold onto a couple themselves. It’s nothing new, but it’s a very good strategy.
Jo: Yes, that’s right. We found that with out clients, Kevin, that when they do build and develop property they do like to hold on. Really, a lot of their purpose and objective behind developing property is to boost and grow their portfolio, so yes, most of our clients are building to hold.
Kevin: How do banks feel about this?
Jo: The banks are fine, but it depends on the size of the development, of course. If it’s a large development the banks do want presales, so that’s definitely something you need to consider with something probably over four units. We tend to work under that threshold because it’s easier for people to finance. We’re mainly dealing with dual occupancies and three- or four-unit sites. Generally speaking, the banks won’t ask for presales on that size development.
Kevin: I can understand why it’s a good thing for developers, because they’re obviously selling out their own development but they’re also giving themselves a bit of a portfolio. What about the other buys in the complex? Let’s have a look at that. Don’t you think it gives a false indication of interest if they don’t know that, in fact, the developer is holding some of the stock themselves?
Jo: Yes, I think in a big development, where you are doing a big strata development of maybe 10 or more units, that would probably be a concern for people buying in. They will look at the holdings. They’ll do their strata report and searches, and they’ll see who is on the strata management committee. That may deter some buyers. Yes, that’s a good point to raise.
Kevin: Buying off the plan, though, you probably wouldn’t necessarily know who the other purchasers are, would you?
Jo: That’s correct, actually. A lot of the larger developers who are building that size development will actually hold on, because they’ll want to reap some of the rewards of future capital growth. So it is a bit tricky when you’re buying off the plan.
Kevin: I can understand, too, if you’re buying into a complex, and you do the searches, as you indicated, Jo – and you should always do that – this is an established development and you find that the developer is holding two or three of the lots, you’re also giving up a bit of control to the developer in terms of what can happen in the body corporate?
Jo: Yes, to a degree. But you have to remember that the developer is going to want things to go smoothly, as well. At the end of the day, the people who have bought in are his clients or purchasers.
I haven’t had any experience where the developer has overridden certain things. I’ve bought off the plan myself and been that situation where the developer has held the majority of the units when they were completed. We didn’t have any trouble, so I guess it does come down to what would be the issues are could come up, that could be raised? Really, everyone is in the same boat. Everyone wants the complex to be well kept, that kind of thing. I don’t think it would be such an issue.
Kevin: It think that’s a good point, too. You’re very right in saying that the developer would want it to be successfully run, they want the development to continue to look good, so they will maintain it. So that point is quite well made.
What about if, further down the track, the developer decides to sell off those lots at less than what he purchased them for? That’s going to depreciate the value of all the other lots, too, isn’t it?
Jo: Yes, and that can happen depending on what the market is doing. Everyone is talking about an oversupply of units coming onto the Sydney market in a couple of years, when they’re all finished. That is an issue. You always have that in the back of your mind when you’re buying into big, massive complexes.
I tend to like small, boutique developments. If I’m purchasing myself, I always go for very small, boutique developments where hopefully that won’t become an issue.
But that’s a very valid point, particularly when there’s an oversupply in the market. In that case, when that happens, if you can hold on, because otherwise you’ll end up selling at a loss and you might kick yourself. At the end of the day, if they’re well located… This happened in Sydney, in the Darlinghurst area in 2003. There was a massive oversupply, but if you held that unit now you’d be enjoying some fantastic capital growth.
It’s definitely something to consider, what’s happening in the area, if there’s a lot of building work going on, you’d need to come back to location, location, location. Have you bought into a really good location that’s going to have future growth? If you can, buy into the smaller complexes, because I think the bigger the complexes the higher the risk of that happening and people having fire sales.
Kevin: It’s always good talking to you, Jo Chivers. You make so much sense. Jo, of course, the CEO of property management company, Property Bloom.
Thanks for your time, Jo.
Jo: You’re welcome, Kevin. Thank you.
Kevin: Simon Henry, who is the co-CEO for Juwai.com, joins me.
Simon, welcome to the show.
Simon: Good morning, Kevin.
Kevin: Congratulations. Juwai.com was named recently as the most influential international property site in China. What does that mean to your company?
Simon: It was a sensational award, the fact that we were recognized by one of the peak commerce bodies in mainland China in 2014. Two weeks ago, we won the follow up award to that one, so we actually received it two years in a row.
For us, it really brings credibility to what we’re doing and what we’re achieving, to really promote the world opportunity to Chinese property buyers and investors.
Kevin: Of course, when we think of foreign ownership, there’s so much talk about Chinese buyers into the Australian market, but really the Chinese impact on the Australian market is fairly low if you look at some of the other countries who are buying into Australia.
Simon: Absolutely. The Chinese, while their dollar value of investment over the last couple of years has been quite high, they still rank outside the top five in terms of total land ownership in Australia. If you take, say, every hundred acres of property owned by foreign investors, the Chinese own only 4%.
The Chinese are definitely buying new projects and developments and houses, and that’s adding to the supply. It’s creating massive amounts of jobs, and it also means a lot more industry is being supported by Chinese tourists and students coming to Australia. It’s a good thing.
Kevin: When we talk about Chinese buying in Australia, or buying units and apartments as you just said, are they buying them to hold into a portfolio, or are they buying them as an investment to put tenants in?
Simon: This is one of the beautiful things about Juwai. We have a product called Juwai IQ, which we launched today. It’s the first time we’ve got really hard information on the motivations behind Chinese buyers.
- The number one reason they buy property internationally is for investment. They’re already property rich in China, Hong Kong, or Singapore, and are looking to diversify their portfolio.
- The second is to buy a property for their kids to live in while they study.
- The third is to emigrate overseas.
- The fourth is for lifestyle. They’re the trophy homes and harbor homes that you see.
The data really does support a diversified portfolio approach to international property.
Kevin: We hear a lot of stories, particularly out of Sydney, about foreign buyers who are buying units in an apartment block, locking them up and not even turning the power on. What’s the reasoning behind that? Why are they doing that?
Simon: This is actually quite interesting. We saw this report out of mainland China for the same practice happening in mainland China, and we asked the question why is it happening? The psyche of the mainland Chinese is that if you buy a property and have a tenant live in it, it becomes a secondhand property and loses some of its value.
We’ve been doing a lot of education over the last couple of years about the benefits of property management and leasing properties back. We’re starting to see a lot of enquiry now for once they purchase the property to actually hand it over to an estate agent to help manage the property moving forward.
Kevin: What is it that attracts so many Chinese to the Australian market? Is it the lifestyle or areas like the Great Barrier Reef?
Simon: Australia definitely has a good brand reputation amongst Chinese communities globally. Australia is obviously a destination where they think food, they think education, they think travel, they think tourism. The proximity to mainland China is fantastic, and the time zones are relatively the same.
It’s a very easy transition to go from mainland China to Australia as one of their destinations of choice when they travel overseas. Australia still lags behind the United States, but it’s catching up.
Kevin: Is Australia seen as a desirable area for Chinese developers?
Simon: Absolutely. We have a number of very large Chinese developers who are now starting to buy blocks of land and parcels to develop projects in Australia. Contrary to common belief, these projects are intended for domestic supply, not for international supply. They’re moving in to build developments and then selling them to locals.
Kevin: Just to round this out, what are the top cities in Australia for Chinese investment?
Simon: Looking at our data for Q2 2015, Melbourne is actually the number one destination, followed by Sydney, Brisbane, Gold Coast, and then Perth.
Kevin: What’s driving that investment into Melbourne? Is it a price point?
Simon: Melbourne has a lot of new project developments being built at the moment, and they’re very aggressively marketing their projects and properties in mainland China. It is about brand reputation and city familiarity, so the Melbourne developers are doing a great job of marketing their product.
Kevin: Great talking to you. Simon Henry, who is the co-CEO for Juwai.com.
Thanks for your time.
Simon: Thank you Kevin.