Speaker 1: Tim Lawless, Mate, what a time crazy.
Speaker 2: I think things are moving very quickly and a lot
Speaker 2: of water under the bridge since we spoke a month
Speaker 2: or or two ago.
Speaker 1: Well do we speak after the budget before the budget?
Speaker 2: I think time is moving so quick, ma, I think
Speaker 2: it's before the budget. For me, I think I think
Speaker 2: it's just before the budget, before the budget.
Speaker 1: And so obviously lots happened to the budget. But we
Speaker 1: had another you know, three months of higher interest rates
Speaker 1: since san or a couple months of higher interest rates
Speaker 1: since sand looking at about another one perhaps in August.
Speaker 1: But let me just go back to let's talk about
Speaker 1: the budget. You know, we've had a lot of interesting
Speaker 1: discussions of various people about the budget in terms of
Speaker 1: data as head of research at Totality formerly known as
Speaker 1: core Logic, one of Australias like you know, leading analytical
Speaker 1: organizations when it comes to the property market and other things.
Speaker 1: But let's just talk about the proborty market. Say, what
Speaker 1: is the data telling you about the state of the market.
Speaker 1: Let's say right now post budget? Yeah, so post budget
Speaker 1: the market's clearly weakened. It was weakening pre budget, I
Speaker 1: think is important for the context.
Speaker 3: Yeah, as you.
Speaker 2: Say, higher rates, affordability, serviceability challenges are really low levels
Speaker 2: of consumer confidence, and then the budget. So I think
Speaker 2: the budget really did to amplify the downturn. We're already
Speaker 2: in the fact that the market was already slowing, but
Speaker 2: since we've seen the budget handed down, there's a lot
Speaker 2: of anecdotes. There's very little hard evidence of say, investors
Speaker 2: pulling back and first home buyers on the sidelines, but
Speaker 2: you can speak to anybody in the market and they're
Speaker 2: seeing it. So I think, well, since since the budget
Speaker 2: we've seen housing values the downturn nationally has gathered some momentum.
Speaker 2: We've seen Sydney and Melbourne already moving backwards and values
Speaker 2: Adelaides now falling over a rolling four weekly basis. Brisbane's
Speaker 2: absolutely flat, Perth is seeing about half a percent growth
Speaker 2: month on month. Go back a couple of months ago,
Speaker 2: Perth was rising in value by nearly two percent month
Speaker 2: on months, So everywhere is either slowing down sharply or
Speaker 2: now going backwards in value.
Speaker 1: That's maybe we could unpack it a little bit more
Speaker 1: to teim if you don't mind them. So the point
Speaker 1: you made was an interesting one, a good one that
Speaker 1: pre the budget we'd had three rate rises, but you know,
Speaker 1: we've got interest rates up quite high, relatively speaking, put
Speaker 1: us up to where we were before the rate reductions,
Speaker 1: which was at that point considered to be restrictive interest
Speaker 1: rate environment. You mentioned that we were already starting to
Speaker 1: see a little bit of an effect from those three
Speaker 1: rate rise increases, and I think that's when you and
Speaker 1: I last spoke and you were sort of predicting house
Speaker 1: price changes. In other words, it's always difficult to talk
Speaker 1: about Australia because it covers a lot of territory, but
Speaker 1: you were sort of predicting pretty much a lightning and
Speaker 1: we were saying that then. But what is it that
Speaker 1: the budget This is only hypothetical at this stage, but
Speaker 1: you probably don't have data to back it up. But
Speaker 1: what do you think it is that the budget did
Speaker 1: to make it go faster or have a great effect?
Speaker 3: What is it?
Speaker 2: Yeah, I think that's probably two really important outcomes from
Speaker 2: the budget. The first wine is very direct towards investment.
Speaker 2: Of course, so if you're an investor in Australian housing markets,
Speaker 2: you've generally been attracted to the opportunities for capital gain.
Speaker 2: So that was already because the tax on capital game.
Speaker 3: No, No, just just.
Speaker 1: You were going to make it gain on the body.
Speaker 2: So the point I'm trying to make is yield didn't
Speaker 2: really factor into your decision as an investor.
Speaker 1: Was the rents?
Speaker 2: Yeah, your the balance between your rental payments and or
Speaker 2: your rental income, and you're holding costs getting mortgage, your payments,
Speaker 2: maintenance whatever, strata, insurance, etc. All that sort of stuff.
Speaker 2: So yield was always well for most investors aside thought
Speaker 2: or a secondary or tertiary part of the decision making,
Speaker 2: most investors will be buy for a couple gain. But
Speaker 2: now that we've seen the negative gearing component being removed
Speaker 2: for established homes in the budget, even though it's not
Speaker 2: legislated yet, I think it's virtually the same as I
Speaker 2: think most people accept this is going to get through Parliament,
Speaker 2: it'll be the new rules. Even if it doesn't, it's
Speaker 2: already disrupted confidence. So I think for most investors now,
Speaker 2: if you can't negaly gear an established home, the math
Speaker 2: just doesn't stack up. The holding costs become prohibitive, and
Speaker 2: your serviceability assessments become very hard if you can't include
Speaker 2: a negative gearing rebate. The second part of the budget.
Speaker 2: I think that's been really impactful simply on sentiment on confidence.
Speaker 2: Confidence was already low due to higher inflation due to
Speaker 2: what's happening ran and then the budget was handed down,
Speaker 2: and now there's just increased, almost palpable levels of uncertainty,
Speaker 2: especially with all the backpedaling and the carve outs we're
Speaker 2: starting to see in the federal budget as well. And
Speaker 2: we know that confidence, for how is critical. When confidence
Speaker 2: is low, you generally see less housing turnover. When confidence
Speaker 2: is high, you have a much more, much better ability
Speaker 2: to make high commitment financial decisions. So we're not seeing
Speaker 2: that at the moment.
Speaker 1: So if the budget and the capital gains tax changes
Speaker 1: are geared towards investors in terms of both negative gearing,
Speaker 1: the ability to do negative gearing, and or the attractive
Speaker 1: tax rates you pay on again, the marketplace is assuming
Speaker 1: that there's going to be gained. There's an assumption built
Speaker 1: into buying property buy investors that they'll make a capital gain,
Speaker 1: and that is based on the fact that we don't
Speaker 1: have enough supply relative to the demand, which will actually
Speaker 1: therefore by definition, push prices up. And if those two
Speaker 1: things are directed at investors, what did it in terms
Speaker 1: of impact. What would you normally see in the data
Speaker 1: as maybe contribution in turnover by investors at any at
Speaker 1: any one particular time. So if the market's one hundred,
Speaker 1: is there forty investors for every sixty home unoccupied?
Speaker 3: Is that it works?
Speaker 2: Yeah, so it's pretty much leading into the budget. That's
Speaker 2: exactly the number. It was about forty one percent of
Speaker 2: demand was being driven by investment, which was elevated. Long term,
Speaker 2: you'd expect investors to be about a third of demand,
Speaker 2: about thirty three percent.
Speaker 1: That's the normal long term run rate of investors buying
Speaker 1: property at auctions and private treaty and whatever it is
Speaker 1: cross the market. Yeah, across Australia, Yeah, exactly. Is a
Speaker 1: bigger or bigger or smaller in other state states where
Speaker 1: they were all pretty much the same.
Speaker 2: I know, there's definitely some variability. So national, at least
Speaker 2: the March quarter, that's the most recent numbers, forty one
Speaker 2: percent of demand's coming from investment. If you've got somewhere
Speaker 2: like Victoria that had one of the lowest profiles for investors,
Speaker 2: but it was still thirty seven percent. That's still quite
Speaker 2: but nowhere near as high as New South Wales, which
Speaker 2: was about forty four percent of demand being driven by investment.
Speaker 2: So if you go back to periods where investors have
Speaker 2: pulled back sharply in the market, and the most recent
Speaker 2: evidence of that, the most recent example would be back
Speaker 2: in twenty eighteen twenty nineteen, when we had the Royal
Speaker 2: Commission and APRA had put in a couple of macrovidential
Speaker 2: policies that really restricted investment lending. We saw investors pull
Speaker 2: back to about twenty four percent of demand.
Speaker 1: My guess, APRA being the regulator, told the banks, we
Speaker 1: don't want to lend as much money to investors. Yeah.
Speaker 2: Well, they had firm limits on interest on any lending yep.
Speaker 2: And they had firm limits on investment credit growth ten
Speaker 2: percent and a thirty percent limit on interest on you.
Speaker 1: So the regulator was turning the banks, we don't want
Speaker 1: you to grow your percentage of borrowers who are investors.
Speaker 1: We don't want you to grow above ten percent pronum.
Speaker 2: That's right, right, Yeah, So we saw investors drop back
Speaker 2: to about from about forty six center demand, So that
Speaker 2: was a record high, back to our twenty four percent.
Speaker 2: My guess is post budget, we're going to be seeing
Speaker 2: something similar, maybe even more dramatic. I just think for
Speaker 2: investors investing in Australian real estate, yields are very low.
Speaker 2: So if you're an investor, unless you have a really
Speaker 2: large deposit, chances are you're going to be negatively geared.
Speaker 2: You're going to you're going to be seeing a negative
Speaker 2: cash flow in your property. That's going to make holding
Speaker 2: that that property harder. Without negative gearing.
Speaker 1: Which they used to mind because they could get they
Speaker 1: would get some money back.
Speaker 2: That's right exactly, So that crutch, if you will, is
Speaker 2: no longer going to be available for established homes, and
Speaker 2: you know about eighty percent of investors are buying established homes.
Speaker 2: I don't think there's going to be a huge diversion
Speaker 2: of investment appetite to buy new simply because new housing
Speaker 2: has a price premium, so it's more expensive. The resale
Speaker 2: market could be quite risky because you're going to be
Speaker 2: selling that investment property to another investor that doesn't get
Speaker 2: the same tax treatment as you did buying the new home.
Speaker 2: Plus there's also just probably some risk around supply. New
Speaker 2: house areas like inner city apartments and out of greenfield
Speaker 2: detached housing doesn't have the same scarcity of supply that
Speaker 2: investors tend to love. Really, yeah, there's more of it. Yeah,
Speaker 2: I mean it could be quite bulky levels of supply,
Speaker 2: especially inner city apartments that you know, one new development
Speaker 2: could add another three hundred apartments, yeah, quite quickly. So
Speaker 2: most investors tend to target the established market, which I
Speaker 2: think is now going to be prohibitively costly and difficult
Speaker 2: to hold because of the non benefit from negative gearing.
Speaker 1: So you know, you guys examine data within an inch
Speaker 1: of its life. Maybe I asked, could Tim Lawless for
Speaker 1: us get inside the head of a residential property investor
Speaker 1: from moment?
Speaker 3: Sure?
Speaker 1: So, And these are the people who are dropping off
Speaker 1: thow flies at the moment. Data indicates, you know, from
Speaker 1: forty one percent, don't we don't have another a new
Speaker 1: number doing it well?
Speaker 3: August fourteenth market calendar.
Speaker 2: That's why we actually the Dune quarter lending indicators that
Speaker 2: I can be the best.
Speaker 1: Okay, So I was forty one percent, and I can
Speaker 1: tell you as a lender, we were around that those numbers.
Speaker 1: Forty percent. Around forty percent of our lending was to
Speaker 1: investors and the balances to unoccupiers. I can tell you
Speaker 1: that number of investors has dropped off dramatically in terms
Speaker 1: of applications. Obviously haven't said all yet, but just that apps.
Speaker 1: But put just if I could get asked Tim Laws
Speaker 1: just to put his self into the mind of an
Speaker 1: investor for property, investor says, I would normally be able
Speaker 1: to buy. I would normally go and buy a million
Speaker 1: dollar apartment forg mistake it just pick an easy number.
Speaker 1: I've got twenty percent deposit, I've got two inn a
Speaker 1: grand sitting in the bank. Normally I would go out
Speaker 1: and buy one of these properties. What is investor weighing
Speaker 1: up now? What is he saying to himself or herself
Speaker 1: about whether they should go to the property market or not.
Speaker 1: What are the pros and cons?
Speaker 2: Well, again, I think the first thing that's going to
Speaker 2: be they're going to be thinking about is what's the
Speaker 2: opportunity for capital gain on this million dollar apartment or
Speaker 2: two million dollars apartment, which I think is going to.
Speaker 3: Be uncertain right.
Speaker 1: I think we have uncertainty.
Speaker 2: I think we have uncertainty around the trajectory of capital gains,
Speaker 2: especially in the apartment sector, where you know, there's a
Speaker 2: lot of focus on getting more supply into that sector
Speaker 2: of the market. As hard as it is and as
Speaker 2: difficult it is to get a feasibility to stack up,
Speaker 2: eventually there will be a supply response, probably quite focused
Speaker 2: on density to some extent, just on that.
Speaker 1: Prior to maybe the capital gains tax, there was more certainty.
Speaker 1: Are you saying that? Are they less certain today than
Speaker 1: they were before the couple of gains tax in the
Speaker 1: budget be announced? Yeah?
Speaker 2: I think I think there's there's definitely a greater degree
Speaker 2: of uncertainty in where capple gains are going to be
Speaker 2: going forward, partly because of the uncertainty around what level
Speaker 2: of aggregate demand are investors going to be adding. You know,
Speaker 2: if we're going from forty percent of demand down to
Speaker 2: say twenty percent or less, that's a big drop. That's
Speaker 2: a big drop of aggregate demand.
Speaker 1: There's a twenty percent drop in the title D demand
Speaker 1: and fIF percent drop in the invested demand. Yeah.
Speaker 2: Absolutely, And then there's uncertainty around what the overall supply
Speaker 2: outcomes are going to be over the medium to long term.
Speaker 2: I think short term absolutely, supply is going to remain
Speaker 2: very tight. But ultimately Australia will see a supply response, yeah,
Speaker 2: probably later rather than sooner, I would say the second
Speaker 2: thing is going to be what's a yield on a
Speaker 2: two million dollar apartment. It's probably going to be something
Speaker 2: like percent, yeah, maybe three if you're likely three and
Speaker 2: a half percent gross.
Speaker 1: In other words, the beginning like maybe twelve hundred bucks
Speaker 1: a week.
Speaker 3: Yeah yeah.
Speaker 2: So add to that, you've got your your mortgage or
Speaker 2: payments probably around the mid sixes from mortgage rates. You've
Speaker 2: got strata fees, you've got insurance costs, all of those
Speaker 2: are going up quite swiftly. You've got tendancy reform, which
Speaker 2: means if you're looking for a tenant, you've got to
Speaker 2: probably ensure there's minimum standards, which can be expensive. And
Speaker 2: you've got higher maintenance costs as well, because construction costs
Speaker 2: have gone up, which implies it's costly or to maintained
Speaker 2: strata strata fees. No, this is actually wear and tear.
Speaker 2: If you've got to fix the plumbing, fix the sink, whatever,
Speaker 2: it's a lot more expensive to do that now than
Speaker 2: it was five years ago, simply because the cost of
Speaker 2: trades and materials have gone up so substantially. So if
Speaker 2: you compare that to what might be compared to say,
Speaker 2: a much lower maintenance style of investment like buying into
Speaker 2: a shareport for you or an ETF no maintenance costs,
Speaker 2: no holding costs really whatsoever, apart from if you're leveraged,
Speaker 2: very low transactional fees generally fairly similar long term capital
Speaker 2: gain outcomes.
Speaker 1: Yeah, they have been. I've seen the sharp ratio has
Speaker 1: done for these things, and there's not much difference. The
Speaker 1: sharp ratio is pretty equal relative to the risk.
Speaker 2: That's right for an asset that gives you a fairly
Speaker 2: similar outcome but much lower holding costs, much more liquid,
Speaker 2: so you can buy it and out with very low
Speaker 2: transactional costs as well. So I think a lot of
Speaker 2: investors will.
Speaker 3: Be doing that. Maths.
Speaker 2: Is property going to give me enough return for the
Speaker 2: risk I'm taking.
Speaker 1: In that asset, especially during the period before I sell it,
Speaker 1: because during that period, I am paying all this costs,
Speaker 1: I am paying the interest, I am not getting much
Speaker 1: return in terms of my rents, So I'm actually losing money.
Speaker 1: Like while I'm holding this asset, I'm losing but this
Speaker 1: is one of those few assets when I lose I'm
Speaker 1: not allowed to actually claim a tax production notwithstanding I'm
Speaker 1: losing money. You can, by the way, what most people
Speaker 1: forgotten is you can accumulate that loss so that when
Speaker 1: you do eventually sell it, if you make it be profit,
Speaker 1: you can offset that loss. Then that's down the track.
Speaker 1: So this is going through the mind of a residential
Speaker 1: investment property buyer. I don't know if you have any
Speaker 1: data on this, but is he or she thinking, Yeah,
Speaker 1: for the time being, i might just put the money
Speaker 1: in the bank, or maybe I'll buy some CBA shares
Speaker 1: and I'll get this return on it. It's pretty simple.
Speaker 1: I don't have to do anything, and I'll get again
Speaker 1: on the CBA shares potentially whoever, whichever bank, and I'll
Speaker 1: get a dividend and they're paying pretty good Frank dividends
Speaker 1: at the moment.
Speaker 3: Yeah.
Speaker 2: So there isn't any data on this that I'm aware
Speaker 2: of yet, Mark, So watch this space, though. I think
Speaker 2: once we start to see more of the lending indicators
Speaker 2: flowing through, Unfortunately, these data sets are pretty lagged, so
Speaker 2: you're seeing it on your own books. I'm hearing other
Speaker 2: banks talking about twenty twenty five percent drop in investment
Speaker 2: inquiries as well, so I think it's already happening. And
Speaker 2: once we start to see the data points that'll be
Speaker 2: well down the track and the trend will have gathered momentum.
Speaker 1: Do you think that people are as sophisticated in that
Speaker 1: process as you've just gone through or is it more
Speaker 1: Are they more just listening to people like you talk
Speaker 1: and just saying, you know, like this is all a
Speaker 1: bit high at the moment, just going to take a
Speaker 1: step back and watch what happens.
Speaker 2: Yeah, I think I'll give them them credit where it's due.
Speaker 2: I mean, if you're spending one hundreds of thousand dollars,
Speaker 2: if not millions of dollars to buy an asset being property,
Speaker 2: I think you would be doing your due diligence. Property
Speaker 2: is not a sophisticated investment. I would say, it's not
Speaker 2: like buying into a commercial asset or an industrial asset,
Speaker 2: where you have much more complex least terms and so forth,
Speaker 2: and make goods property is. I don't think you need
Speaker 2: to be a rocket scientist investor to be investing in property,
Speaker 2: But if you are looking to invest in property, there
Speaker 2: are a lot of safeguards around that. And I think
Speaker 2: even if you weren't a sophisticated investor, he didn't go
Speaker 2: through the mathematics. The bank's going to be doing that
Speaker 2: for you.
Speaker 3: When you go to.
Speaker 1: Apply for a loan, they'll tell you what you can
Speaker 1: afford in your can'ty exactly yes. So what seems to
Speaker 1: be not being discussed is around the couple of gains
Speaker 1: potential of buying into a problem into the problem market.
Speaker 1: Is the problems existed here in austraighta for a long
Speaker 1: long time. I can definitely get at least twenty years
Speaker 1: to twenty five years to the two thousand and one
Speaker 1: election of John Howard when he talked about affordability when
Speaker 1: he launched his election campaign, it was affordability was a
Speaker 1: problem then, as a problem now, and it's never been solved.
Speaker 1: In fact, it's been exacerbated over the last few years.
Speaker 1: The supply demand issue, I don't mean investor demand. I'm
Speaker 1: talking about just population growth. The number of properties are
Speaker 1: available for people to live in relative to the number
Speaker 1: of properties that are available that are demanded to.
Speaker 3: Be lived in.
Speaker 1: That generally speaking, there's a mismatch. In other words, we
Speaker 1: have a supply demand problem. People still got to live somewhere.
Speaker 1: It doesn't matter if I buy propertly as an investor,
Speaker 1: I rendered to you because you've got to live somewhere
Speaker 1: you're either going to buy or rent it. That hasn't
Speaker 1: been solved. So what is the prognosis from someone like
Speaker 1: totality for the future, because surely house prices must dwelling
Speaker 1: price must still go up because the demand by population
Speaker 1: growth is still there.
Speaker 2: Yeah, absolutely, this helps to keep a floor under housing prices.
Speaker 2: If we didn't have that disconnect between supply and demand,
Speaker 2: supply being overwhelmed by demand, we probably would have a
Speaker 2: much worse case scenario when it comes to the housing
Speaker 2: correction that we're starting to move through now. So I
Speaker 2: think most most economists thing will probably see a downturn
Speaker 2: at least a macro level around five to ten percent
Speaker 2: across Australian housing house prices.
Speaker 3: Yeah, exactly. If we didn't have.
Speaker 2: An undersupply of homes in Australia almost guarantee they would
Speaker 2: be a much larger number. So I think that that
Speaker 2: under supply absolutely helps to keep a floor under housing
Speaker 2: prices to some extent. But the demand side fundamentals really
Speaker 2: need to be considered here. Absolutely, we have very low
Speaker 2: levels of supply when you look at immediate supply, so
Speaker 2: how many homes actually being advertised or listed for sale
Speaker 2: that's now getting to above average levels. So for people
Speaker 2: looking to buy a home at the moment, not buy
Speaker 2: a new home, but buy an established home in a marketplace,
Speaker 2: there's more listings than what we've seen over the past
Speaker 2: five years on average, in Sydney, in Melbourne, now in Brisbane,
Speaker 2: which is quite different for that market. Perth used to
Speaker 2: have listing numbers about fifty percent below average. Now it's
Speaker 2: about fifteen percent below average and rising quickly. So there's
Speaker 2: more stock to choose.
Speaker 1: From, so white people selling though. That's interesting because most
Speaker 1: of these would be grandfathered under the couple of gas tax.
Speaker 3: Is that right? Absolutely?
Speaker 2: This isn't about investors dumping stock on the market or
Speaker 2: homeowners suddenly becoming vendors. In fact, new listings coming to
Speaker 2: the market are actually quite low, they're below outage. What
Speaker 2: I'm talking about here is your total stock levels, not
Speaker 2: the flow of new listings coming to market. And because
Speaker 2: homes are taking longer to sell, the things that haven't sold, exactly,
Speaker 2: there's an accumulation of stock in the market that's building.
Speaker 1: Up over the last not desperate by sellers, but just
Speaker 1: wanted to sell for some reason.
Speaker 3: That's exactly right.
Speaker 1: So it's accumulating.
Speaker 2: Auction clearance rates are sort of in the low forty
Speaker 2: percent range now, time to sell is rising, Discounting rates are,
Speaker 2: negotiation levels arising as well. It's now a buyer's market
Speaker 2: in quite a few markets now. So definitely we're seeing
Speaker 2: supply from an immediate perspective is now becoming higher demand
Speaker 2: when you think about people's actually ability to buy so
Speaker 2: demonstrated demand. We're now seeing transactional activities a home sales,
Speaker 2: which I think is demonstrated demand. Well, it's how many
Speaker 2: people actually, it's turnover, it's how many people are how
Speaker 2: many people are buying a home. So the number of
Speaker 2: home sales month to month, that's tracking about ten percent
Speaker 2: lower than a year ago now. So we've gone out
Speaker 2: of a market where demand was consistently rising to about
Speaker 2: October November last year, it peaked and it started to fall.
Speaker 2: And again that probably comes down to affordability, inflation rising,
Speaker 2: the RBA becoming a bit more hawkish at the end
Speaker 2: of last year, and then more significantly breaks rising and
Speaker 2: confidence falling. So we do have clear evidence that demand
Speaker 2: is reducing demonstrated demand and supply is rising in terms
Speaker 2: of immediate supply that that whole conversation around we're not
Speaker 2: building enough homes is still really important, but that has
Speaker 2: much more of a medium to long term influence on
Speaker 2: the market rather than the immediacy of demonstrated demand and
Speaker 2: listing them.
Speaker 1: So would you say, then, irrespective what's happening in late today,
Speaker 1: that the property market residential property market is still a
Speaker 1: good investment, then, I mean, put negative gearing aside. But
Speaker 1: it's you know, like it, Let's assume you only borrow
Speaker 1: forty percent fray. We say, well, whatever, you can pretty
Speaker 1: much break even on it on what your cost of
Speaker 1: holding is relative to the rents. Do you think it's
Speaker 1: a good capital gain asset class?
Speaker 2: Personally, I think there's probably better opportunities for capital gain
Speaker 2: outside of property once we start to see yields rising
Speaker 2: and getting to a level like rents rising well, rents rising,
Speaker 2: and of course values are coming down, which means yields
Speaker 2: will will improve. Once that yield dynamic improves enough that
Speaker 2: opportunities for cash flow become more common, at least with
Speaker 2: a with say a twenty percent deposit, I think that's
Speaker 2: where we'll start to see the investment fundamentals starting to
Speaker 2: stack up in property but at the moment, if you
Speaker 2: if you can't, if you can't buy to the housing
Speaker 2: market and offset that cash flow loss through a negative
Speaker 2: gearing strategy, it doesn't make as much sense anymore, especially
Speaker 2: if over the medium term we're not going to be
Speaker 2: seeing capital gains in the marketplace.
Speaker 1: So in other words, I might put it into numbers
Speaker 1: if I could buy a property in six months ago
Speaker 1: from million bucks, and let's say the rent was one
Speaker 1: thousand bucks a week, five percent return, but today, because
Speaker 1: of the there's so much for me to choose from,
Speaker 1: I can go and buy that same property as something
Speaker 1: similar for nine hundred thousand dollars for Reagan mistake, But
Speaker 1: your assumption is that the rent will still be a
Speaker 1: thousand bucks.
Speaker 2: I think rent will rise. I mean, vacancy rates are
Speaker 2: still extraordinarily tied, so rentals be either what it was
Speaker 2: six months ago or higher or higher. So my therefore
Speaker 2: why yield is better absolutely yeah, yeah, which gets me
Speaker 2: closer to breaking even. Yeah, but there's still a huge
Speaker 2: gap between finding a positive cash flow property and where
Speaker 2: yields are at the moment now with interest rates around
Speaker 2: the mid sixes, for an investor, you'd probably need to
Speaker 2: see a gross yield up around seven or eight percent.
Speaker 2: That have to be positive cash flow when you account
Speaker 2: for your mortgagor payments and all your other holding costs.
Speaker 2: The other areas that offer that sort of return in
Speaker 2: Australia tend to be extraordinarily higher risk mining towns for example,
Speaker 2: or some of the inner city apartment markets around Melbourne.
Speaker 2: Carlton is a good example of a very high yielding market,
Speaker 2: mostly because unit values and that area are still lower
Speaker 2: than they were ten years ago.
Speaker 1: Eventually, though, if this continues on, the yields will increase
Speaker 1: as prices reduce, but the rent stay high and or
Speaker 1: go higher. Eventually, this will become quite an attractive asset
Speaker 1: class because invest are going to say, well, I buy
Speaker 1: you a dwelling in wherever, and my yield might be
Speaker 1: six or seven percent. That's right, So which means the
Speaker 1: investors will come back to the market you would expect.
Speaker 2: Yeah, I think that's that's sound logic. The question is
Speaker 2: how long is that?
Speaker 1: I was going to say, I think that's a really
Speaker 1: gradual phenomenon and it's going to take some time. And
Speaker 1: then also equally, the assumption there is that I'm working
Speaker 1: off for a zero increy, so of course of holding
Speaker 1: so but if the interest rates go up, therefore you
Speaker 1: speak you years ago, you've got to go be more
Speaker 1: because I've never got to get a higher rent to
Speaker 1: cover a higher cost, and we might be looking at
Speaker 1: another interest rate rise coming up. Do you think the
Speaker 1: government got it wrong? I mean in terms of timing
Speaker 1: for example. I don't want to talk about policy so
Speaker 1: much with you, but like, do you think the timing
Speaker 1: of the introduction's policy was wrong relative to the property market,
Speaker 1: not relative to the government a relative to the property market.
Speaker 2: Yeah, absolutely, And I mean if you look at something
Speaker 2: really basic, like the government incentivized first home buyers to
Speaker 2: come to the market in October.
Speaker 1: With the five percent double center posit car and terrible
Speaker 1: to it's just so bad.
Speaker 2: Brought a lot of first home buyers in with a
Speaker 2: very small buffer, and then they smashed the market through
Speaker 2: the budget and are almost orchestrating prices to come down
Speaker 2: more so than they would have otherwise. So for a
Speaker 2: lot of those fresh home buyers that came in, absolutely,
Speaker 2: I think a lot of them will be in either
Speaker 2: neutral equity, if not negative equity right now, yeah, right now,
Speaker 2: which to be honest, I don't think that's that big
Speaker 2: a deal unless we had a blowout in labor markets
Speaker 2: or interest rates went up.
Speaker 1: What do you mean by that is if people started
Speaker 1: losing their job, that's right.
Speaker 2: So I think for most of it that's predicted there. Well, yeah,
Speaker 2: I think leader markets are loosening. But if we saw
Speaker 2: unemployment getting up above five percent, I think everybody would
Speaker 2: be quite surprised.
Speaker 1: But I saw the deloitit access is. Recent predictions for
Speaker 1: the labor market is that unemployment could go above five percent.
Speaker 1: I think it's five point one percent, which means if
Speaker 1: any of those people between four point five and five percent,
Speaker 1: which is four point six whatever it is at the
Speaker 1: moment where I think it's four point six. If you
Speaker 1: fit in that category where you're one of the people
Speaker 1: your job and you've got that government guarantee for five
Speaker 1: percent to purchase your property, you only put five percent in,
Speaker 1: and if the property goes down by ten percent and
Speaker 1: you lose your job, you'll give me one of the
Speaker 1: ones who's gonna lose completely lose your five percent deposit
Speaker 1: and guess what the government has to stump up to
Speaker 1: the bank and he lost. Because the government's basically guaranteeing
Speaker 1: the banks that if Tim sells his property and he
Speaker 1: sells a for lesson he bought it for, well lesson,
Speaker 1: you lent him for nine We the government, US taxpayers
Speaker 1: will pay that bill.
Speaker 3: Is that right? Well, that's right.
Speaker 2: A five point one percent unemployment rate is still relatively low. Yeah,
Speaker 2: well in a historical sense, yeah, I think that's the
Speaker 2: ten year average for unemployments about five and a half percent.
Speaker 1: But in their statistical sense, you're right. But if you're
Speaker 1: one of the people who are in that five percent,
Speaker 1: that doesn't make matter to you. You just think, Wow,
Speaker 1: I've lost some money.
Speaker 3: Absolutely, I mean that's where the risk is.
Speaker 2: And this is something that the IBA is highlighted repeatedly,
Speaker 2: is that if you're on a high VR loan, you're
Speaker 2: much more vulnerable to changes in your circumstances or changes
Speaker 2: in the economic environment. And absolutely, for a first home
Speaker 2: buyer with a small deposit, they're in that category. So
Speaker 2: fingers crossed they don't lose their jobs or there's no
Speaker 2: material fallout in the economy. Negative equity only becomes a
Speaker 2: problem if you need to sell the problem. I think
Speaker 2: most first home buyers will navigate the storm and they'll
Speaker 2: pull back hard on discretionary spending and the day with
Speaker 2: their mortgage or payments. That's generally what happens unless there's
Speaker 2: some sort of a shock.
Speaker 3: I mean.
Speaker 1: One of the things that we noticed at our business
Speaker 1: is that for those borrowers who are taking advantage of
Speaker 1: the governor's five percent the guarantee to the banks and
Speaker 1: where you only had to put down five percent deposit,
Speaker 1: which is a great thing if you if you've got
Speaker 1: no capital and you know you can't you can't buy,
Speaker 1: you'll excod for the market because you don't have the
Speaker 1: capital to buy the deposit to buy. We notice that
Speaker 1: that part of the market between seven fifty and one
Speaker 1: point five people were paying overs. It actually made probably
Speaker 1: prices in that category grow at a faster rate than
Speaker 1: any other category in the marketplace.
Speaker 2: Yeah, we've done the same research and since October first,
Speaker 2: even the month prior to that, which I think highlights
Speaker 2: some of the speculative activity, because the expansion was announced
Speaker 2: at the end of August, and then we started to
Speaker 2: see some speculative activity pre October first, and absolutely prices
Speaker 2: in that category below the price caps have been increasing
Speaker 2: a lot faster than prices above the price caps.
Speaker 1: Yeah. In other words, the government's initiative, rightly or wrongly actually,
Speaker 1: which is always a season, always happened. First home uners
Speaker 1: grants did the same thing. I mean during the Howard
Speaker 1: government he doubled the first time monogram back in two
Speaker 1: thousand and one.
Speaker 3: Hindred was.
Speaker 1: All it did was restructure the price of the marketplace
Speaker 1: for the first home owners. That's right, just went straight
Speaker 1: to the price.
Speaker 2: It pushes prices up, does nothing for affordability in the
Speaker 2: long run.
Speaker 1: I thought to myself the other day, let's put myself now,
Speaker 1: put can I put you you in the mind of
Speaker 1: a property owner investor owns a property as an investor,
Speaker 1: in other words, rent it out. He or She's thinking
Speaker 1: to himself herself, I've got a good property here, because
Speaker 1: attached to it is not only a home, not only
Speaker 1: a loan from the bank, which are hard to get
Speaker 1: under the current assessment provisions. Because I, you know, I
Speaker 1: might have I might be the investor I might have
Speaker 1: got assessed three inches strate rises ago. I might not
Speaker 1: get that amount of money today one two that property
Speaker 1: because I've bought prior to the Caupal Gains tax announcement
Speaker 1: that the capra gaan on that will only be taxed
Speaker 1: if only fifty percent of that's going to be taxed.
Speaker 1: Do you think in the minds of those investors that
Speaker 1: they might be saying, well, why would ever sell? Because
Speaker 1: if I sell them, I'm just going to replace with
Speaker 1: some other asset. The new asset of buy is going
Speaker 1: to be taxed at the new couple of games tax
Speaker 1: and regime much higher. Do you think people are going
Speaker 1: to say, I'm not going to sell.
Speaker 3: Of course they will. Yeah.
Speaker 2: I think you'll see a lot of existing investors pre
Speaker 2: budget are going to hold onto their property.
Speaker 1: Because it's valuable. It's much more valuable all of a sudden.
Speaker 3: Yeah, is that right?
Speaker 1: Omro just making this crap up?
Speaker 3: They get no.
Speaker 1: I know, well the mentality, but.
Speaker 2: The couple of game side of things is really important, right, So,
Speaker 2: especially for an investor's been in the market for a while,
Speaker 2: obviously gets pro rated. So after July first, it goes
Speaker 2: back to twenty twenty seven. Yeah, CPI indexation. But if
Speaker 2: most of your capital gain happened prior to that, absolutely
Speaker 2: you're definitely sitting in a very good position. And if
Speaker 2: you're still negatively gearing a lot of investors that they
Speaker 2: don't need a negative gear after probably five.
Speaker 1: Yeah, that's right, that's a good point. By way, tim
Speaker 1: most negatively geared properties start to positively gear after five years.
Speaker 1: They're not these so called billionaires aren't getting needy gearing
Speaker 1: for thirty forty years. It's for the first five year
Speaker 1: years that the rents are not enough to cover the
Speaker 1: interest rate, the interest payments and all the other costs.
Speaker 3: That's right.
Speaker 2: They might have prayed down some of their principle by then.
Speaker 1: Well they're generally speaking, you have because principal amortizers probably
Speaker 1: after about year three or four star sermitized after which
Speaker 1: means you interest being charged on the principle is lower.
Speaker 1: Therefore you're you're not so negative as the year. But yeah,
Speaker 1: so have we created a has the government created a
Speaker 1: new asset class of property that's more valuable to some
Speaker 1: investors than for them to sell that property, which which
Speaker 1: is what the government's probably hoping they do. They're hoping
Speaker 1: they put things on the market. Do you think we've
Speaker 1: they've created this asset class ques special So it's.
Speaker 2: Going to be very i think prolific and established. Entering
Speaker 2: the middle ring suburbs right where there's been a lot
Speaker 2: of investors. That's generally where they've got the best couple
Speaker 2: of gains. That's where investor concentration.
Speaker 1: What does it mean interering out?
Speaker 2: Yeah, okay, so in most of the capital cities, you're
Speaker 2: established markets where there's not a lot of land to
Speaker 2: be built, for example, so they're real scarce supply levels.
Speaker 2: That tends to be within ten kilometers of the CBD
Speaker 2: with the major capitals.
Speaker 1: And that's where are you saying, Tim, that's who in
Speaker 1: more sophisticated, whether or just generally they tend to invest
Speaker 1: in those areas.
Speaker 2: Absolutely, because that's generally where capital gains have been the strongest.
Speaker 2: So you'll find those investors going to be holding on
Speaker 2: for longer, which in itself implies those inner city and
Speaker 2: sort of middle ring property markets are probably going to
Speaker 2: be the ones that suffer the most from a lack
Speaker 2: of rental supply as well. If you don't see a
Speaker 2: refreshment or an inflow of new investment or new rental
Speaker 2: properties becoming available because you can't get the negative gearing benefits,
Speaker 2: most investors who are going to be active in property
Speaker 2: will probably be going out of fringe or inner city
Speaker 2: where new housing supply gets those tax benefits. So we
Speaker 2: might be creating a market here where rental markets remain
Speaker 2: extremely tight. In those more desirable inner city and established suburbs,
Speaker 2: whereas you're out of fringes, might have higher investor concentrations,
Speaker 2: delivering more rental supply, but also competing with the markets
Speaker 2: that the government's trying to insulate here first home buyers.
Speaker 2: So if we see the more competitive friction between investors
Speaker 2: and first home buyers in greenfield housing estates so new
Speaker 2: where all the new houses are being built on the
Speaker 2: outer fringes of Capital City or in the inner city
Speaker 2: apartment markets, that kind of flies in the face of
Speaker 2: giving first home buyers a leg up anyway, because you
Speaker 2: might just be concentrating investor demands into those markets.
Speaker 1: So recently I heard the Prime Minister in Parliament I
Speaker 1: know it's not that many people listen to this boring stuff,
Speaker 1: but I do, and saying that there's been an increase
Speaker 1: in first time buyers as a result of the capital
Speaker 1: gains tax proposed legislation. Is there data to support that
Speaker 1: or is that a little bit cute in that there's
Speaker 1: more as a percentage of the title, there's less investors.
Speaker 1: Therefore there's more first time buyers or more unoccupied What
Speaker 1: is the data showing? There isn't any data on this yet, right,
Speaker 1: So where would you have got that of information.
Speaker 3: You'll have to ask the Prime Minister Mark, he probably
Speaker 3: won't talk to me. But anyway, Yeah, I'm hearing.
Speaker 2: Exactly the opposite, that both investors and first home buyers
Speaker 2: and subsequent buyers are holding back simply due to the
Speaker 2: own first.
Speaker 1: Time buyers too, absolutely, yeah, and unoccupies and occupied But
Speaker 1: why why why? I understand the mind what you took
Speaker 1: me into the mind of the investor. I understand that part.
Speaker 1: What about first home buyers or unoccupies? What's going through
Speaker 1: their head?
Speaker 2: Well, I think partly it's uncertainty, lack of confidence. Nobody
Speaker 2: wants to buy into a marketplace and spend your life
Speaker 2: savings and suddenly find that assets worth less than what
Speaker 2: it was a day ago.
Speaker 1: So being clever, they're thinking, I might be able to
Speaker 1: maybe the time in the market, I'm timing the market.
Speaker 2: Yeah, I might be able to. It might get cheaper, yeah,
Speaker 2: But I think, what's this space. I think once we
Speaker 2: start to see some confidence coming back to the marketplace,
Speaker 2: that inflation has maintained that interest rate cuts or imminent,
Speaker 2: probably coming into next year sometime now. I think that's
Speaker 2: when we'll start to see a lot more first home
Speaker 2: buyers becoming active, taking advantage of the fact that prices
Speaker 2: have dropped, the affordability is improved to some extent, there's
Speaker 2: more stock to choose from. So yeah, absolutely, I think
Speaker 2: there is a turning point here, and it probably comes
Speaker 2: back to when we start to see more confidence returning
Speaker 2: to the economy of the market. But there is a
Speaker 2: silver lighting, I think, and that silver alighting is that
Speaker 2: first home buyers probably will be in a much better
Speaker 2: position to buy once the dust settles.
Speaker 1: What happens if at the same time as these first
Speaker 1: home owners and owner occupiers are starting to become more
Speaker 1: confident that that now is a time to pounce, which states,
Speaker 1: you know, mid next year for example, just by of example,
Speaker 1: they and they now think that the interist rates are
Speaker 1: pretty much leveled out, So that's one of the reasons
Speaker 1: they're thinking it's time to get in. What happens if
Speaker 1: around the same time, though, the investors start to think
Speaker 1: to themselves, you know what, the yields are much better
Speaker 1: because you know, the prices have come down, the rents
Speaker 1: are still the same or probably gone up. My return
Speaker 1: is now six and a half percent. Like we talked
Speaker 1: about before, that hypothesis from before, the investors jump back
Speaker 1: in the market and we start to get first home owners,
Speaker 1: unoccupier's now competing with investors again. Do you think that
Speaker 1: the house prices automatically go up because I've rarely seen
Speaker 1: in Australia, and I've been through so many cycles, rarely
Speaker 1: seeing Australia house prices stay low for very long. Yeah,
Speaker 1: eighty months maybe max exactly.
Speaker 2: Yeah, So whether or not it's the same. So typically
Speaker 2: we see a pretty much a V shaped recovery in
Speaker 2: Australian housing markets.
Speaker 1: So it goes down yep, and then it goes up.
Speaker 2: Goes up and about the same amount of time.
Speaker 3: Right.
Speaker 2: Sometimes it's a bit more of a use shape, but
Speaker 2: typically it's fairly V shaped recovery. I'm not sure that'll
Speaker 2: be the same trajectory this time around, because I don't
Speaker 2: think we'll see a significant bounce back in investment demand
Speaker 2: coming back into the Australian market unless here's another speculative
Speaker 2: one mark if we see a change of them in
Speaker 2: two years or twenty twenty eight.
Speaker 1: Want to wait there.
Speaker 2: Well, for the first half of twenty twenty eight, I
Speaker 2: think is probably when we'll see another election, and what
Speaker 2: if we see a change of government and some of
Speaker 2: these rules get wound back. I mean, that's that's deeply speculative,
Speaker 2: and maybe that's not even a good thing because it
Speaker 2: just adds to the un I mean, you can't have
Speaker 2: a playing field that's swapping and changing.
Speaker 1: But they will, You're right to if Liberal and Nationals,
Speaker 1: because they're already committed to that, they'll wind this stuff back.
Speaker 1: That's not good either. No, it's too many variations, it's
Speaker 1: too volatile.
Speaker 2: Yeah, so absolutely, I do think when interest rates come down,
Speaker 2: or maybe even when interest when inflation is tamed and
Speaker 2: it's clear that interest rates are about to come down,
Speaker 2: I think that's when we'll see the market at the
Speaker 2: very least flattening out, if not moving back into some
Speaker 2: level of growth. So that's probably coming into the second
Speaker 2: half of twenty twenty seven, right, So that's when most
Speaker 2: think we'll probably see interest rates starting to come down,
Speaker 2: and that's when we'll probably see the housing markets stabilize,
Speaker 2: probably move into some level of growth. But there's a
Speaker 2: lot to think that level of growth there's going to
Speaker 2: be a lot milder than what we've seen through previous
Speaker 2: periods of recovery.
Speaker 1: How much has the last five years been way out
Speaker 1: of the box in terms of growth.
Speaker 2: Yeah, substantially. It's not unprecedented, but it is quite extraordinary.
Speaker 2: The last time we saw a five year growth rate
Speaker 2: this strong, you'd go back to the early two thousands,
Speaker 2: So the two thousand and one to two thousand and
Speaker 2: four the market, yes, showing very similar conditions for similar
Speaker 2: reasons as well. You know, rates were generally low, not
Speaker 2: as low as what they were through the pandemic, but
Speaker 2: there was very strong rates of population growth. As you mentioned,
Speaker 2: the first home buyer grant had become available. It was
Speaker 2: a lot of first home buyers active as well. But
Speaker 2: some markets, I mean five years has been extreme in
Speaker 2: its diversity as well. Melbourne in five years housing values
Speaker 2: are up one percent percent.
Speaker 1: Someone said that back to twenty fourteen levels or something.
Speaker 3: It's not that something bad.
Speaker 2: If we saw a ten percent drop in Melbourne housing
Speaker 2: values now, they'd be back to about twenty nineteen levels.
Speaker 2: Because vellies did rise pretty decently through twenty twenty before
Speaker 2: there was so much disruption from Lockdown to Melbourne. But
Speaker 2: then go to the other end of the book. Okay,
Speaker 2: so the other book end is Perth. We're in five years,
Speaker 2: the market's up about ninety percent. Well, so you've got
Speaker 2: Melbourne at one ninety ninety five years. But remember prior
Speaker 2: to that five year period, Perth was navigating the post
Speaker 2: mining poom downturn. So it's off a very low base.
Speaker 2: So there are some extremes that are influencing the numbers here. Nationally,
Speaker 2: if you look at a really macro level of growth,
Speaker 2: the market's up a bit over thirty percent in five years,
Speaker 2: which still is a pretty strong outcome.
Speaker 1: Do you think therefore has embedded into our investor brain
Speaker 1: that this property increase, these types of increase have been
Speaker 1: considered to be the norm and therefore, and whilst we're
Speaker 1: not really in for a shock, we're what we're really
Speaker 1: going to do is just see things to go back
Speaker 1: to more normalize growth pattern relative to property as opposed
Speaker 1: to this what we all thought might be normalized. This
Speaker 1: ninety percent in Perth, but you know, thirty forty percent
Speaker 1: in other places growth I mean, in other words, there
Speaker 1: have been extraordinary periods for extraordinary reasons and that we
Speaker 1: should not have expectations like that anymore.
Speaker 2: Well, absolutely, I think investors need to be realistic. The
Speaker 2: last five years has been extraordinary. You know, a typical
Speaker 2: average rate of growth over a long period of time,
Speaker 2: it's probably more like around five percent to seven percent
Speaker 2: per annum, right, sustainable, a sustainable rate of growth, and
Speaker 2: it's cyclical, So I mean everyone's already forgotten. Between the
Speaker 2: middle of twenty twenty two and early twenty twenty three,
Speaker 2: the housing market went through a really short and sharp correction.
Speaker 2: Sydney home values fell about twelve percent, Melbourne was down
Speaker 2: about nine percent, Briston was down about nine percent in
Speaker 2: that really short space of time. So to think we
Speaker 2: might be heading into let's say, a ten percent correction
Speaker 2: against that context of extreme growth doesn't sound too extraordinary
Speaker 2: to me.
Speaker 1: I think you probably heard him, but Chris Joy, who
Speaker 1: was on the podcast last week, said he thinks, and
Speaker 1: you sort of touched on this yourself as well, that
Speaker 1: this could be a different downturn to we've experienced in
Speaker 1: the past. But he sees our current inflation, which is
Speaker 1: he believes causes the downturn and property prices, but our
Speaker 1: current inflation period and the taming of that inflation by
Speaker 1: a reserve bank with higher interest rates. As currently, this
Speaker 1: will be something that we've never seen before, unprecedented. In
Speaker 1: other words, it will last a lot longer than we've
Speaker 1: ever seen in the past. We talked about eighty months,
Speaker 1: but this is going to last a lot longer, and
Speaker 1: he talking about twenty eight and maybe even beyond. Does
Speaker 1: fatality look at the future of interest rates and what
Speaker 1: are you guys thinking about that? Yeah?
Speaker 2: So, frankly, no, we don't. We're not macroeconomists. We don't
Speaker 2: have a macroeconomic model that forecasts interest rates or inflation.
Speaker 2: Will leave it up to the extraordinarily smart people like
Speaker 2: Chris Joy. But I do tend to agree with Chris
Speaker 2: that we probably are in a period that's going to
Speaker 2: be quite different, not necessarily just because inflation might be
Speaker 2: higher for longer, interest rates might be higher for longer.
Speaker 2: This downturn is multifaceted. Normally, when the market moves through
Speaker 2: a downturn, it's through a singularity like interest rates rising,
Speaker 2: or a credit tightening period, or a shock like the GFC.
Speaker 2: This period we're moving into now has record levels of unaffordability,
Speaker 2: high interest rates, deeply pessimistic levels of confidence, which will
Speaker 2: gradually change now that the strait of Horme moves is open,
Speaker 2: but already seeing a little bit of a lifting confidence
Speaker 2: but from very low levels, and a structural change in
Speaker 2: taxation policy as well. All these things I think are
Speaker 2: adding to the headwinds for housing markets that in many
Speaker 2: ways are unprecedented that we'd have this array of this
Speaker 2: diversity of negative factors influencing the market. But we still
Speaker 2: have some positives in the sense that, as we say
Speaker 2: talked about, supply levels are really low, demand from population
Speaker 2: growth is still quite strong as well. These are the
Speaker 2: factors I think that will probably stave off a more
Speaker 2: material correction.
Speaker 1: Does toutality currently take the view that there are places
Speaker 1: in Australia regions or suburbs or cities that will outperform
Speaker 1: the rest of the country.
Speaker 2: Yeah, there's always going to be I think a fairly
Speaker 2: diverse tapestry of outcomes. For example, I think if I
Speaker 2: think around the capital cities, in my mind, Melbourne is
Speaker 2: probably the best place market to outperform over the medium
Speaker 2: to long term. And the reason I say that, even
Speaker 2: though it's probably a little bit counterintuitive because that market's
Speaker 2: been extraordinarily weak. That's part of the reason why it
Speaker 2: is very affordable. You're took amount into the yields. No, no, well,
Speaker 2: yields are higher in Melbourne, but they're they're not stand out.
Speaker 2: The sort of still sub four percent grows at least
Speaker 2: on average. I'm talking about opportunities for capital game, right,
Speaker 2: So if you're buying into the Melbourne marketplace, you know,
Speaker 2: we haven't seen Sydney Melbourne part and prices we talked
Speaker 2: about last time it chatted since forever.
Speaker 3: The gap is the widest we've seen because.
Speaker 1: They are aways sort of pretty close. Weren't they in
Speaker 1: terms of price.
Speaker 2: Simply maybe a fifteen percent difference less than that now
Speaker 2: now it's about fifty five no difference. Really Yeah, it's extraordinary.
Speaker 3: Wow.
Speaker 2: I think that affordability of advantage from Melbourne really stands
Speaker 2: out for me. For Austory's second largest city, for an
Speaker 2: economic you know, a diverse economics state with arguably strong
Speaker 2: fundamentals over the meeting to long term, that market looks
Speaker 2: quite affordable.
Speaker 1: Can you get tenants down there? Can you get me?
Speaker 1: Is a population sort of allow you to get tenants in?
Speaker 2: Melbourne's got one of the fastest rates of population growth.
Speaker 2: That's mostly driven by overseas migration, which tend to be
Speaker 2: mostly short term visas, so it's students and absolutely that
Speaker 2: the rental market's very strong. Vacancies are still sub two percent.
Speaker 2: The capital gain story, though, has been very weak over
Speaker 2: a long time. Let me talked about it for five
Speaker 2: is one percent. So I think that's probably the civil
Speaker 2: lining of Melbourn's underperformance is it's very cheap, It's probably
Speaker 2: going to rise off a very low base, and there
Speaker 2: needs to be some equilibrium between Sydney and Melbourne in
Speaker 2: terms of their prices. So partly that's going to be
Speaker 2: corrected by Sydney values moving through a downturn. Melbourne is
Speaker 2: as well, but probably has stronger upside potential regional markets
Speaker 2: as well. I still think some of the commutable regional
Speaker 2: markets around the country are I wouldn't say undervalued, but
Speaker 2: still relatively good value.
Speaker 1: So what's that meaning commutable?
Speaker 3: How far?
Speaker 2: What are we talking about within two hours driving distance driving?
Speaker 2: So Gosford, for example, in Sydney other central Coast and
Speaker 2: Sydney is a great example of that, or even Newcastle
Speaker 2: but further a bit further out for around Melbourne, it's
Speaker 2: getting out to Geelong or Ballarat, those sort of markets.
Speaker 2: In Queensland it's Toomba, the Gold Coast, the Sunshine Coast.
Speaker 3: So those satellite.
Speaker 2: Cities which are commutable, they've got a liveability advantage in
Speaker 2: some ways.
Speaker 3: I think.
Speaker 2: Given I think we've seen the structural change in how
Speaker 2: people work that we can see remote working going, you know,
Speaker 2: it's probably something that's here to stay. Those markets are
Speaker 2: suddenly a lot more popular with a broader base of demand.
Speaker 1: What about Canberra and Darwin?
Speaker 3: Good question.
Speaker 2: Darwin is definitely very volatile, fickle market. It tends to
Speaker 2: move on the back of big infrastructure projects and any
Speaker 2: sort of capital investment that's going in. So yeah, at
Speaker 2: the moment it's a market. It's very resilient. We're not
Speaker 2: seeing the same sort of weakness in Darwin as we're
Speaker 2: seeing in most other markets. But then again it's it's
Speaker 2: extraordinarily affordable. It's got the highest yields. We talked about
Speaker 2: opportunities for positive cash flow. Darwin's got a gross yield
Speaker 2: that's up around six percent, well way higher than any
Speaker 2: other capital city.
Speaker 1: Is it because of supply problems or is it because
Speaker 1: people just pay that because it's you know, it's Darwin.
Speaker 2: I think it's mostly because it went through such a
Speaker 2: long running downturn. The prices are very low.
Speaker 1: So that's again that that's your thesis, like if the
Speaker 1: price is low and stay the same, will go up
Speaker 1: You're yielding.
Speaker 2: Green is looking pretty good, but for a lot of
Speaker 2: investors that's not attractive enough because they don't see the
Speaker 2: I suppose the certainty of capital gain.
Speaker 3: To the market.
Speaker 2: Like Darwin, Camera is kind of similar in the sense
Speaker 2: that that market has been a fairly consistent performer, but
Speaker 2: there's a real difference between the apartment market and Camebra,
Speaker 2: which is severely oversupplied versus houses, and houses have been
Speaker 2: quite strong buying to the Camera. Unit market has been
Speaker 2: a very poor investment. Generally, Uni values have been holding
Speaker 2: flat to going backwards for.
Speaker 1: Some time now, but it has very low vacancy rate.
Speaker 2: Though Camera, well, the vacancy rate is still quite low,
Speaker 2: but that doesn't seem to be supporting a strong rate
Speaker 2: of capital growth, especially in the apartment sector where there's
Speaker 2: still a lot of apartments being built as well. So
Speaker 2: it's a great testament to build more supply and you'll
Speaker 2: definitely keep a lid on housing prices and ensure some
Speaker 2: level of affordability. And that's the other thing with Cambra.
Speaker 2: It's a very affordable market given incomes tend to be
Speaker 2: quite high as well.
Speaker 1: Yeah they do, and there's lots of doubling comes down
Speaker 1: there too, and they're got jobs which are usually not
Speaker 1: at risk because they're usually government jobs. Basically most of
Speaker 1: them are. Let's just look at a place like Sydney,
Speaker 1: and I quite like what you said before. It would
Speaker 1: seem to be those suburbs within Sydney that are within
Speaker 1: the two rings of the CBD. I think you said
Speaker 1: how many commuters ten combat.
Speaker 2: About ten kilometers, But yeah, the rule of thumb is
Speaker 2: is tanklomitters. Sydney being such a large metro, you can
Speaker 2: probably go out a bit further than that to describe
Speaker 2: that's sort of inter city boundary.
Speaker 1: So that seems to have a prognosis wise, it seems
Speaker 1: to have a good outlook for the future.
Speaker 3: I would assume.
Speaker 2: So don't get me wrong, it's it is chronically unaffordable.
Speaker 2: So still it's still very very expensive markets. And these
Speaker 2: are some of the weakest markets in Sydney as well.
Speaker 2: These very expensive markets, but I think that's more cyclical
Speaker 2: than the long term.
Speaker 1: When you say weakest market, what do you mean, Well.
Speaker 2: It's some of those markets that are quite affluent. Eastern
Speaker 2: suburbs a great example, or the lower north Shore or
Speaker 2: getting into the Northern Beaches. These are markets where values
Speaker 2: are falling at the most rapid rate at the moment.
Speaker 2: In Sydney, these are blue chip areas, but they do
Speaker 2: tend to be a little bit more volatile. So I
Speaker 2: think once we start to see the market turning around,
Speaker 2: Truak or the eastern suburbs in Melbourne is another really
Speaker 2: good example of quite weak markets at the moment.
Speaker 1: Are you seeing significant price reductions there?
Speaker 2: Some markets around those, these really high high end blue
Speaker 2: chip markets are down more than ten percent already.
Speaker 1: Absolutely Wow, what does coatalities? So sitting here today because
Speaker 1: we know we sat here pre budget, but sitting here
Speaker 1: today has totality change its future outlook for Australia. I
Speaker 1: think you I think by a regulation you said something
Speaker 1: like overall you Sydney, Melbourne, you were looking at a
Speaker 1: ten percent downturn by the end of this col under year,
Speaker 1: and you were saying place like Brisbane. I think think
Speaker 1: my memory serves me correctly six percent of a few
Speaker 1: of the others were a little less, but the bigger
Speaker 1: markets were ten percent.
Speaker 2: Are you still seeing that? Yeah, I think they might
Speaker 2: have been piked a trough on those numbers, but yeah,
Speaker 2: it's probably worse than a little bit since work since
Speaker 2: we've spoken and the budget was handed down, so not significantly.
Speaker 2: I still think, you know, overall, you know a macro
Speaker 2: view of about a ten percent drop in housing prices,
Speaker 2: given the context of the strength of the upswing and
Speaker 2: how much equity people hold in their homes. If you've
Speaker 2: got a Brisbane and you see housing prices four by
Speaker 2: ten percent, you're getting back to levels we've last seen
Speaker 2: in September last year. It's not that that larger falls
Speaker 2: in the past of the upswing, But if you see
Speaker 2: a ten percent fall in Melbourne values from the current level,
Speaker 2: you're getting back to twenty nineteen. That's significant, which is significant.
Speaker 2: So yeah, I think, you know, if you put a
Speaker 2: lending lens on this, or a risk lens, there are
Speaker 2: definitely some markets that if they do go through a
Speaker 2: more meaningful correction, there is going to be much more
Speaker 2: widespread levels of negative equity. The RBA estimates negative equidy
Speaker 2: in Australia is less than one percent, but obviously it's
Speaker 2: prices fall. Clearly we will see more prevalent of negative
Speaker 2: equity and probably pick up in areas numbers as well.
Speaker 1: I know you don't do the macro economics in terms
Speaker 1: of you know, looking at geo political stuff and all
Speaker 1: those other things, but at totality. But have you guys
Speaker 1: got a view on what to expect in New Yorgu's
Speaker 1: meeting for the RBA. Yeah, mate, it's I mean, compares
Speaker 1: to why the numbers come out in the end of July.
Speaker 2: But yeah, everyone's watching inflation. Obviously we see another uptick
Speaker 2: in the core inflation numbers like we saw through the
Speaker 2: main numbers, then yeah, I think it's game one for
Speaker 2: another twenty five basis point hike. I'm definitely not in
Speaker 2: the camp of two more rate hikes. I think one
Speaker 2: more and we're done, hopefully. But that doesn't mean we're
Speaker 2: about to see rate cuts.
Speaker 3: I think. Yeah.
Speaker 2: I think the second half of next year is when
Speaker 2: we'll see finally core inflation getting back to where the
Speaker 2: RBA wants it to be, and that'll be the trigger
Speaker 2: for rates coming down.
Speaker 1: There's a lot of stuff being published. I mean you see,
Speaker 1: you would have seen the Deroit deloid accesses on economic Update.
Speaker 1: You look at you read all the commentaries, you produce
Speaker 1: your own commentaries, you produce your own data and analysis.
Speaker 1: Has it do at any stage the government ring you up?
Speaker 1: The federal government say Tim, could you come down to
Speaker 1: Canberra and we'd like to sit down with you and
Speaker 1: talk to you about what you guys are seeing.
Speaker 2: Yeah, I think to the credit the governments are very
Speaker 2: open to speaking with the private sector with the marketplace.
Speaker 2: So absolutely we do provide briefings to different departments within
Speaker 2: the government.
Speaker 1: What about the elected officials like.
Speaker 2: I won't go there delve into that, but yeah, I
Speaker 2: think with say Treasury, with IBA, with Human Services. I
Speaker 2: mean a lot of these government departments are also clients
Speaker 2: of toatality as well. And with any of our clients,
Speaker 2: absolutely we do try to make sure that they're informed
Speaker 2: in the market trends and the sort of insights that
Speaker 2: we're producing and how it influences their decision making.
Speaker 1: You must be sitting back thinking, well, we're in this
Speaker 1: massive to a directory about before Christmas last year, right
Speaker 1: up into February. House prices continue on in my case,
Speaker 1: loans loan levels being at record levels, lending being at
Speaker 1: record levels, house prices continuing on the lack of supply
Speaker 1: relatives to demand, population growth going crazy increasing. What do
Speaker 1: you think sitting here today, Given like it's only like
Speaker 1: six months, not even six months, the change has been dramatic, It's.
Speaker 2: Been fast, and I think the complexity in the market
Speaker 2: is very different to what we're used to seeing. Like
Speaker 2: I said that, there's a lot of headwinds at play
Speaker 2: at the moment, but yeah, things are changing very quickly.
Speaker 2: And I think the fact that there's been so much
Speaker 2: curiosity about the impact of the federal budget at a
Speaker 2: time when we're not really seeing firm evidence yet of
Speaker 2: how much investors are pulled back, it just highlights how
Speaker 2: uncertain people are about changes in policy and how it's
Speaker 2: influencing the housing sector. And the reason for that is
Speaker 2: we have the vast majority of households have their wealth
Speaker 2: in housing. Yeah, it's about fifty five percent of Australian
Speaker 2: wealth is in the housing asset class, and it's about
Speaker 2: seventy five percent of our household debt is in housing
Speaker 2: as well. So that's why we see so much fascination
Speaker 2: with housing trends.
Speaker 1: I don't even use the words kiddishness, you know, and
Speaker 1: you know like I see a bit of I see
Speaker 1: a bit of politically insensitivity to what is and actually
Speaker 1: what is actually an economic outcome as opposed to just
Speaker 1: a political outcome.
Speaker 3: I see.
Speaker 1: I don't think government's treasury. I'm mean the Treasurer, but
Speaker 1: treasury who advised the Treasurer as having made or pulled
Speaker 1: the right lever in terms of perhaps timing, I mean
Speaker 1: apart factor that my person view TV they should have
Speaker 1: gone to an election with it, But just take that
Speaker 1: out for a second. If they were going to introduce it,
Speaker 1: they should introduce it next to you, and everything settled
Speaker 1: down a little bit. I just think the timing of
Speaker 1: this whole program, probably also the way they announced it,
Speaker 1: because there's been so many changes to it. I can't
Speaker 1: keep up on't about you. I'm confused. What's example, what's
Speaker 1: not exempt? You know, commercial properties, exampt superinnovation funds have changed.
Speaker 1: It's a bit of a nightmare.
Speaker 2: Yeah, I think Sidley, the amount of carve outs in
Speaker 2: the backpedaling we've seen since the budget was handed down
Speaker 2: highlights this wasn't thought out well enough that the decision
Speaker 2: makers didn't go through all the scenarios to think, well,
Speaker 2: what are the unintended consequences here? Yeah, I think for
Speaker 2: your federal budget, we should have seen a lot more
Speaker 2: strategic forethought going into it.
Speaker 1: Yeah, it seems like it was politically time to do it,
Speaker 1: but maybe not economically sensitively, sensitively analyzed.
Speaker 3: Yeah, that's right enough.
Speaker 1: Well, Tim, things very much as usual, made for your
Speaker 1: great insights and the insights of cautality. Appreciate it. I
Speaker 1: think that you're the way you've unpicked the brain of
Speaker 1: an investor is really important for those people who are
Speaker 1: thinking about becoming investor or being an investor or are
Speaker 1: an investor. That's really important around the uncertainty, but also
Speaker 1: just around the changes and yield and the timing. I
Speaker 1: actually I've never really thought it through, but the increase
Speaker 1: in yield as a result of the rent staying the
Speaker 1: same or going up and the price going down could
Speaker 1: well be the catalyst to bring people back into the
Speaker 1: marketplace at some stage. But that's going to be but
Speaker 1: that relies on a reduction in price, and it's going
Speaker 1: to be a gradual phenomenon. It's something happens. Tim Lawyls,
Speaker 1: thanks for much any thanks Mat