Buyer Beware

There are no tricks to property investment!

 

Beware of those who make sweeping statements, offer guarantees, use pressure tactics, don’t acknowledge the risk, and avoid questions or concerns.

There are no rabbits to be pulled out of hats!

But it’s not rocket science either!

As with any purchase, the onus is on the buyer to be aware.

The best way to be aware is to be educated and know the right questions to ask.

Understand that there are no guarantees. A qualified, honest property professional will make evidence-based recommendations that meet your needs (not theirs)

Understand that ‘life is what happens while making other plans’ and so your circumstances may change over time.

It is therefore important not to over-commit and to invest sustainably for the long term and to ‘stress test’ your cash flow figures.

 

Go into it with your eyes open:

 

Resilience planning for economic downturns

If this past month has taught us anything, it’s that good times can turn bad quickly.

 

In December almost every property commentator was salivating at the thought of markets on the rise. After price retractions in Sydney and Melbourne, the turnaround was beginning to gain momentum. Markets such as Brisbane were seeing long years of dormant performance coming to an end with early February 2020 indicating a bumper year was in store for the Sunshine State’s capital.

Cue forward four weeks and who could have imagined the picture before us with the COVID-19 pandemic. Millions unemployed, tenants provided a moratorium on evictions and banks offering a freeze on repayments.

Of course, the full force of the economic tsunami is yet to be seen, because the property market’s strength is directly linked to confidence. If convincing solutions to the crisis can be found quickly, then the market will return in force. Prolong the pain and the recovery will likewise be extended.

But of course, the big lesson for everyone from political leaders to entry-level workers is simple – planning pays. Here what we can all learn as property investors from the Coronavirus (COVID-19) crisis about surviving the ups and downs.

Know your path

Advisors in our network follow a 14-step process to help clients build a portfolio… and the first eleven of those step having nothing to do with property selection. So when it comes to beginning an investment journey, don’t get caught up in researching real estate straight off the bat. Instead, carefully plan your path.

Recognise your starting point and defining your goals.

Write down your current asset base and income and work out what you want them to look like eventually. Think about how long you want to take to get there and layout your prospects for future income growth. Also, consider what life events may be before you. Are there kids in your future? Is a move interstate or overseas for professional advancement likely? You won’t know all the answers with 100 per cent certainty, but most people can sketch out a reasonable idea of how they’ll get from beginning to retirement and the types of considerations that need to be added to the mix. By setting out your path, you have a reasonable plan to follow to reach your endpoint.

Assess your risk tolerance (Stress Test)

This is important because long-term investors must be able to deal with market ups and downs. It’s essential to understand how you relate to risk so you can select the right composition of property types for your portfolio. For example, you may be an average wage earner with a family that needs the surety of shelter, education and other essentials. As such, you might seek assets that compromise a little on value growth potential but provide a stronger cash flow position. Conversely, you might be a young professional on good income who can invest a bit more and bear the cost of having to tip in a little extra each month to support your investment, knowing that it has great potential for value growth. Understanding your risk tolerance means you can travel with confidence and avoid panic if the market takes a hit.

Understand your finances

It is essential to have a handle on your finances. This includes home budgets, asset balance sheets and your borrowing and loan servicing capacities. This is where an experienced mortgage broker and property investment advisor are essential. Your investment advisor can help guide you through the key numbers to make sure everything is up to date. Great advisors also implement a regular audit of your figures to ensure they’re always current. Mortgage brokers will help you seek the best loan terms and give plenty of advice on what to do to improve your chances of gaining approval. This could be for a new purchase, or when refinancing under changed circumstances.

Buffers are essential

Perhaps more than anything else, those who are most successful at riding out the market rollercoaster are investors who have buffers in place. Make sure you are not overextended continuously in your loan capacity. Similarly, ensure you can comfortably meet loan repayments and other portfolio operating costs. Finally, work toward having a pool of available cash you can draw on in emergencies. This usually is best kept in an offset account to help reduce your interest bill as much as possible. This buffer – which should cover at least three months’ worth of outgoings – means you can hunker down and ride out most unexpected hits. This buys you the one thing that we all need in a crisis – time. The buffer lets you make plans without fear and can help deliver you to another side, a downturn intact.

While maintaining personal and physical safety during these events is your primary goal, the importance of planning for financial hits can’t be ignored.

Applying the principals outlined above will help you ride out the storm.

Author: Richard Crabb | MD ASPIRE Network | PIPA Board Member

Locations

There is no simple answer!

 

Smart property investment involves identifying assets that offer growth potential coupled with a sustainable level of rental return.

This combination is the basis for long term wealth building.

Australia is a vast country and opportunities exist in different states and different locations within those states. Even within the same suburbs, various types or styles of property present different opportunities.

The best place is the place that meets the investor’s specific situation and strategy.

One thing is for sure, the best place is not necessarily, the place you live in now! Many novice investors make the mistake of assuming that the ‘devil you know’ is the best way to go.

Looking over the back fence of an investment property is not only unnecessary but ill-advised. The investment property is an investment vehicle and should be chosen devoid of emotional attachment.

Concentrating on your work and income earning potential and leaving the management of your asset to a carefully chosen property management professional is the wiser approach. ( the benefit of specialisation is higher productivity)

This is particularly appropriate when you build a property portfolio. The logistics of managing multiple properties is beyond the scope of most people unless it becomes your full-time job!

Choosing a location to invest in ought to be a well-considered decision, based on your situation, budget, goals and time frames as well as an analysis of the demand side drivers and the supply side constraints prevailing in different places at different times.

The factors influencing demand and supply in any location are multi-layered and don’t always conform to textbook models.

Perfect competition requires perfect knowledge. To get the lowest price for bananas, you need to know who is selling them, where and at what cost at any time point in time.

Likewise, perfect knowledge and mobility in the housing market do not exist.

It is unrealistic to expect that the price of accommodation, either house prices or rents will be met with a ‘perfectly elastic’ responses on both sides of the equation.

For example, despite rising rents, families may not be easily mobile across locations in search of lower prices. Access to employment, transport options or the lack thereof, family ties and established links to schools, sporting and friendship groups make moving home tricky. It can also be prohibitively expensive.

Likewise, the timeframes involved in new supply limits the ability of the market mechanism to work as efficiently as it might otherwise.

 

It’s important to understand that Monetary Policy is a ‘blunt instrument’, that is, it affects all sectors of the economy generically and it’s not possible to selectively target just the ones you want to dial down or the ones you want to stimulate.

The effect of macro drivers for demand, such as interest rates is not location-specific. For example, the RBA was not able to increase interest rates in Sydney and Melbourne alone to slow house prices during the past expansion phase without collateral and unintended damage to other property markets. So, while record-low interest rates now are designed to provide a stimulus to the economy and to ‘soften the landing’ of slowing activity, they do so generically.

You can’t assume all markets will grow as a result of increased consumer optimism and confidence – it’s crucial to look at the specifics and to match a location to your particular needs before arriving at a decision.

 

 

 

Influences on the choice of location include:

 

 

 

 

 

 

 

 

 

 

 

 

Drivers of Demand and Supply Constraints

Demand and supply

 

in the property market

 

are subject to a range

of factors

 

 

 

If you have ever been to a fresh food market, especially at the end of the day, you have seen the free enterprise market dynamic first hand.

Prices are determined by the supply of fresh fruit and vegetables and the demand for them. If demand is low, stocks sit on the shelves, if supply is low perhaps due to adverse weather events, then prices rise, and of course, the opposite is true.

Surplus perishable items or less popular items will come down in price at the end of the day.

To understand the property market is no different; we need to examine the interaction of the demand side drivers and also the constraints on the supply of housing and how they influence prices.

DEMAND SIDE DRIVERS:

POPULATION GROWTH – Australia’s population grew by 1.6 per cent in the year ending 30 September 2018, reaching 25.1 million, according to the latest figures released by the Australian Bureau of Statistics.

As of June 2020, our population is estimated to be 25.71 million.

The population counter ticks over by one person every 1 minute and 28 seconds, on the assumption that there is one baby born every 1 minute and 44 seconds, one person dies every 3 mins and 11 seconds, one person arrives every minute, and 1 leaves our shores every 1 minute and 44 seconds.

POPULATION GROWTH = BIRTHS minus DEATHS minus NET MIGRATION

ABS Live Population Clock

 

 

Net overseas migration added 240,100 people to the population and accounted for 61 per cent of Australia’s total population growth. Natural increase contributed 155,000 additional people to Australia’s population, which was the result of 312,600 births and 157,600 deaths.

Australia’s population to reach 30 million in 9 to 13 years

Based on current trends, Australia’s population is forecasted to reach 30 million people between 2029 and 2033, according to the latest figures released by the Australian Bureau of Statistics (ABS). Population projections are based on assumptions of future levels of fertility, life expectancy and migration, which are guided by recent population trends.

Three series of projections (series A, B and C) have been selected from a possible 72 individual combinations of the various assumptions.

Series B primarily reflects current trends in fertility, life expectancy at birth and migration. In contrast, series A and C are based on higher and lower assumptions for each of these variables, respectively.

STATES: Under all theories, the population of New South Wales is expected to remain the largest with a tally of between approximately 9 and 9.3 million.

Victoria will experience the most significant and fastest increase in population; possibly reaching between 7 and 8 million by 2027.

Queensland’s will continue growing over the forecast period, increasing to 6 million people in 2027.

Western Australia is predicted to increase to 3 million by 2027, while South Australia will see slower growth, to reach 2 million.

And, 67% of Australians live in and around capital cities, and this is anticipated to rise to around 70% in the next few years.

CITIES:

Melbourne is predicted to be the largest city in Australia by 2066 with a forecasted population between 12.2 million and 8.6 million, surpassing Sydney in 2031.

Brisbane will grow in size with an increase from 49% of Queensland’s population to 51% in 2027, becoming the majority part of Queensland’s population.

The population of the Australian Capital Territory is set to increase to between 479,000 and 510,000 people closing the gap on Tasmania’s population, which is calculated to reach between 545,000 and 573,000 people in 2027.

The Northern Territory is expected to increase to between 270,000 and 284,000 people in 2027.

The demand for housing is a product of its necessity and the population size and forecast growth, currently at record levels both current and projected.

It’s also influenced by government policy, incentives, consumer confidence and unfortunately, at times, the media!

 

NET MIGRATION – Australia is a culturally diverse nation – over 200 different nationalities go into the mix with 25% identified as overseas-born on the last Census night. Migration continues to be a significant factor in the growth of our population and workforce. While exhibiting a pattern of variability over time, net overseas migration has remained above 180,000 people since 2006. In the year ending 30 June 2018, there was a net gain from overseas migration of 237,200 people.

“More people are deciding to call Australia home – if not permanently, at least for longer than a year. The lift in permanent and long-term arrivals reflects a perception of Australia as a great place to live and work – a country with a high standard of living and great opportunities….the annual total of 844,800 is also a record high and up 11.4 per cent on a year ago – the strongest growth in 20 months” (Commsec Eco Insights April 2019)

 

At the moment, the pace of population growth from migration is low due to our closed borders. An interesting perspective is that because of our very successful response to COVID-19 and the likelihood of us emerging out of the pandemic restrictions ahead of the rest of the world, Australia is going to be a very attractive option for future immigrants. The effect on our future population totals may be even more profound than previously anticipated.

 

 

 

OTHER DRIVERS

DEMOGRAPHIC CHANGES – There are approximately 10 million households in Australia presently. Demographic changes such as the size of those households and the divorce rate influence not only the number but type and size of housing that is being demanded. Single-person households are a growing segment of the population that increases the demand for smaller, higher density accommodation types. The growth in multi-family housing patterns may mean that designs need to change to accommodate the desire for separation and privacy. This segment would also include the ‘boomerang’ generation of young adults who keep coming back and the ones who won’t leave!

MAJOR INFRASTRUCTURE PROJECTS – “More than $123 billion of construction work has commenced since 2015, with a committed forward pipeline of more than $200 billion aiming to build for a population projected to grow by 24 per cent to 31.4 million by 2034″.

 

 

 

Major Infrastructure Projects Kicking Off Development

 

 

 

AFFORDABILITY – many factors will influence a buyer’s perception of affordability. As incomes rise, purchasers are in a more favourable and confident position to be able to service the debt that is usually incurred to buy a large ticket item like a house. In turn, incomes will be a function of ECONOMIC GROWTH and therefore, employment.

INTEREST RATES are the cost of that credit, and therefore as they fall, the affordability factor increases. Similarly, even if demand is present for housing, the AVAILABILITY OF CREDIT will act to dampen demand if lenders tighten their lending criteria. Sometimes this is to ‘balance’ their loan books or is in compliance with the prudential regulator’s (RBA & APRA) directives, whose mandate it is to moderate excesses in the market (business cycle)

“The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia”. www.apra.gov.au

For example, until recently, lenders were required to assess a purchaser’s borrowing capacity as if mortgage interest rates were at 7%, well above the 4-5% rates readily accessible in the finance market. This has precluded some people from the market. APRA has now announced that it intends to ease the limitation on ADI’s (Authorised Deposit Institutions)  allowing them to adjust the ‘qualifying rate’ to an obligatory, but more reasonable 2-2.5% above their retail rates.

The interest rate qualification floor (an example of government regulation and intervention in the freely operating market) will remain. Still, it should allow more buyers to enter the market and increase the demand for housing.

Remember that economics is a social science because it studies human behaviour. To build models of the economy and predict outcomes, economists have to make assumptions about human behaviour and, by and large, have to work on the basis that consumers are rational. Psychologists would beg to differ!

Attitudes, perceptions and CONFIDENCE are important drivers (or inhibitors) of demand. When the economy is thriving, and the news is good, consumers are buoyed and optimistic about the future, and the reverse is also true. The media plays a role in shaping consumer outlook and confidence, and unfortunately, bad news and sensationalism sells!  The first diagram below is a simple representation of the property market. As prices rise for houses less are demanded, and more is supplied and vice versa.

At P1 Demand for homes equals the Supply of dwellings.

The positive drivers of demand ( increased population growth and net migration, buoyant economic conditions, low unemployment, rising incomes, relaxed credit conditions, higher consumer confidence, consumer expectations) can

SHIFT the DEMAND CURVE to the RIGHT, as shown in the second diagram. 

Assuming SUPPLY cannot be expanded easily or without significant time delays, the result is a

HIGHER EQUILIBRIUM PRICE, or a rise in house prices,  P2

 

SUPPLY SIDE CONSTRAINTS

The supply of housing is the sum of the existing stock plus the level of new construction.

According to a recent report by ANZ, Australia’s housing shortage stands at 250,000 currently, due in large part to the fact that the population projections we thought would take 40 years to reach have been exceeded in the last 16!

https://bluenotes.anz.com/posts/2018/08/The-25-million-person-housing-problem 

 

 

 

 

In a perfectly operating market, supply would simply shift out to the right to meet the excess demand, and all will be in equilibrium again! But we don’t live in a perfect world! The ‘elasticity’ or responsiveness of supply has STRUCTURAL impediments that are hard to change in the short term, including:

LIMITED LAND – remember the definition of resources, they need to be known, accessible and cost-effective. Given most of us ( 67%, expected to reach 70% within a few years) want to live in the metropolitan areas of the capital cities, land releases are LIMITED.

COMPLEXITY of the PLANNING APPROVAL PROCESS – this ties in with the first constraint. The rezoning of land for residential construction is a long-winded and complicated task hamstrung by red tape and bureaucracy.

INFRASTRUCTURE PROVISION – “Investment in economic infrastructure (such as telecommunications and transport networks) and social infrastructure (for example, schools, hospitals and public housing) has a major bearing on the community’s well being” (Commonwealth Government of Australia Parliamentary Research Paper 2014)

Releasing land without the provision of infrastructure is a recipe for disaster both economically (employment opportunities, shops to spend in, transport to get to employment hubs, childcare to make work possible etc.) and socially ( lack of recreation facilities leads to youth crime etc.). Infrastructure is by, and large, ‘big ticket’ items and so given the competing demands on budget resources, opportunity costs and trade-offs, the provision of infrastructure is not easy or unlimited.

INFRASTRUCTURE LEVIES – these are high costs imposed on developers by the government, so they co-contribute to the provision of local infrastructure. Contributions are made per lot for the supply of power and water, kerbing and guttering, street lights, roads, and sometimes upgrading of feeder roads and the installation of traffic lights. Every parcel of land will have built into it a cost component for these co-contributions.