API Blog :: Have your say!

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Podcast Transcript

Welcome to the monthly podcast of Australian Property Investor, Australia’s most trusted and widely read property investment magazine. For information on how to subscribe to either our print or online magazine, as well as other great investing property information, please visit our website, www.apimagazine.com.au.

Lauren: Hi listeners and welcome to this month’s podcast. I’m Lauren Day, journalist with API and this month I’m speaking with property millionaire and author Jan Somers.

Today we’re going to discuss what you should do if you’ve bought a lemon.

Hi Jan, and welcome.

Jan: Hi Lauren, how are you?

Lauren: Good how are you?

Jan: Good.

Lauren: That’s good. Now, you’ve always believed in holding property, never selling. Why is that the case?

Jan: Well, a long time ago, probably 30 or 40 years ago, I decided I really wasn’t a trader or a speculator. I got burnt on a few, not quite burnt, but didn’t make a lot of money out of a couple of attempts and there were too many ‘ifs’ involved. Too much depends on the market timing, when to buy, when to sell, and so I just thought ‘do what you do do best, go teaching, do something else and hold onto your properties. Let it look after itself.’

Lauren: And you’ve always been happy with that decision?

Jan: It’s been a very reliable formula is the best word.

Lauren: I guess the thing is though, a lot of people in the Gen Y generation have bought a property in say 2007, 2008. Since then, it hasn’t had much growth in some areas, not all cities obviously, and that could be costing money to hold. So what I wanted to put forward was, is it actually worth keeping, if you think you’ve bought something five years ago and it hasn’t performed.

Jan: Okay, five years in the scheme of things is really too short a time to make that kind of decision. You need to make a whole list of what could happen, what might happen, what’s gone wrong, etc etc. But really, the decision should be made after a minimum, absolute minimum, of 10 years and preferably 20 years. I think Gen Y and all the rest of it, Gen X, is really not patient enough to see the long-term effects and to even be prepared to wait that long to see the effects.

Lauren: So even if you bought five years ago, it had gone down, would you just say, it’s still too early, don’t worry about it?

Jan: It’s still too early. It’s still far too early. It would have to be an absolute lemon, absolute. And that’s pretty much hard to define to decide to sell it, but in general, I think it’s too early to make that kind of decision.

Lauren: But what about opportunity cost? Say it’s costing about $100 a week to hold, that’s stopping you from buying something else. What’s your opinion on that?

Jan: Well, then you need to look at what’s the something else and that something else can really only be shares or cash or if you’ve put your money into self-managed funds then they’re very dependent on shares. So the opportunity cost is really about looking at the ‘what else’ is there. To me, it’s really a no brainer. Cash is just dead money, the interest rate is too low and shares is too much of a ‘what if’ kind of speculation game.

Lauren: Yeah but what about selling and then buying in another area in Australia?

Jan: You could, but again you’d need to wait at least a minimum of 10 years to decide that you’re going to do that. Buying in another area of Australia is fraught with the distance landlord syndrome and you need to make sure that the light bulb does need changing when the manager says it does.

Lauren: I wanted to ask as well, for example, my own husband bought a property in a suburb in Brisbane and that’s gone backwards. Is he better off just selling that or again, is it a case of waiting for the cycle?

Jan: It is a case of wait. It really has to be an absolute complete dud to want to sell. Perhaps if it’s in a totally flood prone area that you can see is going to get flooded every year for the next 100 years. Ipswich has always been prone to floods, way back in 1840s when land was first released it’s prone to flood. So if you accidentally bought in an area that it’s going to be continually prone to flood then of course, that might be a good reason to get out and move onto something else. But in general, I’d say 10 years is the minimum to make that kind of decision.

Lauren: Ok well funny enough, this is actually in a flooded area but it has flooded in what, 2011, and then also 1974.

Jan: Yes, and if we went back even further, probably in the 1960s and the 1930s and going back to the 1890s and even 1841 there’s records of floods in those areas. We tend to forget about it too quickly, we tend to believe there’s never going to be another flood, we’ve got Wivenhoe Dam but we should know by now, not to believe a politician.

Lauren: So in that case then, would you sell it?

Jan: Possibly, possibly. If I knew it was going to be prone, I’d move on and move out. But it would have to be, like I said, a complete dud, completely, before I moved out. We’ve only had one or two in the whole history of our 40 years, and one I’ve kept, and it’s still a dud, and the other I did sell and it just happened to be at the peak of a market so I did okay out of it.

Lauren: Wow, can you say where the dud was?

Jan: In the Redlands area, and it was mostly to do with the construction of the building, more so than the location or anything else. I had a habit of buying properties cash, no pest, no building, no controls. Most properties have problems with them. Two of these properties had a lot more problems than the others.

Lauren: So why didn’t you ever get a pest and building inspection?

Jan: I’ve always avoided it because it doesn’t always reveal everything. Ninety per cent of properties are okay, and it enabled me to buy properties cash, on the line, at a much much cheaper, discounted price. Rather than the seller know, it could be subject to finance, it could be subject to pest, it’s subject to building. It’s subject to this. You’re going to get it at 10 per cent less. And so the money I’ve saved doing that more than covers the termite control or whatever else might have been needed further down the track.

Lauren: That’s amazing, have you had people say you’re crazy to do that?

Jan: Of course, but it’s just a betting game, that I bet that something probably won’t go wrong with a property. And so I’d rather get a property for $500,000 when I know the market price is $550,000 because someone was prepared to accept $500,000 on the line and no ifs, buts, maybes, subject to or anything else, and so I’ve got $50,000 up my sleeve to pay for anything that I might have missed in the first instance.

Lauren: Okay. And what do you actually define as an absolute lemon when you say ‘if it really is a lemon, I’d sell it’?

Jan: Well it’s hard. I think one that’s costing large amounts of money on a regular basis. Large amounts. And the property is probably beyond repair in its present state and would have been better off knocked down. So in other words, the house that you bought has gone back to land value only, and they would have been the two major problems that we had with our (two) properties. One was built on very reactive clay, and the second one was just a homemade job that was very cleverly tidied up at the time.

Lauren: And you’re happy with those decisions, to sell those?

Jan: Yes, very happy. Well, sort of happy, but you sort of pass the problem onto someone else and you wonder is that an ethical decision anyway. I go along with the line that ‘buyer beware’. We’ve always had to beware and everyone else should do their homework as well. And accept, all properties have problems. It’s just that some problems are bigger than others.

Lauren: Yeah definitely. Do you actually think we’ll ever see a return of the boom times that so many young investors hear about? If only you bought 10 years ago, you’ve probably done quite well. Do you think that will come back?

Jan: Well, it sounds like my father. He said forever and a day that he should have bought the property next door back in the 50s when it was only 200 pounds, because it boomed not long after that in the early 60s and probably now it’s worth $300,000. The boom time happens at that point in time and no one knows exactly when it’s going to happen again. But with a long-term investment you never really have to pin point when that boom time is. You’re just there, you hang on and if a boom happens and if not, well, you’re there for the long haul.

Watching the pot, it never boils, so ‘watch pot never boils’ is a good philosophy. If you’re going to watch when the boom is and then buy it right then to get in with the boom, it never happens.

Lauren: So where would you be buying right now if you were looking for another investment?

Jan: Anywhere where there’s not lots of the same kind of thing. I think there’s certain areas like the Gold Coast and Sunshine Coast where there’s lots and lots of units that are there and they’re pretty much all the same. If you’re going to buy an investment, it’s not really of an investment because there’s too many other choices as far as rentals are concerned. If you’re going to be an owner-occupier it’s an absolutely great time to buy in those kinds of areas. It’s cheap and you’re not relying on the rental income, you’re just in it.

Lauren: Exactly. And what about other areas around the country?

Jan: Each one has to be judged on its own but there’s a lot to be said for location. I think infrastructure and public transport is a great concern now in Australia and I think we’re hopefully going the same way as Europe where public transport is very well defined and very well built.

But that’s just starting to happen here so the key would be to buy in very good transport locations.

Lauren: And is that what you always look for now?

Jan: I’ve always looked for good transport locations. I’ve taken a punt in the past and punted that people would buy where the train line was but in fact people were starting to buy where the bus line was because it was more reliable. There’s always those hit and miss decisions but if you stick by a few rules and have good transport, the train is better than no transport at all because if you don’t have any transport than you’ve got two cars to get yourself around and double the cost. You’ve got the depreciation and all your rego and all your insurance and all the petrol costs and spending that extra money to get into slightly better locations is far cheaper than having two cars.

Lauren: Definitely, we all know about that.

And what do you make of the low interest rates at the moment, are you advising that now is a really great time to buy because the holding costs are just so affordable?

Jan: My philosophy is any time is a great time to buy. We shouldn’t look at the overall economic condition of the country on deciding whether it’s a good time to buy. I’ve always bought property based on my own personal circumstance. I do the sums, it’s not very difficult, I draw a line down the centre of the page. I draw my income on one side, and my expenses on the other. I get another page, put my assets on one side and my liabilities on the other and say ‘can I afford a property right now’? And so I’ve bought when interest rates are as low as they are today at 4.9 per cent but I’ve also bought property when interest rates are 16 or 17 per cent because we could afford it at the time. Because the rent was extremely high at that point. So I don’t look at the overall economy. I look at my own personal finances to make that decision.

Lauren: Fantastic, thanks so much for your time today Jan.

Jan: Most welcome Lauren.

For more on finding great investment properties, check out our cover story in the May issue of API magazine. Read our flagship issue, with the original and best Hot 100, where all the predicted growth locations are around the country.

There’s also 40 bonus locations including the 10 cash flow hotspots, the 10 overseas hotspots, the 10 development hotspots and the 10 commercial hotspots.

One investor reveals how they coped with the GFC and the long delays on their first development.

Discover where you can buy a house for under $100,000 with a rental return of nine per cent.

And find out how one investor made $173,000 in equity by buying right. That story and much more are in the new issue of API magazine.

The information in this podcast is of a general nature only. It doesn’t constitute investment advice. Listeners should seek professional advice in relation to their particular circumstances before acting.

Podcast: Download (Duration: 12:48 — 6.1MB)

Podcast Transcript

Intro: Welcome to the monthly podcast of Australian Property Investor, Australia’s most trusted and widely-read property investment magazine. For information on how to subscribe to either our print or online magazine, as well as other great property investing information, please visit our website, www.apimagazine.com.au

Kieran Clair (KC): Hi, listeners and welcome to this month’s podcast. I’m Kieran Clair, journalist with API Magazine. And today we’re talking about some knowledge almost all owners want in their investment arsenal – the best ways to preserve wealth in a falling market.

Property markets run through the cyclical highs and lows and along with the art of knowing when to buy and sell, investors need to know how to ride out the bad times and not just enjoy the good. To help us understand what is happening to our portfolios during these market slowdowns, and to give us some strategies on how to cope financially, we’re joined by author and investor, Steve McKnight. His latest book is called From 0 To Financial Freedom. Hi Steve.

Steve McKnight (SM): G’day, Kieran and hello to everyone listening.

KC: Firstly, what signs should investors look for to indicate their particular market of interest is stalling?

SM: Well typically the number of properties that are for sale is a great indication and the reason for that is that it speaks to something in the property market called absorption. So, basically, there is always properties coming on the market and people buying those properties, whether they’re homeowners or investors, but if we enter a situation where more properties are coming on the market for sale than are being absorbed by sellers, then that’s the first sign that prices are going to start to drift because economic theory has when supply is greater than demand, the price will fall. So, normally in a booming market you have more buyers than sellers competing so that pushes price up, as the market shifts though and more properties are available for sale, all of a sudden now the sellers hold the cards and can negotiate the price down because there are more buyers. So, that’s why I say that’s the biggest telltale sign of what’s happening in the market at the moment is the amount of properties that are coming on the market for sale relative to the number of properties that are being sold and being able to determine that is really a matter of going and talking to real estate agents and seeing if they can supply any data because it’s all tracked.

KC: Interesting, and how are you reading the markets in the Australia right now, Steve, given the mixed bag we’ve had in 2012?

SM: The driver of real estate or the drivers to start off with are really, there are two of them. The first one is the economic fundamentals of what’s going on and then, secondly, the emotional fundamentals of what’s going on. Now, the economic fundamentals of what’s going on are quite strong at the moment, particularly with interest rates as low as they are. You would, if you separated out the emotional side of stuff for a second here, the fact that interest rates are so low should be bringing people who would otherwise rent into the owner market and people who would otherwise invest, given that the cost of capital is so cheap compared with where interest rates in Australia have been, you would think it would bring them out of the woodwork as well – but it’s not and the question we have to ask ourselves is why not and then that speaks to the emotional side of things because people, at the moment, even though interest rates are low, are afraid of their financial futures and indeed glass-half-empty pessimists rather than half-full optimists, and so they’re not ready to commit to a significant financial investment such as a piece of real estate and borrow tens if not hundreds of thousands of dollars to do so. But I believe this confidence shortfall is a temporary thing. Potentially after the elections in September with more political certainty whether or not one party wins or another, that doesn’t really matter so long as one party has a mandate to execute their political objective, we should see confidence slowly start to return. So, rubbing my bald head as a crystal ball, I believe that between now and the election the market will trend sideways as it struggles for direction. If there’s a clear political outcome in September, the September sales season might pick up a little bit but it’ll be 2014 before we see any kind of revival or later.

KC: Even so, I’m sure there’s plenty in the market who would be pleased to hear you say that there will be a revival.

SM: Well, Kieran, here’s the thing, all right. When it comes to real estate everyone wants to buy tomorrow at yesterday’s prices because if they can buy tomorrow at yesterday’s prices, they’ll know they’re getting a good deal. They’ll buy tomorrow because there’s more activity but they want yesterday’s prices when there’s no activity and that’s just not possible. You cannot buy tomorrow at yesterday’s prices. There are good deals out there to be had however those good deals are not buying new property off-the-plan with a growth focus. What you want to be doing is buying strategically for a different market than exists today and so you’re buying at today’s prices for tomorrow’s market and if you can adopt that kind of strategy with your real estate investment portfolio, you can do quite well. But I would not be buying for what I call generic growth, market driven growth in the current climate. There would need to be more certainty before I executed that kind of strategy.

KC: Looking to some practical advice now, if your property portfolio is well established but your equity is disappearing due to a softening market, what are some of the strategies you should employ to maintain value?

SM: Well, the first strategy that people need to have that they don’t is some kind of idea around what profit return they want from their investment and I often say to people investments should be like employees, that the good ones get to stay and the bad ones get fired and when it comes to real estate what I tend to find is that people hang onto the bad ones waiting for them to become good and fund the bad ones by selling or refinancing the good ones which is completely counter intuitive to common sense. But people aren’t willing to say they made a mistake and because they let their pride get in the way, they tend to compound their losses. So, if you’ve got a property that’s not performing, you should sit down and you should counsel it, which means that you should set new performance benchmarks, you should think about strategies for reeducation or redeployment. But ultimately, if it can’t perform, if it won’t perform, if it doesn’t perform, you should simply say I made a mistake, sell it and start again.

KC: So, keeping in that vein, is there a checklist of what assets you should look to liquidate if you find yourself in trouble?

SM: Well, maybe not a checklist so much as I believe that profit is a good indicator. The reason why people buy investment property is for a financial outcome so they should track the financial outcome. So, in order to track a financial outcome, you need to have an expectation of what you want from the investment in an income or growth return situation and then compare actual against budget. It either met the performance or it didn’t. What kind of return should you want? Well, you need to look at what’s happening in the area, look at averages. You can get that data for free off various different websites or off real estate agents and try and think. You know, this is something that real estate investors do as a, you know, last resort. When all else fails – think! Where what I want investors to do is to think before they buy so that they can find ways to outperform the market.

KC: And do you use different strategies for portfolios that are more heavily leveraged?

SM: Well, I’ve never been comfortable with borrowing more than 80 percent of the purchase price. So, if you borrow more than 80 percent, my grandfather gave me some very good wisdom when I was a little boy. He said “Steve, no one ever went broke owing no money.” So, I believe that debt is something that you get into to get out of and so, if you are more highly leveraged than 80 per cent then you need to have some kind of strategy at the time of borrowing that will see you pay down that debt otherwise, your risk as an investor is too high for a sustainable property portfolio beyond one or two properties, in my opinion.

KC: And finally, Steve, I notice you’ve been looking to the U.S. for some of your recent acquisitions. What attracted you to go over there and what sort of performance have you achieved through your investments?

SM: I’m pretty shallow, Kieran. What took me over to the U.S. was the money that could be made and it was seemingly appeared better than what could be achieved over here in Australia and so, I went over to the United States to see whether their stories of big foot and big property returns were real and I have seen no evidence of big foot but I’ve been able to buy some pretty outstanding properties since I started going over there a couple years ago. I think it was the end of 2009 I started buying. Unfortunately, as I have been shouting from the rooftops for years since, those returns weren’t going to last and they haven’t lasted. The property market in the U.S. is bouncing back with a vengeance and the sort of 25, 30 per cent returns that I was getting net are now down to sort of net 10 to 15 per cent, depending on where you buy. Most of my stuff was in Florida so I know the Florida market pretty well. I haven’t sort of got tangled up in Nevada or Arizona or anywhere else.

KC: Still, that 10 to 15 percent return would sound pretty attractive to some of the property investors in Australia I’d imagine.

SM: Well, when you invest in property in the United States and maybe this is a topic for another time because there’s a fair bit to discuss, but when you invest in the United States you’re not investing in real estate so much as you’re investing in management because you’re not there and a mistake that a lot of people make is that they find a property that seems cheap and seems to have a high return but they fail to understand that in order to get that return they need good management and so, my number one tip for people buying in the United States of America is before you buy anything, whether it’s from an organisation that’s selling properties to Australians or buying something you see on the internet yourself, go over there and have a look because you need to have a feel for the area and when you’re over there try and figure out how the management is going to happen for the property because you won’t be there on the ground unless you’re planning on moving to the United States to manage it and a cheap property can be just as much of a headache as an expensive property if it’s sitting there vacant, particularly when it’s on the other side of the world.

KC: Getting an education always seems like good advice I think. So, thanks very much for your time today. You’ve been really great.

SM: Any time Kieran.

KC: Thanks, Steve. To meet investors who gained financial freedom through buying properties for cash flow check out our cover story in the April issue of API Magazine. Four savvy buyers tell how they’ve built portfolios and created life-changing incomes, including Geoff Doidge who earns a staggering $1.1 million a year from his properties, or Hance Limboro who held onto his troublesome first investment property and now creates $665,000 a year from his 23 property portfolio. Plus, we talk to a project manager who returned over 27 percent with his joint venture partners in 15 months, and the couple who bought an ugly duckling property and produced a $46,000 equity gain in only six weeks, and if you’re new to property and wondering how to get started on your dream portfolio, don’t forget to check out API’s ready guide on the basics of investments. All that plus your chance to win $1,000 and much more in the new issue of API Magazine. For subscriptions and more information, visit our website at www.apimagazine.com.au

I’m Kieran Clair, thanks for listening.

Podcast: Download (Duration: 8:33 — 4.0MB)

Podcast Transcript

Intro: Welcome to the monthly podcast of Australian Property Investor, Australia’s most trusted and widely-read property investment magazine. For information on how to subscribe to either our print or online magazine, as well as other great property investing information, please visit our website, www.apimagazine.com.au

Shannon Molloy (SM): Hello, I’m Shannon Molloy – deputy editor of Australian Property Investor magazine – and in this episode we’re talking all things home loans.

There’s no doubt it’s been a while since the going was this good for borrowers. For one, banks are sharing a smaller pool of potential customers, thanks to the GFC. So, needless to say, they’re increasingly keen to be competitive. Plus, the Reserve Bank has slashed interest rates several times in the past year or so. It looks like there’ll be a few more reductions across 2013.

But are you taking advantage of these ideal conditions? Could you be saving even more on your home loan? To find out, I’m joined by Loan Market mortgage broker Josh Bartlett. Josh, thanks for your time.

Josh Bartlet (JB): No problem at all.

SM: Tell me, how competitive is the mortgage market at the moment?

 JB: As far as a broker’s concerned, there are a lot of people out there looking at the moment. I’d suggest as far as brokers and bankers competing, we’re all starting to up our game as far as professionalism is concerned. We’re now realising we’re not back in 2009 or 2010 anymore. Our service levels need to jump to the next level to give customers what they need.

SM: What’s the best way a borrower can nab the lowest possible rate with a lender? Is it simply a case of asking for a better deal?

 JB: It’s a very interesting question. I often speak to a lot of clients who say they’re going to a CBA, Westpac of NAB. If they walk into a bank, I think they’re doing themselves an injustice. A lot of clients probably don’t realise what a broker does enough, to an extent.

As soon as I sit down and go through what we have on our panel – 30 to 40 different lenders, a whole lot of different packages and finding the best structure and rate for them – they start realising how beneficial we really are.

We can start looking at whether they want an offset account, a no-frills kind of product, interest only, principal and interest… that’s when we can start playing the banks off against each other.

It’s important to look at what banks are doing with discounts at the time. A lot of customers wouldn’t realise that at any one time some banks are discounting heavily because they’re trying to build their book.

Sitting down with a broker, it’s a great opportunity to find out which banks are discounting the highest.

 SM: There’s plenty to consider when it comes to loan features. What are some of the frills and are they worth it?

 JB: It depends on each client’s situation. If you’ve got a high disposable income, sometimes I like to sit down and talk about possibly having a package. A lot of banks charge an annual fee to have a package but sometimes it can benefit the client, depending on their income.

When you get a package you might get an offset account, credit cards available to you and different little niches available. A lot of the time, people don’t use it. If you’re not an investor or have a few different loans, sometimes it’s not worth it at all.

 SM: Opting to pay interest-only is popular with some investors. What are the risks and is it for everyone?

 JB: Look, definitely not. It sometimes comes down to chatting to your accountant to see if it’s beneficial. It comes down to each individual’s circumstances to see if there’s a negative gearing benefit there.

Other times, it comes down to generational preferences. Everyone has an opinion about what you should do. Old school investors, the older generation, they probably like to make sure their loan is being paid down all the time.

If you’re looking for a taxable advantage, I believe it might be better off to go down the interest-only path. Every single person’s situation is totally different. I like to go through options for customers…

 SM: And finally, it’s a hot topic at the moment – fixed or variable. Which would you suggest?

JB: It’s one of those things. As a broker or a banker, anywhere you are, you should never tell people what to do. It’s a hot topic with clients, they always want to know what I’d do.

I always talk about where rates are now, what variables are, the fixed rates and what repayments would be with adjustments. It comes down to options.

At the moment, I’d suggest a 4.9 (per cent) fixed rate is pretty cheap; that’s cheap money. There are a lot of people in the market at least splitting their loans and fixing part of it. It’s kind of hedging your bets.

I mean, 4.99 (per cent) is quite cheap. A lot of people are liking the idea of a fixed rate.

SM: Sounds very tempting. Thanks for joining me, Josh.

JB: Not a problem at all.

SM: Check out the March issue of Australian Property Investor for a special look at fixed versus variable interest rates. Plus, in our cover story, we find out how three young gun investors have amassed more than $1 million in equity.

We also reveal 60 property hotspots where prices are set to shoot up. And, in a special API exclusive, property bear Steve Keen and property bull Christopher Joye face off over the future of house prices.

All of that and more in the new issue of API magazine, on sale now. For subscriptions and more information, visit our website – www.apimagazine.com.au. I’m Shannon Molloy, thanks for listening.

Podcast: Download (Duration: 8:57 — 4.2MB)

Podcast Transcript

Intro: Welcome to the monthly podcast of Australian Property Investor, Australia’s most trusted and widely-read property investment magazine. For information on how to subscribe to either our print or online magazine, as well as other great property investing information, please visit our website, www.apimagazine.com.au

Lauren Day (LD): Hi listeners, welcome to this month’s podcast.
I’m Lauren Day, journalist with API, and this month I’m speaking with Sydney-based WBP property valuer, Chris Lackey. Today we’re going to discuss the Sydney market, and what investors should be looking for in 2013.
Hi Chris, and welcome!

Chris Lackey (CL): Hi Lauren, how are you going?
LD: Good thank you!

LD: Now tell me Chris, where is the Sydney market at the moment?
CL: Look at the moment, we still have vendors and purchasers reluctant to engage with the property market. We’re generally seeing a continuation of the uncertainty, which was an issue during 2012. Just as an indication, we actually saw during 2012 total sales volumes in New South Wales drop by 7.8 per cent from 2011, which was quite interesting.

LD: So what do you see happening then in the Sydney market in 2013?
CL: I think we’ve got to try and look at what the drivers for the market will be during 2013, whether it be interest rates, which, I think buyers are probably going to wait and see what happens and if interest rates have actually bottomed.
We’ve got major lenders getting together and supposedly talking about out of cycle rate reductions, which would be a first, certainly from my exposure to the Sydney property market. So I think buyers are still going to take a ‘wait and see’ approach and perhaps look for a bottoming of rates or a clear bottoming of rates and probably in terms of prices, based on what we know and what we can see for the future, Sydney property prices based on current fundamentals have probably bottomed, really as a continuing issue of confidence for the market.

LD: So do you think now is a good time or a bad time to buy and why?
CL: I think for buyers it’s always going to relate to their individual circumstances. I guess, I’m not an accountant or investment adviser, but property I guess should form part of someone’s investment portfolio to some degree. Sydney is a major commercial centre for Australia. In terms of big business, so in terms of last year’s performance, overall, I think Sydney performed best of all the states.
It certainly remains a state which needs to be considered for an investment portfolio.

LD: So you would recommend Sydney then as a market to buy in, compared to say Melbourne or Brisbane or Perth?
CL: Well I think in terms of supply, we’re not really addressing the supply issue in Sydney. We haven’t had that and that’s not going to happen quickly, so in terms of housing stock, particularly while vendors sit on the fence and take a wait and see approach, I can’t see that stock levels in Sydney are going to increase.
That’s probably going to pin prices, particularly entry-level property. So if you’re looking to invest in Sydney and you’re looking to get into entry-level property, then I think probably yes, if you want to have Sydney as part of your property portfolio, yes, it’s probably as good a time to buy, considering interest rates during 2012 were three to 3.75 per cent and could possibly be lower again this year.

LD: So what sections of Sydney would you see moving – would it be the west, the east, the north, the south?
CL: I think you’ve got to be a bit cautious when you say, property is going to be ‘moving’. I think very much, with the availability of information, particularly statistical information, you can probably have actual sustainable growth and you can have short-term perceived growth. If you’re looking towards areas, say in the northwest or southwest of Sydney, where you’re having a lot of new housing stock being introduced, statistically, from a month to month basis or quarter basis, you’ll see growth in those areas and that may simply be because that product is very much hinged between inflation and with building costs increasing each year, you probably will find you will see growth in those areas statistically.
So I think probably buyers should be cautious and make sure they actually are seeing sustained growth other than short-term growth because of something being new product.

LD: Great advice there. So what other things should investors be looking for if they were buying property this year?
CL: I think what we’re seeing is a lot of investors are returning to the market compared to previous years, and I think they’re looking for entry-level property with existing infrastructure. You may be talking about a two-bedroom unit in the $400,000 to $500,000 price range within an established locality, because really, we’re not seeing any new housing stock being introduced into the existing areas of Sydney with existing infrastructure.

LD: Anything else?
CL: We’re seeing some people getting into, again, entry-level houses but they’re looking at the… what you’ve got to look at, you’ve got to look at what you’re going to end up with in your hand at the end of the day. You may consider looking at, well you really should consider looking at, what sort of land tax threshold if you’re going to be buying a house, I think its $406,000 for 2013. So if you’re looking to acquire or invest in a house, you need to consider what are the council rates going to be? Do you have to pay land tax, because it’s quite a hit in New South Wales, land tax. In terms of your investment you need to look at not only what the tax incentives are, but what is your net return going to be at the end of the day and does that property offer growth? Is there evidence of growth within that locality and is it sustained real growth?

LD: That’s awesome advice, thanks very much Chris.
CL: No problems.

LD: Chris Lackey there from WBP Property. For more on finding great investment properties, check out our cover story, in the February issue of API magazine.
Read our special report – find out if 2013 is the year of recovery.
We reveal the 40 suburbs to buy in now, including 21 areas in or near capital cities.
Discover the genius idea set to boost an investor’s equity by $415,000 in just five months.
We talk to one couple who managed to fight off bankruptcy, to push ahead with an 11-lot subdivision.
And we chat to one investor who’s creating a passive income of $100,000 a year!
That story and much more in the new issue of API magazine.
For subscriptions and more information, visit our website, at www.apimagazine.com.au.

I’m Lauren Day, thanks for listening.

Podcast: Download (Duration: 12:21 — 5.8MB)

Podcast Transcript

Intro: Welcome to the monthly podcast of Australian Property Investor, Australia’s most trusted and widely-read property investment magazine. For information on how to subscribe to either our print or online magazine, as well as other great property investing information, please visit our website, www.apimagazine.com.au

Shannon Molloy: Hi listeners, welcome to this month’s podcast. I’m Shannon Molloy – deputy editor of API magazine and today we’re talking about the economy; where we’ve been this year and what’s in store for 2013.

The performance of our property markets is driven by many factors – consumer sentiment, fiscal policy and what’s happening in the broader economy, to name just a few. To shed some light on what we can expect next year, today we’re joined by leading economist Su-Lin Ong from RBC Capital Markets.

Su-Lin, thanks for joining us. Firstly, did the performance of the Australian economy in 2012 largely meet your expectations?

Su-Lin Ong: We’d probably have to say the economy, particularly in the first half of 2012, was stronger than we’d anticipated. We’re expecting growth for calendar year 2012 to be around 3.5 per cent, but it’s very much driven by a stronger first half which is giving way to a weaker second half.

The first half of the year, consumption in particular proved a little more resilient. Cap-ex (capital expenditure) was also pretty buoyant. That’s definitely giving way to a softer pace of growth and we think the economy is moving towards a more sub-trend pace at the moment. That’ll continue into 2013.

Shannon Molloy: It was a year of highs and lows in many regards, a bit of a mixed bag. How would you describe the past year from an economic sense?

Su-Lin Ong: I think we’d characterise 2012 as a bit of a tale of two-halves – that stronger first half, which is now easing, and the underlying growth pulse which is moderating in half two.

Overall, I think growth this year will be about 3.5 per cent, which is above trend. That decent number for the year as a whole is masking a bit of weakness in the second half, as I said, which we expect to continue into 2013.

Shannon Molloy: There’s a lot of talk about the so-called ‘end of the mining boom’. What’s your take on that?

Su-Lin Ong: I think the debate really has to be broken down into the prices side as well as the actual capital expenditure side.

There’s no doubt the boom in commodities prices peaked some time ago. That’s probably best captured by the terms of trade – that peaked about 12 months ago and has really declined ever since. We expect a drop of about 12 per cent this year and a further six per cent next year, and that’s driven primarily by the decline in commodity prices, particularly in coal and iron ore.

The boom is over in terms of some of the high commodity prices, but when we look at the resource-related capital expenditure, that continues to be pretty strong. We’d expect another double-digit year of business investment in terms of capital spending and then that will peak out late next year and into 2014.

The cap-ex side remains a very strong contributor to growth right now.

Shannon Molloy: When it comes to 2013, what are some of those main indicators showing?

Su-Lin Ong: I think as we move into year-end and into 2013, there are a few indicators we’re watching very closely. The consumer index is showing more signs of moderation recently. We think the trend in monthly retail sales has softened up and I think households face a number of challenges, particularly the weakening in the labour market that we think is occurring.

One of the key indicators we’re watching is everything from the official labour market data through to vacancy surveys as well as the employment components of business surveys. We’re seeing a real decline in vacancies, which is pointing towards further moderation in growth.

I think we go into the end of the year with a bit of a moderation occurring in the consumer, a softer underlying belly to the labour market, a housing sector which is showing some signs of stabilisation but in terms of construction continues to experience a drag on activity.

I think the outlook is for further moderation from here on in.

Shannon Molloy: Looking abroad, Europe remains a big wild card and despite some improvement recently, short-term prospects both there and in the US and UK, and even China, continue to cause some concern. How much does the global economy impact us here in Australia?

Su-Lin Ong: It’s very significant. At the end of the day, Australia is a small and open economy that’s highly leveraged to the global growth cycle. It’s no coincidence the Australian cash rate tends to track some sort of proxy for global growth and the growth outlook.

We’ve seen over the past few years a transmission through credit channels and confidence channels, probably quicker than through the trade channels. There’s no doubt that when we see ongoing headlines about the fiscal cliff in the US and uncertainty there, about the difficulties in Europe and the lack of solutions, that it transmits through very quickly in terms of confidence, in terms of credit and even in terms of equity markets.

The global economy is definitely important via trade linkages as well as confidence, credit and equity markets.

Shannon Molloy: Here in Australia, are we likely to see an improvement in confidence any time soon?

Su-Lin Ong: That’s an interesting question. There’s no doubt business confidence has languished to levels that are well below the long-run trend, and there are a number of factors (causing) that. I think the challenges to the global economy, particularly to Europe, and the uncertainty that implies is feeding through to business confidence. There’s also some uncertainty over the policy framework in Australia, especially as we go into an election year next year and whether certain policies will be revoked or not. It’s hard to see a big bounce or sustained bounce in business confidence anytime soon.

For consumers, we’re starting to see a bit of an improvement of late and maybe that’s a reflection of the fact that 150 points of rate cuts from the RBA is finally starting to get a bit of traction. Really for consumers, I think the key is going to be the outlook for the labour market.

Shannon Molloy: You spoke a little earlier about that bounce in property prices we’ve seen in the second half of 2012. What’s your forecast for the housing market in 2013?

Su-Lin Ong: I think it’s important when we talk about housing to distinguish between housing activity and construction, and house prices. On the prices side, I think we’re in for a period of flat growth, maybe small increases next year if we get further cuts to the cash rate – which we do expect – in half one.

I think we’ll see a little bit of support for house prices and we’re unlikely to see declines, declines of five to six per cent year-on-year that we were seeing in the first half of this year. There are some supportive factors there, not least of which is lower mortgage rates and the likelihood of even further cuts.

In terms of activity, we’d have to argue that most of the leading indicators of housing activity and construction still remain quite weak. They’re not signalling any big upturn in construction next year – in fact, we expect it to remain a drag on activity through to at least the middle of 2013.

Again, there are some supportive factors in place and some senior RBA officials have talked about that recently. We think it’ll be the second half of next year when housing starts to contribute to growth once again.

Shannon Molloy: And finally, are you more optimistic about 2013 than you would’ve been this time last year looking at 2012?

Su-Lin Ong: Probably not. We’re looking at more moderate growth in 2013 compared to the current year so we think the softer trend will continue. We’re looking for growth next year a little under two-and-three-quarter per cent. Now, that is below a long-run trend rate.

Housing is likely to drag on growth for at least the first half of the year. We expect consumers to remain reasonably cautious and the labour market to weaken. The odds are the peak in the investment and cap-ex boom will be in sight by the end of next year.

We’re a little more cautious and we remain of the view that global growth is unlikely to pick up significantly next year. There are a number of structural headwinds in both Europe and the US, and there remain a lot of risks.

I’d say we’re not extremely optimistic and it’s probably a more cautious outlook.

Shannon Molloy: Another interesting year ahead by the sounds of it. Su-Lin, thanks very much for your time.

Su-Lin Ong: No worries, thanks.

Shannon Molloy: To meet buyers who are more than confident about the prospects for property, check out our cover story in the January issue of API magazine. Five incredible investors reveal how they’ve built their portfolios, like Dean Zarif who quit his job to focus on a $3.3 million investment kitty. Or Toni Caldwell, who got started with a $1.9 million profit in just a year.

Plus, we list the 42 suburbs where you’ll find property priced under $200,000 – including 20 in or near capital cities. We’ll also tell you the right and wrong ways to buy an investment property and introduce a couple who gained a $500,000 equity boost in 15 months.

All that, your chance to win $5000, and much more in the new issue of API magazine. For subscriptions and more information, visit our website at www.apimagazine.com.au.

I’m Shannon Molloy, thanks for listening.

Podcast: Download (Duration: 8:34 — 4.0MB)

Podcast Transcript

Intro: Welcome to the monthly podcast of Australian Property Investor, Australia’s most trusted and widely-read property investment magazine. For information on how to subscribe to either our print or online magazine, as well as other great property investing information, please visit our website, www.apimagazine.com.au

Lauren Cross: Hi listeners and welcome to this month’s podcast. I’m Lauren Cross, journalist with API, and this month I’m speaking with chief property consultant for Property Power Partners, John Lindeman. Today we’re going to discuss with you how investors can be sure the property they’re buying is actually a good buy and if it has potential for growth. Hi John and welcome.

John Lindeman: Hello Lauren and hello everybody.

Lauren Cross: John, many investors want to buy something, they just don’t know exactly where to buy, so how exactly can an investor figure out if it is a good investment or not?

John Lindeman: Well, I think one of the most important things is to look at the reasons why you’re buying an investment property and whether you’re buying for growth or whether you’re buying to renovate or leveraging. So that in itself indicates where you should be buying, because, we are firm believers in the practice of buying for short-term growth, and therefore we would say to investors, your best bet is to go for areas where short-term growth is about to occur.

Lauren Cross: And so how do you figure out where that short-term growth will happen?

John Lindeman: Well that’s the million-dollar question isn’t it! Everybody would like to know. We’ve developed a number of ways in which you can identify areas that are about to grow. Probably the main way is to look at the dynamics of the market, that is, the potential for change that’s about to occur there. Things like the type of market, you know, are retirees about to move? Are people upgrading? Are first homebuyers about to move into those areas? They’re the areas where you’d look to see immediate growth occurring.

Lauren Cross: So, what are your top tips in figuring out if the property is actually a lemon, if there won’t be that growth?

John Lindeman: Well, I’d look at the property by itself. I’d be looking at things like the rental history and the type of area that it’s in, so you know, you’re looking at those two things. One is, is there demand for an investor property, based on its recent performance as a rental property, but more important is the type of area that it’s located in.

Lauren Cross: Okay and a lot of people look at the history of the area and they look back at figures and see if the property has risen or if that area has risen or if it has fallen over time. What would you say about looking at the history of a suburb?

John Lindeman: Well I think there’s a lot of importance in looking at the, the history of an area and the prices, such as you’ll find in the back of API magazine. There’s a lot of good information in there, but if you’re relying on that information to try and predict what’s going to happen, you could come unstuck because these indicators such as price and the price history are lagging indicators. What they do is, they tell you what’s happened in the past, what people have already done, and that’s really no guide as to what they might be doing in the near future.

Lauren Cross: That’s true, so how can an investor find out if one suburb is actually the next sleeper suburb? So if it’s the next potential boom suburb? Are there any stats that investors should be looking at?

John Lindeman: There’s a very simple way of doing this, which is highly accurate if you’re looking for short-term growth potential. And that’s to compare the number of potential sellers or intending sellers with the number of buyers, so you’re comparing the supply to demand in a very, very simple way. And the way you do that is, you go to the back of the API magazine, you pick your suburb that you’re interested in and look at the number of sales. Now the sales figure that’s in the back of the magazine is the annual sales figures, so it gives you an idea as to how many sales were in that, occurred in that suburb, over that month. And you do that for houses or for units, they’re the two categories. Then you look at the other part in the back of the magazine, which tells you the number of listings. That is, the number of properties that people are trying to sell. And you compare one to the other. So if you’ve got lots of listings and very few sales, then that’s not a good area at the moment to be buying into and vice versa. If you’ve got a lot of sales and few listings, it looks like it could be a good area. Then, Lauren what you do is, you compare the trend. You analyse this data over a few months and you’ll start to pick up if there’s a trend occurring. In other words, if more properties are being sold and less are being listed, or the other way around.

Lauren Cross: That is a very good tip John! What about something like Bureau of Stats, do they help in any way? Is there anything investors should be looking at there?

John Lindeman: Well, we are very lucky at the moment, because the 2011 statistics are just becoming available and this information is now all free of charge, it’s available at the ABS website. The easiest way to find it is just to Google ‘QuickStats’ and when you go to ‘QuickStats’ you type in your suburb name and there’s a wealth of information there about the number of first homebuyers, the number of upgraders, the number of renters, what proportion are people paying off a mortgage and so on. So, it’s very, very useful information and one of the, the most  -  it’s like a window that we’ve got in time here because this information is just becoming available and you can now compare it to the previous statistical information, the previous Census. So what you’re getting now is a trend, you can look at the number of say, the population growth, if it’s occurred in a suburb over the last five years. Bearing in mind that it also gives you what the average is for the whole of the state and the whole of Australia. So you can see if an area is growing in population, much more quickly, than the rest of the state or the rest of Australia. It’s fantastically useful information.

Lauren Cross: Okay, well, going on that, where do you think the next opportunities are over the next year or so and why?

John Lindeman: Well I think the biggest opportunities that generally are going to come forward in the year are in first homebuyer markets. Using QuickStats, you can easily identify those, by simply the age profiles, median age and so on. Looking at the back of API magazine, the way you’d find those is by looking at areas where house values are about $350,000 or less. And, what’s happening in that market is the interest rates are now at generational lows and a number of State Governments are putting incentives in place to encourage first homebuyers to move into the market. And of course, rents are increasing rapidly in most of our capital cities, so the pressure on people to buy a house or a unit is increasing rapidly. Our statistics show that on average, first homebuyers move after five years. So we’re approaching that five-year timeframe, I think next year will be the year of the first homebuyer.

Lauren Cross: John Lindeman from Property Power Partners, thank you so much for your time.

John Lindeman: Thank you everyone.

For more on finding great investment properties, check out our cover story in the December issue of API magazine. Find out how to make massive profits with niche market strategies, including commercial properties and student accommodation.

We look at the 10 sleeper suburbs about to wake up, and let you know how you can discover them first.

We reveal five ways to get into your first property sooner.

Discover where you can find bargain properties for less than $250,000.

Plus, it’s never too late to start investing!

We chat to a couple in their 40s who started investing in the GFC and have since built $1.2 million in equity.

We also talk to couples in their 50s who have started investing and we find out why.

Those stories and much more in the new issue of API magazine. For subscriptions and more information visit our website, at www.apimagazine.com.au

I’m Lauren Cross, thanks for listening.

Disclaimer: The information in this Podcast, is of a general nature only. It doesn’t constitute investment advice. Listeners should seek professional advice, in relation to their particular circumstances before acting.