arrod McCabe of Wakelin Property Advisory and Stuart Wemyss of ProSolution Private Clients considered the factors that may either help or hinder the property market in coming weeks and months, including:
- Government financial support for (and eventual withdrawal from) employers/employees and developers/renovators;
- Impact of hard-to-solve coronavirus-inflicted economic challenges: immigration, international students, tourism, retail, hospitality;
- Lending conditions, processing times and terms.
- Demand dynamics
- Property listings
Finally, they considered how prospective property market participants might adapt to these circumstances. Buy and sell now or later?
Key topics and timings
|Agenda||0 mins 38 secs|
|Government support (including impact of eventual tapering and withdrawal)||1 mins 35 secs|
|Immigration, tourism, education||13 mins 05 secs|
|Lending environment||21 mins 20 secs|
|Outlook for market: Supply (listing volumes) and buyer demand||28 mins 25 secs|
|Property values||38 mins 11 secs|
|Pent up demand?||41 mins 00 secs|
|Buying approach in this market||45 mins 00 secs|
|Questions||51 mins 50 secs|
|Fix loan now?||52 mins 05 secs|
|Oversupply of units exacerbated by lack of immigration?||54 mins 05 secs|
|Accuracy of auction clearance rates currently?||55 mins 32 secs|
|Are regional locations now more attractive in this working from home world?||56 mins 30 secs|
|Are banks more conservative, especially around valuations?||58 mins 10 secs|
|Does receipt of JobKeeper affect ability to borrow?||59 mins 45 secs|
|Ends||60 mins 46 secs|
– Good afternoon, everyone. I’d like to welcome you all to our latest webinar, today’s is titled “Property market opportunities “and expectations for 2020 and beyond.” So I’m obviously joined, again, today by Stuart Wemyss from ProSolution Private Clients, welcome Stuart.
– Great to be with you, Jarrod, as always.
– So we’ve got a few topics to discuss today, given that there’s been a fair bit happening in the economy as a whole, but also what directly impacts on the property market. So, what we’ll do first is, I’ll give you a slide to have a look at which will just give a bit of an overview as to what sort of things Stuart and I are looking to cover today. So, as you can see there, the government support, how that will impact, particularly how it will impact once it’s seemed to be withdrawn or scaled back come at the end of September. The economic headwinds around immigration, tourism, education, those sorts of things. Stuart’s got some good feedback and good things to discuss around the lending, potential pauses of loans, those sorts of things and how that may impact on supply levels and also demand levels. Obviously, then we’ll get more into the direct impacts of the property market. So the listing volumes, the buyer demand, how it might be impacted with some of these economic factors. And then obviously, the direction of the property market for the balance of this year and into 2021. So let’s start off Stuart on that, on that government financial support and how that’s going to impact, particularly around, say, job keeper and job seeker. We’ve discussed in a fair bit of depth, and it’s certainly been publicised a fair amount about what they involve, so we won’t go into too much detail around that. But I know you and I have discussed a number of times around the fact that, there’s been certainly some concern about when job keeper and job seeker come to a conclusion, it looks like they will come to an end. There may be some slight alterations between now and then but they’ll come to a conclusion at the end of September. But we’ve discussed quite a bit and if you wanna elaborate on the fact that we don’t think that it’s likely to mean that the government’s going to just step away and not provide any form of support, because that would certainly undo a lot of the good work that’s been done over this period of time to support the economy. So what are your thoughts around that?
– Yeah, I mean, obviously, most people are really concerned about what happens post September, not only with job people, but also the loan pauses, which I know we’re gonna talk about. And, you know, I think there’s probably, you know, it’s a probably irrational concern, what happens but really you’re gonna think about the government spending $10 billion a month on JobKeeper to really keep businesses alive through the shutdown period, and most states are now obviously gradually opening up, which is a really positive thing. So from an economic perspective, you really want to have a broad base policy that gets an economy through a lockdown period, but as as you start to open up, what you’ll need to start to do is still support the economy, but not all parts of the economy will need the same levels of support. But also, again, from an economic perspective, you don’t want that support to be a disincentive. You want to make sure that there’s enough incentive for businesses to reopen, to start trading as much as possible. So, by keeping JobKeeper post September, the risk is that within some sectors, you don’t really provide that incentive for them to reopen. But also, you know, it’s a little bit like, you know, if you had surgery, but the surgeon decide to refuse to do any post operation follow up or consult with you. You know, that’s just not gonna happen, ’cause what’s the point of doing the surgery in the first place, if you don’t deal with any possible complications after the fact. So the fact that the government’s invested $70 billion of taxpayers money to get the economy through this point. I can’t really see a situation where there isn’t further targeted support. And that targeted supports probably gonna have to be in respect to industries that aren’t yet able to reopen to this same extent that other industries are. So you know, the common ones like education, tourism, hospitality. If they don’t provide additional targeted support, I would then argue that they’ve wasted their $70 billion through the the JobKeeper programme.
– Have you seen or heard anything specific around what that targeted support might look like? Has there been any mentions or anything that’s been suggested?
– No, I imagine they’re still working on it. I imagine they’re working really hard on it. You know, the thing with stimulus and it certainly a lot of US economic commentators are saying the same sort of thing and their experiences through the GFC. The thing with stimulus is that if you make it too convoluted, if you try and make sure that it gets to the right people at the right time, and there’s no waste, per se, you sometimes reduce its effectiveness. To some degree, it’s about getting money out into the economy to get those businesses going as fast as possible. The other part of it will be, are people going, I mean, if they open up airports and they let airlines start going again, let’s say this, in a few months time, maybe September or whatever, are people going to be worried about doing that? You want the demand to be there as well. So it could be a combination of specific stimulus for certain businesses and then a more generalised stimulus, but to consumers. You know, much like the US and I here overnight Congress are thinking again about writing checks to and sending checks to Americans to get them out spending. You need those sorts of things and some of that money will be wasted, some will go to businesses that maybe don’t need it as much as others, but it’s really about getting that money out as quick as possible and stimulating. And if you don’t do that quickly, if you don’t do that well enough, effective enough, then you risk a prolonged recession, which costs taxpayers a lot more in the long run. So, you know, once we’re spending taxpayers money, it’s important to do. So, I think without a doubt those things will happen. And I know, you know, a lot of us are concerned with, I feel very sorry for sectors like hospitality, particularly in Victoria, but I think that there’ll be stimulus for those sectors going forward.
– So some of them I guess, the one that’s probably come to light a little bit in the last fortnight or so has been that the Home Builder Incentive that’s been brought in, which obviously we’ve listed as one of the things to discuss. So, it’s been put in a different way and that it’s not so much government support, but it’s more of an incentive. Try to drag people out to look at that side of things. I’ve certainly got a few thoughts on that. Is there anything that you’ve noticed specifically around that and how you think it might impact on building and the property market?
– Yeah, and the other thing we can talk about, Jarrod is stamp duty, you know–
– Yeah that’s true.
– It’s a really, really popular topic. Look, I think the the home builder ones are a really interesting one. To me, it seems like how do you design a policy without actually designing a policy. You know, put something out there, so you can say, look, we’ve helped the sector but not really help them. Because I don’t think the $25,000 grant for someone that’s gonna spend $150,000 or more on a renovation, this calender year, you know, it has to be this year, of course. I don’t think it’s really gonna have any effect. I think maybe it will help people that were contemplating spending that sort of money anyway. But whether it would entice people to get off the couch and say, hey, we’ll just go and put another room on the back. Because we can Get a free $25,000 grant. I think it’s a nonsense, I don’t think it’s gonna have any impact on the market, what do you think?
– I think if it’s going to, it’s probably gonna be more in that off the playing house laid package type sector of the market where a buyer, purchaser has to just go in and sign a contract of sale, there’s no pre planning, there’s nothing organised. It’s just a walk in, go in sign a contract for an off the plan apartment or sign a contract for hassle in package in one estate and get that extra incentive. I think that sector of the market. But whether that was the intent to support those types of builders because the majority of that type of builder is going to be the mass production type. So whether it’s a developer or whether it’s a larger, a branding of a family home type developer in the state, I think that’s more where it’s going to support rather than the individual, small time builder or renovator extender. I don’t see that type of builder getting that much extra business out of what’s being proposed. It’s so limited around what you need to qualify around the minimum spends, the income that you’ve got to be, that you need to be earning, all those sorts of things. It really just shrinks down that buyer pool. And then you put those time constraints, as you mentioned on as well. It just makes it really difficult.
– Yeah, yeah, so it seems like something, let’s help the property market or maybe the government promised the banks that if look, if you hold borrowers, we’ll do something to stimulate the property market, but didn’t really wanna do it.
– I don’t think it’s necessarily about the property market, I think it’s more about the builders. And I think that’s why they’ve pitched it, to try and help that sector. The interesting thing that I found, I don’t know about you and any of the viewers, but particularly over the two to three months locked down. That’s one of the things that I noticed hadn’t changed too much. A lot of townhouse sites and things around where I live, we’re still going ahead and builders were still there every day working away. So, I’m not saying that’s been across the board. And by no means is that the case, but there was certainly still a lot of sites that were still going ahead.
– Yeah, I’m not sure they really needed the stimulus. What about stamp duty, Jarrod, do you reckon we’ll see stamp duty abolished?
– Oh, that’s an interesting one, and I know you probably have stronger opinions on that than I will, but I mean, I certainly think it’ll have an impact on the property market. And If it does, it will certainly increase the number of transactions that occurred, which is part of the reason to do it. Because that’s one of the reasons that we’ve seen in the last 15 to 20 years with the growth that’s been in property values, particularly in our metropolitan areas. It’s meant that there hasn’t been as much transaction, so the common scenario for people in the 90s, early 2000s was, in metropolitan areas, owning a single fronted cottage terraces house to go for the entry point into a location that doesn’t compromise my lifestyle too much. But once I have children, I’ll move out to a middle ring suburb and have a five, 600, 700 square metre site and just have that extra space. But people have looked at that now and said, well, that’s just too expensive. I’m gonna basically spend 50 to $100,000 depending upon what my initial purchase is. So I’m just gonna sit back and say, I’ll do an extension on my terrace house and I’ll put a first floor on it and have a three bedroom, two bathroom and make use of public space rather than having the the outdoor area in terms of a backyard. So this might give people a bit more incentive to be able to do that. But I think the other side of it will be is that, a lot of people will just take that 5% roughly of stamp duty and tack it on to the purchase price.
– Yeah, it’s interesting is that because, I mean, property has half the volatility than the share market does and sort of similar volatility to sort of bonds really so, that is that. You know, you don’t get too many negative returns, negative return yields in property where you can in the share market, and I suspect that a lot of people that are attracted to investing in property for that reason that the prices are relatively stable, and part of that is that the entry and exit costs just don’t accommodate speculation. You know, if I wanna speculate on particular property in a particular area, there’s a big cost associate of me doing that, so I think very carefully about buying and selling. I think that’s one of the benefits of stamp duty. Probably one of the most attractive suggestions I’ve seen is a lifetime stamp duty limit. So that if you’ve already paid, you know, if you go and buy a house, you pay $30,000, then you wanna upgrade, you only pay on that upgraded amount. And then similar, if you downgrade, I bet you don’t get a refund, but at least you don’t pay stamp duty again. At least that, I think that kind of makes sense and will then incentivize people to, you know, use property a little more wisely in terms of downgrade and upgrade, rather than disincentive being there. But of course, then you’ve got state governments have to negotiate with the federal government, in terms of funding and tax revenue and so forth. So, good luck with that I would have thought but, good idea, but whether it’s actually going to come to fruition, who knows? Hey, another thing Jarrod, we were gonna talk about was immigration and tourism and so forth. I know that’s been a really big sort of headline. Obviously, we, the international border’s closed. You know, we’re not looking at any immigration at the moment. What are your thoughts in respect to that?
– Well, it’s certainly that that’s one of the probably the impacting factors that we’ve seen on the rental market, certainly with some of the inner city areas. And we’ve certainly seen that rental values have dropped in varying degrees depending on the type of property in the inner city areas, that so values have certainly come back. And there’s been a number of reasons, obviously, the downturn in immigration numbers, but also from a student education perspective, because a lot of those students do occupy a large amount of the inner city apartments. So that has a form of effect, but also the lack of tourism as well has meant that we’re not seeing as many people come in and want the Airbnb accommodation. So a lot of owners of that type of property have reverted to long term leases or that sort of 12 month lease. So that’s just led to an increase of supply in property in that sector, and as a result, there’s been that reduction in values. Now, the loosening of constraints around domestic travelling was probably more regional travelling in recent weeks has meant that there’s probably been a little bit more demand for that Airbnb. Interestingly, I’ve spoken to a couple of people in recent weeks who’ve said, who own holiday houses that they Airbnb out for certain periods of the top of the year and use themselves at other stages, and they’ve said that for holidays between now and Christmas, all holidays, being school holidays, public holidays, those sorts of things, they’re fully booked. So people are looking to go down that path to try and use that domestic travel because they are probably sick of being locked down. So planning for holidays going forward, so that Airbnb type of combination might start to pick up the demand there, which will mean that there’ll be less supply in that space. A lot of it’s been taken away for at least 12 months, though anyway, if you’ve signed that lease, you’ve got to be prepared to not be able to Airbnb that property for a six to 12 month period, depending upon the time of your lease. So, that’s probably the main thing that I’ve seen. I haven’t seen it as much from a capital value point of view, I don’t think there’s been as much impact as yet. But that could very easily change over the coming months. So, what have you said, Stuart?
– Well, if you have a look at the numbers, most of our population growth from net overseas migration is net overseas migration accounts for 60% of Australia’s population growth. So at headline figures, you go, wow, if that migration stops, is gonna have some significant impacts. But if you have a look at what makes up that net overseas migration, most of the visas aren’t for permanent arrivals, they’re for temporary visitors mostly. About 75% of temporary visas as opposed to permanent visa. So about 240,000 people come to Australia. About 85% of them are either in Melbourne, Sydney or Brisbane or I should say Victoria, New South Wales and Queensland or they tend to congregate in capital cities, but 180 of that 240,000 are on temporary visas. Now, if you add up all the temporary and permanent visas about a third from the higher education sector, they tend to be in the ages of 18 to 22, about 29% or almost another third are on skilled visas or working holidays. And their ages range between 22 and 37. And that 21% are just temporary visitors, you know, so they’re just coming to stay in the country for a little while. So if you think about, you know, where is the buyer demand? So there is demand obviously for accommodation, we all need to live somewhere. But in terms of buyer demand, well, temporary visitors can certainly buy a property to occupy, they can’t buy to invest. But when they leave Australia, when their visa is out, they have to sell within a three month period.
– That’s right.
– So if you’re on a working holiday or a temporary visa for a few years. You know, whether you contemplate going and buying a property, where you’re living, knowing full well that if you go back, go back home, you’re gonna have to sell that property. That’s questionable, right?
– And as you said before, if it’s a short term thing with the cost of buying property, as we spoke about with stamp duty, it’s not an attractive thing to do for a two, three-year period.
– So I think the reduction in immigration will certainly have pretty substantial impacts from an economic demand perspective. You know they come to this country, they spend money, they do those sorts of things, they stimulate the economy, they also create jobs because you know, if you get skilled immigration in a business helps a business to grow, which then helps the employment, therefore and also they’ve got to be of a certain occupational education to qualify for that school visa. So it’s not like they’re really taking Australian jobs either. An industry is made, a case of the Australian Government, we don’t have enough of that labour, that skilled labour and then once that skilled labour is it’s taken off the list. So I think there’s, there’s the economic demand impact, there’s certainly demand for rental accommodation, particularly student accommodation, I imagined, I mean, not that I’ve ever suggested it’s a good idea to invest in those sorts of properties, but I imagined they would be under a bit of stress, but it’s not as bad, I think as as the headline numbers look. And it also would posit to say that Australia’s performance with respect to managing COVID I think will be the envy of the world. And so if you’re, mostly people aren’t coming in, because Australians education is so much better than the rest of the world. They’re obviously after residency more correctly. So, you know, if I was a Chinese or Indian student thinking, where am I gonna go study, and you’re comparing UK, US and Australia, which is typically Canada, and maybe New Zealand are the comparisons, you’d have to say Australia and New Zealand are gonna stand out in terms of the performance round COVID. So I think maybe short term, there’s obviously some hardship there and some impact. But if we take the longer term view, I would say that Australia has really cemented its position of attracting those sorts of students and immigration. What do you think, Jarrod?
– You know, I agree with that, yeah I think so, I mean, it’s a long term strategy around those sorts of things. And I think once we get outside of the current climate, which things will come back to relative normality at some stage, it’ll be will be a different world that we’re living in, but I still think that we’re going to be very attractive, attractive option for many international students.
– Just while I was doing some research on demographics, and not really related to immigration, but something maybe we can talk about further in future presentations. But it was interesting to know that the prediction round millennials, which are typically in a mid 30s, mid 40s, at the moment, that sort of bracket, as the demographers put it, they procrastinated getting married and buying a home for such a long period of time, but more than generations that came before them, and that now that they’re actually moving into that sort of family building phase, is what it’s called, you know, starting a family and upgrading to a family home and the predictions, the demographic predictions around that is that cohort are actually doing that on scale at the moment, and we will potentially be contributing a lot to property demand. So I found that kind of interesting and as something we might talk about in the future.
– So next topic that we’ve been talking about is around done probably, right in your wheelhouse, so the loans and certainly loan pauses, but also the appetite for the banks, I guess, at the moment to be lending to prospective property purchases, or along those lines. What are you finding? What are you saying? What’s good, What’s bad? What’s the difference?
– Well, I wrote a piece for the Australian a couple of weeks ago, and I suggested that I thought that it was the lenders appetite to lend that was going to really dictate what will happen to property prices in the sort of medium term. You know, we’ve sort of spoken about and we will talk about maybe what will happen this year, but I’m sort of talking over the next two or three years as we get past COVID, and so forth. And that’s kind of a concern, what will the lenders appetite be. Well, I think that I mean, they’re in the business of lending money to borrowers and charging interest margin on those, those lending. That’s their core business, particularly now as they have divested from a lot of wealth and insurance businesses, which has been probably more of a distraction than anything over the last 10 years. And certainly, they’re realising the liabilities that those businesses have created for them, or their behaviours created those liabilities more correctly. So I think the banks will really be keen to get back to doing what they’re doing, but also, they need to do that in an environment that is far more highly regulated than what it has been in the past as well. So that that will be an interesting thing. Look, at the moment, the general theme is that the banks are conservative, that credit is tight, probably as tight as it’s ever been. And the bank so worried about certain segments of the market and prices, unemployment. And so you’ve got these, so you’ve got two restrictions, the credit restriction, which is really, you know, do you work in a industry that’s been heavily impacted by COVID? Has your income currently being impacted by by COVID? Give us really up to date information. So there’s a lot of hoops you’ve got to jump through to get finance today. And then the other aspect is from an operational perspective, so the banks tend to use a lot of outsourcing in India or the Philippines. Well, they’re all but sort of closed at the moment. So they’re not able to access those human resources, they’ve had to onshore all processing, which has caused a lot of problems at the same time, as increased workload because of loan pauses and all the things that are going on with helping their customers through COVID. And then working from home, you know, people working from home, which can increase someone’s productivity. But, you know, depending on systems and processes can produce hurdles. So we’re finding that to get a loan approved and settled, you know, the times that take a very, very unpredictable, you know, so you’ll get a couple of weeks, a string of a couple of weeks when lenders seem like they’re getting on top of things, and then things blow out again, and it takes them three weeks to pick up a new application. So you’ve really got to be patient and you’ve got to understand that, you know, that these things are unpredictable. Look, we’re still getting finance approved. So it’s still a positive thing for borrowers that haven’t been impacted by COVID or haven’t been impacted to a material extent, it’s no problem, just a longer road to get there. But as a general sort of view from the overall lending market, we saw the ABS release that stats, the volumes were down 5% in April. I suspect the country months will be more severe than that. And that’s that’s the thing that I think will stop people coming, stop the property market coming back. In terms of loan pauses, we’ve seen some people coming back to the bank, well before September, obviously and coming back off pause, so that’s positive. Most of the banks now have a policy that helps people switch from principal interest repayments back to interest only for 12 months. So particularly if you’ve had a home that’s on principal interest repayments, you think, look, I can afford some repayment, but maybe not the full amount, that could be, normally to do that, you would have to get that credit approved. But you don’t have to do that for a lot of the banks now, so they’re coming to fall with those policies. And I think because there’s a lot of pressure on banking profits, they don’t wanna see an increase in arrears rates. So I think there’s a big, there’s a really strong incentive, if not just to do the right thing, but to help people that continue to be impacted by COVID to provide further assistance, whether that’s an additional pause or a partial pause. Particularly, I think, for people in certain sectors, so I would anticipate the banks will come out with sort of blanket policies, you know, if you work in hospitality, you can have another three months or something like that along those lines. So I don’t think it’s September cliff, where we get to and all of a sudden, you know, give us all your money and get back up to speed. I think the banks have a strong incentive to help borrowers through that period.
– And that’s been a lot of the talk is that, yeah, look, the problem. Again, from a property perspective, the property market seems to be holding up reasonably well at the moment and still ticking along and there’s been some pretty good competition at certain auctions around Melbourne. But there’s always been in the back of people’s mind, but wait until the end of September and October, and that’s when the forced sales is going to start to come through. It’s not having as though that’s what you’re expecting at the start. They may well be some, but it’s not avalanche.
– Of course, there’s gonna be some, but they’re probably the people that were to halig from the start, you know that we’re. It’s a little bit like the share market. You know, there’s some businesses that aren’t gonna get through the COVID period, mainly because their business model wasn’t that strong, or their balance sheet wasn’t that strong. So they’ll probably tell you you’re on the edge of failure, as it was anyway. Now, that’s probably not true at a personal level, but you know, and I feels very sorry, there’s gonna be some people through no fault of their own, they’re gonna be impacted and I get that. So I’m not having a go at those people. But I think they’re gonna be the minority, you know, I don’t think that you’re gonna see, at the end of September a wave of false sales. The bank is not in the business of going in selling people’s property. It’s expensive, it’s time consuming, you know, and they’re in the business of lending money and charging interest. They continue to charge interest-free loan pause period. So, from a profitability perspective, it doesn’t impact them. It certainly has a cashflow impact but not a profitability impact. The banks I think will be very accommodating through this period.
– What about listings, Jarrod? I think one of the things that’s really held property prices up is that demand has continued to exceed supply and mainly because there hasn’t been a lot of property on the market. What are you seeing in terms of speaking to agents and seeing yourself on the ground?
– You’re looking certainly, I’ve got another slide that we can put up here in terms of the supply things, it took a little while. And that was partly to do with the fact that vendors really didn’t have a lot of options in terms of methods of sale. There’s obviously concerns around whether or not there was genuine buyer demand there as well for a period of time, which was absolutely accurate. So through April and May, there were still people around but a lot of people sat back and said, let’s just cool our jets wide for two or three months, see what happens and then if things are okay then we’ll enter the market and that’s what we’re starting to see now. Vendors are also responding to that. So they’re now saying that if they would like to auction a property, it’s justified, there are providers around there. So if you conduct an auction in the right market, that you will get people will attend that. So that’s starting to lift as well. So, we’re really starting to see a bit more positivity around. You can see on the slide there that particularly down the bottom there, the auctions in comparison for June 2020 compared to 2019, there’s not a drastic difference. And bearing in mind that June 2019 was just after the federal election, so people were quite cautious, immediately after that anyway, May and June last year, were a little bit quieter, but we’re not that far behind. And the clearance rate is actually quite reasonable as well, it’s sitting in the mid 60s, which from our experience is fairly indicative that we’re in a fairly balanced market. Typically once the clearance rate exceeds 70% you’re in a seller’s market, and if we dropped below 60 into the 50s or 40s. we’re very much in a buyers market. But seeing it hovering around that 60 mark is certainly indicating that it’s fairly balanced. So you’ll find that there’ll be some auctions, which typically there’s been a few spoken about in the media in recent weeks, where there is good competition and there’ll be anywhere from three, four or five people bidding and potentially others that didn’t get an opportunity to, but there are so many other properties where they might be the same level of demand. And what we’re typically say at the moment, is that you are finding that properties that have got a bit more diversity to them, in terms of the buyer profile, a finding is a bit more demand for that. Whereas say, some of the middle ring type suburbs where it’s more focused on either, particularly those where the improvements don’t add a lot of value. So they may be seen as a more of a development site, whether it’s for a new single dwelling or for multiple townhouses, that sector where there is more of a reliance on the developer builder, that’s certainly quietened off a bit more in recent months. So, there are certain sectors that are certainly more active than others. And as a result, the supplies is being met in those areas. The interesting thing will be, which I guess flows onto what you’ve just spoken about Stuart around the loans and things, is that a lot of agents and a lot of people in property at the moment and those that are buying are saying that the people that are buying are those that were active in the marketplace, pre-COVID. So, January, February and early March this year, they were looking perhaps and weren’t successful, they may have had a time frame there of a couple of months where they held back and now that they’re comfortable with their own position, they’re moving back into the market. The question will be whether or not they are going to be replaced with new buyers coming in. And when the market’s going well, there’s momentum, you’ll constantly get that replacement, the demand keeps up there and exceeds supply. And as a result, the values keep going up. So, I guess my question to you would come back to that is, is there going to be a bit of a gap there where we get a bit of a hallway, buyers aren’t being replaced, and so there might be a little bit of a slight downturn before things start to get back up to that level.
– Yeah, I imagine it might be driven by a supply shortage, so Jarrod, more than anything else. Like I imagine if there’s less supply, you know, sorry, if there’s less supply, if supply is really tight, I imagine there’s gonna be enough borrowers, buyers out there to sustain the property market. But if listings were to spurt, particularly before September on the thesis that everyone’s waiting for September to see what happens, that could potentially cause some problems. So, you hear anything from agents in terms of listings, numbers and so forth?
– New listing numbers at the moment are quite good for that very reason that people care concerned about that for September. So there’s a few vendors around who are thinking, well, we’ll take advantage of those buyers that are comfortable at the moment. And so, they’re entering now to sell now, while they still confidence there, well, it’s not necessarily strong confidence, but it’s stronger confidence than what we were experiencing in April and May. So there’s certainly a bit more momentum in that space. Now, I know that its expected to be an increase in supply in August, September, anyway, because as it happens every year, there’s the perception that properties, well not a perception, properties do present better certain types of property in the spring and the warmer months. So, gardens, those sorts of things will look better. So there will be an increase in supply during that time. The question is whether or not it will be forced sales. And from what we’ve discussed earlier, I don’t necessarily think that will be the case. There’ll be some, but the majority will be elective sites, and people that are choosing to sell at that point in time. Perhaps they were hoping to have sold back in April, May, chose not to because of the climate that that was in and they are looking to hold off until that timeframe. I think there will be, I don’t expect the supply to be anywhere near what it would normally be through a spring market. But I certainly think that there’ll be a bit more activity.
– Yeah, I feel like we’re having this conversation back in, was it may 19, all bleeds into it, just before the election, you know, where people were thinking, well, do I buy now or, you know, maybe I’ll wait to see who wins the election. Because if Labour wins, you know, I think there’ll be carnage and I’ll buy in a couple of years time. You know, if you look at, if you look at some data set, so all the banks now and I think they’re feeding this through to the RBA now, that they look at spending data on credit cards, so that as you can imagine, you got millions of customers from all different backgrounds, it produces a really healthy data set. And it kind of tells us in real time, what people are doing and what they’re spending on and how they’re feeling, because if you look at consumer confidence, and there’s a few different measures, you know, Westpac has one but there’s a few different measures. Consumer confidence looks like it’s recovering really well. When you have a look at spending, spending on the whole looks really healthy. Spending on particularly on goods rather than services is very high, particularly on consumer goods and furniture and these sorts of things. But if you have a look at spending on a total level, now services is low, but mainly because of the shutdown, you know, they can’t go out and spend money on certain services anymore. There’s another measure called, the acronym is PMI, Purchasing Managers Index. It’s a index that tries to measure the appetite for businesses to spend on goods and services as well. And the PMI index has recovered quite considerably. So what we’re saying in the property market, doesn’t really match what we’re saying in the economy in real time, and I suspect that it all hinges on the September situation. Now, Josh Frydenberg’s gonna come out in July, I think with his statement around his budget, his Federal Budget, that’s the word I was looking for. And then he’s going to allude to what happens post September, so it’ll be interesting to see, we don’t necessarily have to wait until September for that concern to necessarily evaporate. But I think it’s a really interesting observation, maybe human behaviour observation that we’re all waiting for September. I don’t think that September thing, and it seems like you don’t think that September thing is gonna happen. And as long as there’s a reasonable number of listings, and I think there’ll be a number of buyers there, as long as listings don’t go through the roof, which I don’t think they will. I think property will hold its value. I think we’ll get past September and we’re all looking, we’re all looking fine–
– Well see, we see every year, I don’t think last year was probably the exception, but nearly every year, even when the market starts to pick up. You come to that September, October period and the clearance rate drops. So, because there’s that increase in supply and demand doesn’t meet it. So, don’t be pulled off if all of a sudden that maybe you start to sell the clearance rate’s dropping as we get around here, the confidence is not there. The worry is that the market’s going to drop, people can’t. It drops every year. As I said, last year was the exception, it held really well. But it was building off of a two year downturn where nothing had happened. And so there was a real, there was some real momentum that went through, but more often than not that clearance rate does drop going through that spring period with the increase in supply.
– And median prices and clearance rates. I mean, they’re relatively, I mean they’re interesting macro economic data, but doesn’t really necessarily inform us on what’s happening in a particular location or a particular type of assets. What in terms of price movements, what are you seeing, have you seen any evidence of values coming back?
– We’ve been having discussion around the office and I think that a lot of it, we really, we’ve been working on a very small sample size up until the last couple of weeks. And I think by mid July, I think we’ll have a much better idea as to what’s happened around values. I think there’s been a slight slip, I certainly think and again, we’re focusing on that investment grade type property. So we’re focusing on the single family cottages, terraces, on the style apartments, villa units, that sort of thing. And so there was certainly periods there from April and May where there were opportunities to be had at certain price points. It’s easy in, in hindsight, but a lot of people didn’t have the confidence to take advantage of that either and that was understandable too. But looking back, I think there were some opportunities. I think there still is now the prices aren’t quite at the premiums that were being achieved back in February, because it was some pretty strong momentum. But I don’t think it’s slipped too far. Maybe 5% at the moment, and that might come back a little bit more in certain areas, but it’s not a notable amount and former colleague of mine, Paul Nugent always used to say you can value property within that level of accuracy anyway. So, you’ve got to be very mindful of that and trying to say, well, it’s dropped 5%. Well, some properties may have, but I think others have probably held up reasonably well. That’s what you want them to do in a market like this. And that’s what we’re seeing, so many single front cottages and terraces in those inner city areas that have got that multifaceted demand. Okay, investors aren’t necessarily out in force at the moment. But young, young singles, young couples, that sort of 30 to 45 type of age bracket, they are and there’s any number of properties and we were having the discussion in our property meeting yesterday that there is competition there. There might not be five or six in every auction, but there’s two or three and in a market like this, that’s pretty good. I noticed on the weekend in Melbourne that about 140 million of property sold. So that’s the total value of property sold at auction, compared to December which is about 650. Now, certainly the number of options were different too, about 200 to about 800. So quarter of the volume of auctions and that December market was pretty strong. But it’s certainly suggesting that upper end of the market is a bit absent at the moment, you know, it’s lower value properties that are selling, is that right?
– Yeah, it certainly was, that’s the general feel around at the moment. Yeah, that’s sort of the strongest sector of the market at the moment is sub one and a half mil. That sector is where this, and again, I’ll come back to that point of multifaceted demand. So you’ve got young couples and themes, but you’ve got investors that are looking at, you look at those that inner city area have got downsizes that are coming from. Potentially $3 million properties that are looking, so there’s more activity in that space, creates more competition. And there’s more buyers that are likely to buy this. So that’s why it’s always one of the reasons why it’s always been an area that we focused on as an investment grade asset.
– Yeah, so one of the things I wanted to talk about Jarrod was pent up demand, and the idea that if we’re all waiting to see, you know, there’s going to be a large cohort of people that will wait and say, you know, let’s get through COVID, let’s see what the implications are, let’s even wait beyond September, I want to see what happens next year because I don’t really wanna buy a property today in case the market, the bottom falls out of the market. That may be the case and it’s probably, you know, property is had a few different hurdles over the last few years. You know, you’ve had the Royal Commission and the tightening of lending that that created, then you had the IOPs policy around negative gearing and the uncertainty around who was gonna, well, at some point there was actually certainty that Labour was going to win that election, and that in fact, it was almost a fight a complete and then now we’ve had COVID. So really, property, the market hasn’t really had any sort of runway to build up any kind of steam. But the idea is that there’s always an underlying level of demand. A level of demand to undertake certain transactions, whether they upgrade, downgrade, buying investment property, those sorts of things. Now, people will tend to find reasons not to implement them if there’s uncertainty around and ironically, if the markets going gangbusters, that’s when they feel the most confident. And that would be true in all markets, share market and property market. So, what I wanted to do is share this slide that I did last year. Yeah. What I did is I looked at property price growth, all the distribution of property price growth over almost four decades. And so the data goes through to the end of 2018, I think it is, so it misses out only one of the most recent years. As we can see, except for probably Melbourne is the outlier, we can see that property typically go through periods of very strong growth, followed, which typically lasts five to eight years and then followed by a period of below median growth. So, a lot of growth in there nothing and that wouldn’t be unique to the property market. That you would be able to observe that in lots of different markets, including the share market. And the idea is that in all markets, there’s a very strong trend of mean reversion. So that is over time, returns will revert to the long term main, which means that if you’re in a period of very strong growth, then that’s typically period followed by a period of lower than average growth. And then when you average them out, you’ll see that. So you can see on the left hand side of that chart, I’ve got the average growth over that period. And if you look at, say, Melbourne and Sydney, Sydney, 7 1/2%, Melbourne about 8% over that period of time, but the distribution is kind of the interesting thing. And I feel like and if you look at, say Sydney, for example, between ’05 and ’12, there was a lot of factors that was specific to Sydney during that time, like I had the Vendor Tax, I don’t know if you remember that which was just ridiculous, you had to pay stamp duty when you sold your property. These sorts of things had some state government issues during that period of time. So, it’s always localised issues. But the reason why those periods get followed by a very strong period of growth is because there is that underlying sort of level of demand. So, of course, we can sit here and say that to the end of the day, but it only matters what story you’re telling yourself about the risks and opportunities that sort of present themselves. But what is your advice to people at the moment in terms of, should they wait September to see what happens or is it a case of, you know, understanding what makes a good quality investment property and just buying when you can?
– I think it’s, it’s absolutely, I mean, our advice has always been buy when it suits you not, don’t try and time the market, don’t try and predict, because even if there is a slight change between now and September/October, it’s not gonna be drastic from what we’re seeing at the moment and it’s not like you’re then intending to sell this property in 12 months time. So, if you buy when it suits you, then you’ll still do well, provided you buy the right asset. It’s always about asset selection, so focus more on that. Be very cautious and very sensitive around, sensible, sorry, around range of price and what you’re prepared to pay for probably, because that’s really important at the moment. And I think you’ve got another slide that I was looking at before that it will be quite relevant to that too. So you need to be sensible about it. But don’t just focus on picking up a bargain because the types of properties that we’re buying, you won’t get for a bargain, you’ll miss out on it because there is competition there for them at the moment and they are holding up reasonably well because they are good assets. So you will have to compete for them now, even in what’s determined to be a pretty average market or what the commentators assign is. But in a few years time when you come to sell it in 15, 20,30 years time, this is the type of property that’s going to be in demand again then and you will have competition. So, if you’re able to buy at the moment, I mean, record low interest rates, all of those sorts of things are still very much working your favour, take advantage of it if it’s the right time for you.
– Yeah, I mean, I think CBA came out with a worst case projection couple months ago with a 32% drop in, yeah, in property prices. I mean, that’s just an absolute. I mean, nothing, anything is possible, obviously, but it’s inconceivable how that could actually occur. I don’t think property prices will fall, particularly for really good quality assets. That’s just my view, and I think that you know, if there’s a lag between confidence returning and more supply coming on the market. So let’s say September, we pass through September, everything’s fine, all of a sudden people wake up in October and think let’s go and buy a property. But vendors haven’t yet been quick enough to react, because obviously, you can’t put a property on the market overnight necessarily, not in all circumstances, that then you’re going to see severe excessive demand and then prices take off. And as we know, prices tend to sort of hit a new price point and hold at that level. So if you kind of miss that boat, the risk is that, you know, you’re going to be too late to the party, by the time you turn around and think, okay, now’s a good time to buy, which probably leads me into sharing a chart, which I’m gonna write a blog about next week. But the thesis behind this analysis is that the price you pay for an asset only really matters if you buy a terrible asset. So that is, that if you buy an asset and its capital growth prospects are pretty poor, then you’ve got to be very careful about the price that you pay. You wanna pay what it’s worth, intrinsic value, or you wanna get yourself a deal. Because your future returns are gonna be heavily impacted by the price that you pay, not necessarily the performance of that asset. Whereas, if you buy a good quality investment grade asset, actually doesn’t matter, almost doesn’t matter what price you pay, because the future growth and ability of that asset to grow and kind of mask your purchasing mistake, if you like, will more than offset the returns. So to read the chart, if you’ve got a 3%, so the top row there, 3% capital growth rate. If you buy 10% below intrinsic value, you increase your return by 75%. Whereas if you pay 10% over, you reduce your return over 20-year period by 77%. And what I’ve done, is I’ve taken include all costs, suggest you hold it for 20 years, then sell it pay capital gains tax and walk away. But you’ll return ranges between 1% and 7 1/2%. So really we’re not playing with a massive range here. And at best, if you buy really well, bought a poor property, you make some okay money. If you then look at the most, the alternative extreme example with 9% growth. If you buy well, you’ll increase your return over that period of time by 10% or reduce it by 8%. But the return is gonna be somewhere between 20 and 25%. If you’re able to secure an asset that’s gonna produce that sort of growth over the long term. I don’t think we’re gonna get too excited then if I’m gonna get a 20 to 25% return, they both seem pretty good to me. I don’t think I’m gonna get too excited about when I buy or the price that I’m gonna pay. I don’t wanna look like an idiot and most of it is ego driven, I wanna get myself a bargain. And that’s what’s driving us around the fear of overpaying for an asset, it’s mostly ego. But as we can see financially, it doesn’t make a big difference. Now, when you look at that 20/25%, how could that be Stuart? The reason is, if you go and buy an asset and borrow the full cost of that asset, then you haven’t actually outlaid $1 in terms of contributing that asset. But what you do have to outlay is it’s gonna have a negative cash flow over 20-year period. So that’s kind of your investment of cash flow, and then when you go and sell it, you’ll keep the net sale proceeds after paying tax. And that’s why the return’s such a higher return, it’s because of that, the impact of gearing. But I think the way at least I thought the table was kind of interesting to put some numbers around the fact that buying, the price that you pay doesn’t make a big difference, it’s really about the quality of the asset. And I know Richard Wakeland has said a few times “Overpaying for the right asset “has never ruined an investment.” I don’t know if I’ve quoted that perfectly.
– Well, it was always again, I quote Paul Nugent. It was always, “You won’t pay too much, “you just pay it too soon.”
– Yeah, okay, yeah, perfect. So, I think maybe that sort of analysis can help people, you know, if they’re worried or if I supply these funds, and property prices dropped 10%, do I look like an idiot or is it gonna ruin my investment? The answer is, is definitely no. And my wife and I are looking, well, if the right property comes along, we’re looking for something is, you know, Jarrod, I have no concerns about buying, if the right asset comes up buying something tomorrow or I’m happy to wait until September if that’s what it is, but I’m not gonna be guided by the market or other people’s fees. It’s gonna be buying the right asset.
– That’s right. Well, I think we’ve covered most of those topics and just saw we’ve had a few questions come through, which is been great. So we might try and get across a couple of those just quickly. There was one that came through from Jeff, as part of the registration, Stuart, which was, sorry, it was from Alice not Jeff, Jeff’s got another one. From Alice, is it worthwhile to feature loans now that is fixed interest rate instead of variable interest rate?
– Interesting, I had the same question from a client late last night. The RBA has provided unlimited source of funding to the banks at a fixed rate of 0.25%, so that’s what the banks can borrow at. The idea is, the government’s idea is to make sure that they’ve got enough money to own land so that they can offer some pretty competitive three-year fixed rates. Hopefully to get people through, not they’re expecting necessarily it to last for three years of course, but help people get through that period of time. One of the downsides to fixing rates in the past has been if you break it before the fixed rate term has matured, you’re potentially up for a large break fee and that fee is ascertainable at the beginning because it really depends on the cost of funds, but if you fix at this level, and a couple of years later you wanna break the rate at current fixed rates are down at this level, you’re gonna pay that gap back to the lender, so the lender is not gonna be any worse off as a result of breaking. If we think about the likelihood of that occurring, if you’re fixing a two, 2 1/2%, the RBA has said no more cuts, no negative interest rates in Australia. The chance of them wanting to get out of that exit, that fix rate term and say one or two years time and the chance of fixed rates being lower at that time, very unlikely. So, almost probably the only time in history you could probably take a fix rate with very little downside, even if you have to exit that. So I think fixed rates look really attractive at the moment.
– Yeah, great. We’ve got some other good questions that have come through in the chat section of the webinar. Lemme have a look here. There’s a good one which I’ll ask, but it’s probably more for me. COVID aside, you see an oversupply of units in Sydney without migration to buy these units prices will fall. So that’s come from Matt Wellings. So again, we are more mobile focused there’s been a, we’ve felt there’s been an oversupply of apartments in these capital cities, particularly the modern ones for a long period of time. And I think that that’s a very valid question to ask. And I think it’s something that’s likely to play out is that a lot of them are coming to buy that type of property. There’s been a turning down on that, because there’s been a requirement put in place in recent years, where developers can only sell 50% of those properties to overseas investors, whereas previously, they had been unlimited. So now there is a greater requirement, that’s already started to have a bit of an impact, there hasn’t been as much construction, that’s gonna overflow on now, as well. So they could very well be, but there’s probably been, there’s been some fairly significant negative press around modern off the plane apartments, high rise apartments in recent years, with the cladding issues and things that have been in place as well. So there’s certainly been a rejection of those. Will the home, the builder incentive help that, maybe. But I don’t think, because it’s only going to be between now and the end of the year, it’s probably not gonna be drastic impact. So yeah, I think there could be, it could be, bring that oversupply back to life.
– Jarrod, Joseph has a question and he asked, in your view, how reliable auction clearance rates given that they’re dependent on agents reporting auctions. What do you think about auction clearance rates in terms of reliability?
– They’re a good guide, but I wouldn’t be heavily reliant on reading them alone and saying that they are what I’m making my sole judgments on. So they’re a good guide, and you can look at them as a point in time, but again, you’ve got to look at the information that’s been provided. So, bearing in mind that say auction clearance rates don’t necessarily mean that a property had competition. So a property is included as being sold under auction conditions as within the clearance rate, if it passes even to one buyer on the day and sales often negotiation later that afternoon. So it doesn’t necessarily mean that there’s been strong competition, strong interest, but it’s sold under auction conditions. So, there’s you’ve got to understand how they’re coming through with that. It’s a good guide, but I wouldn’t heavily rely on it solely.
– Sheree and Tracy are asking about regional locations. So I imagine probably linked to be to the work from home seeing that there’s been a bit of media about that. What’s your view on regional locations?
– It’s pretty certainly been an uptake of it and interest around it, I’ve helped a couple of clients in recent months that have looked to do that. It’s not as though they’ve all of a sudden elected to do this because of COVID. A lot of them were still planning it as they were, but there’s certainly been people that it’s been brought to their attention that they figured it wasn’t something that I’m considering, but now that I’ve seen this, and I’ve had discussions with my employees, perhaps it is an option for me. So, it may have a flow on effect, it’s never going to mean that a regional area is going to have significant levels of growth, because it doesn’t have the fundamentals that the capital cities do. So it doesn’t have the immigration power that we do in the capital cities. But it will certainly still, it will be a viable option for people, particularly as they figure out that they can work around it.
– Immigration is a big one, that’s one of the things that the demographers are saying that regional towns, regional cities will probably wear a bigger impact, because immigrants typically wanna come to capital cities, although there is other programmes, other skilled programmes to try and stimulate regional centres, but they probably got more to lose from a reduction in immigration than what the capital cities do. Again, I don’t think it’s, it’d been interesting to see whether it plays a major role, but it might offset some of the higher demand from as a result of working from home.
– I’ve got another one here, Stuart from Mart Homby, who says, ask Stuart, have you noticed that banks are even more conservative than usual at moment and also tie into that bank valuations.
– Yes, look, so there’s two ways that banks will change policy, they’ll change it overtly by saying, look, now we’re only gonna include 70% of gross rental income, and then you know that’s gonna reduce borrowing capacity. The more common way for them to do it is to just change their calculators. So every bank will have a serviceability calculator and you put in all the inputs, and it will spit out and tell you whether the loan will be approved or declined and how much that person can borrow. What happens behind the scenes in those calculations is far less transparent. And they’re always tinkering with them. So, we can do a calculation one week and say someone can borrow 800,000. The next week we come back to that calculation, it’s 750. And in the past, say, I’ve been running this business for nearly 18 years, so if you go back 10 years ago, that almost never changes. They haven’t updated every now and again, but they’re pretty reliable. So you could sit in front of a client go, no, no worries, you can borrow that. Now it’s almost change by the minute, and you’ll never know if it changes anyway. So it’s up to you to go back and check it. So there is a lot of moving around in these sorts of things, it’s quite volatile. In the main though, if you’ve got a good, strong financial position, you’re good at managing cash flow, you haven’t been materially impacted by COVID, you shouldn’t have too much problem. Just the time it will take to get the loan approved, is the only consideration there really is.
– Job, if you are receiving JobKeeper as a result of your employee deposition, that’s what I thought.
– Yeah, forget about it. So they’ll ask you what they call the COVID questions, whether you have been impacted by COVID, whether you feel that your ability to make repayments has being impacted by COVID. They could ask you that at the beginning of the application or at the end of application just before the loan’s gonna settle. Still we haven’t had it, but they stories from other brokers that where they’ve tried to verify employment just before settlement, so the ring the employer and make sure the person is still employed. Some lenders we’re asking for March BAS statements on one April, you know at the end of that quarter, I mean you’ve got two months to lodge it but they want it straight away. So they are being very careful but if you can demonstrate that your financial position hasn’t been materially impacted by COVID you should be fine. The only caveat there is the time taken to get an approval.
– Very good, that probably brings us to the end of the hour.