Coming up on today’s show we’ll take a look at splitter blocks. We’ve all seen them; beautiful big house blocks that have been split into two and sold off. Looks like an easy process, but is it? Is it actually a good way to make money? We get the lowdown from Jo Chivers.
I also speak to Graham Jarry who describes himself as a small full time developer. Graham has built a business out of splitting blocks and he tells us how and what to watch out for.
After two years of exceptional house price appreciation, Core Logic-Moody’s Analytics Australian Forecast Home Value Index shows a slowdown in house price growth across the country, underpinned by expectations of slower income growth. Tim Lawless from Core Logic RP Data joins me to discuss the report and the findings
One thing is certain: there is no such thing as a perfect investment. If somebody tells you they have found “the perfect investment” be very sceptical and ask lots of question, because chances are they’re trying to sell you something you just shouldn’t buy. Michael Yardney tells us what to look for in an investment including liquidity and appreciation …… lots more too that you will hear from Michael in this show.
A study of more than 3,000 potential mortgage customers has found an alarming number of people are opting for bigger loans with smaller deposits. The study was taken by comparison website RateCity and Sally Tindall, Money Editor for Rate City joins me to discuss the findings.
How true is it that property doubles in value every 8 years? You have no doubt heard that and John Lindeman says it is a load of rubbish. Hear what he has to say.
Transcripts:
Tim Lawless
Kevin: After two years of exceptional house price appreciation, CoreLogic-Moody’s Analytics Australian Forecast Home Value Index shows a slowdown in house-price growth across the country underpinned by expectations of slower income growth. Joining me now to discuss the report and some of the findings is Tim Lawless from CoreLogic RP Data.
Tim, thanks for your time.
Tim: Thanks, Kevin, for having me on the show.
Kevin: It’s a pleasure, mate. While there might be a bit of a short-term slowing, the report shows stability in the medium term. Is that correct?
Tim: That’s right, and stability in the sense that as we see the housing market slow down in its pace with capital gains, we aren’t likely to see any sustained declines across any of the capital cities. In fact, if we look at even the cities where growth has been the highest, in Sydney and Melbourne, by 2017, for example, those cities are likely to start seeing their annual growth rates more around the rate of inflation, around 1.5% to 2.5%.
Kevin: So, a bit more stability, you think, as opposed to those big increases?
Tim: That’s right, and there are no surprises there after such strong capital gains. Look at Sydney. We’ve seen values rise by nearly 75% since the beginning of 2009 at a time when household incomes aren’t growing all that much, so it shouldn’t come as any surprise to see the rate of growth moderating back to a more moderate or sustainable level.
Kevin: Yes, just talking about those phenomenal growths in the Sydney market, there has been talk recently that if it does slow a bit in Sydney – which you’re saying it’s likely to – the regional outlook might look a little bit better. Would you go along with that?
Tim: Yes, absolutely. The regional markets, of course, are really diverse, so we’re still seeing softness in the regional area associated with the mining and the resources sectors. We see the big wind down in infrastructure projects and spending in those markets.
But the lifestyle markets in the secondary cities, like Newcastle and so forth, look at somewhere like Byron Bay or the Gold Coast, any of those markets are really showing quite a positive trend now. We wouldn’t expect the same slowdown to be occurring in those markets partly because growth previously hasn’t been anywhere near as strong as what it’s been in Sydney, but also because we are seeing some improvement in the underlying fundamentals of demand.
Kevin: I’ll ask you to give us an overview in just a moment about some of the cap cities and what the outlook is for those going forward, but just before we do, you mentioned mining regions. What does the report say about how they’re faring?
Tim: Well, the forecast themselves don’t drill down specifically the mining areas, but there’s plenty of other indicators that show the mining regions have certainly softened substantially. This is after a backdrop of leading up to 2012, 2013, some very significant capital gains largely driven by investment, so of course, areas like Moranbah and Mackay, urban WA areas like Pilbara, Karratha, and Port Hedland have all seen value falls of upwards of 20% to 30%, so steep declines.
But there are some signs showing that these markets might be starting to level in their declines. No signs of any capital gains coming just yet, but potentially, the worst of conditions may have passed in those markets.
Kevin: Tim, let’s talk about borrowing just for a moment because I know the report deals with that. Are we borrowing more for our properties, or are we getting better at saving for higher deposits?
Tim: Well, it’s a bit of both. We are seeing households devoting more of their incomes towards housing, and that’s a symptom of the strong capital gains we’ve seen in the higher prices. There are some affordability challenges particularly in a market like Sydney, where even between say Sydney and Melbourne, there’s a 33% difference, so a one-third difference in typical pricing. Between Sydney and Brisbane, it’s more like two-thirds, despite the not much difference between household incomes.
But in the same sense, we are seeing households also focusing on savings. We’re still seeing the household savings ratio relatively high compared to where it used to be pre-GFC. Households are still saving roughly around 8% of their incomes. That’s down from nearly 11% around 2009.
Kevin: Of course, we heard recently about the banks tightening their regulations on borrowings from investors. Has that had any impact that you can see?
Tim: It has had an impact. I think it’s been quite a profound impact. You remember, APRA introduced their speed limits on the pace of investment growth back in December 2014. They aimed to limit the pace of an investment portfolio credit growth to 10% per annum.
It took a long time for that to get down below 10%, even though, it wasn’t substantially above 10%. But based on the latest data, up to January, we’ve seen the pace of investment lending slow down to just below 8% now, so potentially, we might start to see the banks loosening the purse strings just a little bit for investor lending thanks to the fact that they’re down now well below that APRA speed limit.
Kevin: Let’s stay with investors just for a moment. What do you think the outlook is for property investors as opposed to owner-occupiers?
Tim: Well, I wouldn’t be surprised if we do continue to see a further moderation in the number of investors or the value of investor loans that are being committed to in the market. But keep in mind that we saw investments as a proportion of all new mortgages peak at about 55% in May last year, and that’s since drifted down to about 45%.
The long-run average, you generally expect investors to comprise about a third of all market activities, so it’s still relatively elevated. I wouldn’t be surprised if we do see the proportion of investors in the market drift a little bit lower – not just because of the premium on investor loans based on the higher capital requirements but also because the serviceability standards really are getting tighter from the lending sector.
But another factor, of course, is just the natural cyclical effect of the market. We’ve seen rental yields compress to record lows in Sydney and Melbourne, and of course, affordability barriers, particularly in Sydney also acting as some disincentive in that city.
Kevin: Tim, if we could just have a quick look around Australia at some of the cap city markets, what does the report say about how they’ve been faring and what’s ahead for them?
Tim: Well, we just touched on Sydney. Our forecast for Sydney by the end of 2016 is a growth rate probably around 2%, 2.5% average over the year.
Whereas, Melbourne is forecast to be much more resilient. It’s currently tracking at about 11% growth per annum, and by the end of the year, we would expect that to drop down to around 7%, so still a relatively strong level of growth. But of course, by 2017, we’re going to start to see the effect of higher supply levels and a lower level of jobs creation starting to pull that rate of growth back to the mid 1% mark, about 1.3% in our forecasts.
There are some markets that we are forecasting to actually accelerate in their growth rates, though. Brisbane, for example, is likely to see growth by 2016 pick up to the mid 4%, and by 2017 by nearly 8% growth.
Hobart, which has been a real underperformer, is now starting to show some really positive signs. We’re expecting a growth rate of about 6.6% this year, and then lifting to about 7.5% by 2017. Hobart values are still roughly level with where they were back in 2009, so that’s a turnaround that’s been a long time coming.
But of course, markets like Perth and Darwin that are well into their down phase, we’re expecting values to fall further this year before starting to bottom out late this year, and then showing some rises through 2017. But of course, that’s provisional on seeing commodity prices bottom out and then starting to rise in 2017, as well.
Kevin: Tim, a great outlook there for a number of those cap city markets. I want to thank you for giving us your time today to talk about that report. My guest has been Tim Lawless from CoreLogic RP Data.
Tim, thanks for your time.
Tim: Thanks again, Kevin.
Jo Chivers
Kevin: I don’t know if you’ve ever heard of the term “splitter blocks,” but obviously, as it sounds, it’s where you get a block of land and you split it, whether it’s in half or a subdivision of some kind, to maybe get another property on it or at least get another block of land off it. Someone who is the expert at doing this, Jo Chivers, who is a director of Property Bloom – they’re a development project company – joins me.
Good day, Jo. Nice to be talking to you again.
Jo: Hi, Kevin. Nice to be talking to you again, too.
Kevin: I know that’s a very simplistic way to describe it, but that’s pretty much what it is, isn’t it? A splitter block?
Jo: Yes, I think the term is probably used a lot more in Queensland. We refer to it as straight-out subdivisions. What it is basically is getting a block of land and cutting it in two. That’s a very simple, small-lot subdivision.
Kevin: Typically, these were where a house was maybe sitting on two blocks, and that’s almost like a no-brainer. That’s where you can move the house over and get a separate block. Is that the most common form, Jo?
Jo: I know that’s used a lot in Queensland, too, shifting a house over. If there are two titles already, that’s a very simple way to do it because you already have your subdivision through. Commonly, what we look for is a house on a large block. It might be on 800 or 1000 square meters, but it’s quicker and easier not to have to move the house if the house is located in a good position over to one side.
Typically, where we develop, mainly around the Hunter area, there are 1000 square meter blocks and the houses are nice and conveniently located over to the side. They’re typically 20 meters deep by 50 meters long, and we can cut that in half without having to move the house, but there is still a lot of work to do when you’re subdividing.
Kevin: Let’s run through what some of that work is. I imagine you have to get all of the services there, as well.
Jo: Yes. That’s the main thing. When we look for land that we want to subdivide, we’re looking at where the services are located and particularly the slope of the block, the gradient of the block.
If that block of land is sloping towards the rear and not towards the road, then that could be tricky if there is no drainage easement in place because you always have to look to where you’re going to drain that newly created lot. We mostly want to drain it to the street. That’s the easiest way. If it’s sloping away from the land, we have a look to see if there are any drainage easements in place. If so, that’s good; that’s easy, too. We can drain to the rear.
Typically, in older the suburbs, or more established suburbs, there is not an easement available. In that case, you would then have to negotiate with neighbors to basically drain through their system and create an easement, which can be very tricky and take a long time. If the block is sloping backwards, we give that one a miss, move one, and look for one that is more suitable, sloping to the street.
We also look for things like curb and guttering. If it’s corner block, for instance, there’s curb and guttering on one side and there perhaps isn’t on the other. This is a red flag for us because usually, councils will want you to then put in that infrastructure. They’ll want you to put in the curb and guttering on the side that’s missing. That can cost you $30,000 to $50,000 depending on the length and how much work is involved there. That, again, is a no; we won’t touch that one because it’s not adding any intrinsic value to the subdivision.
The other thing we look for is where the other services, such as water and electricity, are located because it’s really important that you can actually get electricity to the newly created lot. You might find that the lot actually has an electricity pole right around the corner that is supplying electricity to the block, but then you may need to then install a new pole, for instance, which can be very costly, too.
Service connections are very important to have a look at, and that is one of the first things that we obviously assess when we are looking for our sites.
Kevin: Would it be fair to say that one of the big mistakes that new people make in this area is that they simply don’t know what they don’t know? In other words, you’ve been through a number of issues there that if someone wasn’t experienced, they simply wouldn’t even know what they’re looking for, Jo.
Jo: That’s right. It’s so true to do your due diligence. It’s really important that if you haven’t done this before, then use the services of a project manager like ourselves, Property Bloom, or go to your local surveyor. Your local surveyor will have a wealth of information that they can share with you. They’ll know what the council requirements are, as well.
The next thing you need to understand is what your minimum lots size is – what the council will allow for the minimum lot size. You need to understand the zonings of the land where the land is located and you need to understand what the lot size is.
If you have a 1000 square meter lot, for instance, you want to cut it in half and the minimum lot size is 500 square meters, then that’s great; you can do that. But if it’s more than that, then you may not be able to do that depending on the position where the house is. It’s really important to have an understanding of what your minimum lot size is and the zonings of the land.
Again, your local surveyor will be able to help you usually with those sorts of issues and also give you a really rough estimate of his costs – the surveyor’s costs – but also of some of the civil work costs, like the sewer extension and extending the other services to the newly created lot.
Start with a few questions to council and then go to the local surveyor. It’s really important that you do a lot of work upfront so that you do have a bit of an understanding of the process.
Kevin: If I could just pick up on a comment you just made there, you said, “Ask a few questions of your council, then go and talk to the surveyor,” and maybe even the certifier. How helpful have you found the council? Do you really need to go past the council, or can you get most of your answers from them?
Jo: The council should be very helpful. You can give them the address or the lot and the DP, the deposited plan number, the lot number and the plan number, and they’ll be able to look it up on their system. They can tell you straightaway what the zoning is.
In fact, in the sales contract, if there is a contract available, there should be a county planning certificate in there that will tell this information, as well. It will also tell you if it’s flood-prone or if it’s bushfire-prone. Those sorts of things, as well, are important to understand.
The town planner, the duty planner at council should be able to answer quite a few of your questions, but they’re not there to advise you and they really won’t have an understanding of what the costs may be.
While you can get some information about the land from the council town planner, you do really then need to have the next step and talk to a surveyor or talk to a project manager who has also done this sort of work, and they’ll be able to give you a ballpark figure to start with on the civil works – the driveway has to be put in as well for the newly created lot and also connection of the services.
Kevin: You’re talking here about doing some due diligence. At what stage would you do this? Would you do it before you go to contract? If you’re not – in other words, if you’re putting a due diligence clause on your contract – how much time would you allow yourself, Jo?
Jo: Ideally, you want to have a good understanding before you even start looking for land because sometimes if something comes onto the market, it can move very quickly. If it’s a large enough block to subdivide, then there will be other developers looking at it, so you really need to start with finding a location you want to be developing in or subdividing in and doing your due diligence on pricing.
Is there demand? If you’re planning to sell off that newly created lot, is there demand for land in that area? Or are you going to build on that lot? If you’re going to build on that, why not combine a DA for the building work and subdivision process in the one DA?
It’s all about doing that due diligence, understanding council guidelines, and then searching for your property because if a good one comes up, it probably will move quickly and you may find yourself getting caught up in the excitement of it all and ending up purchasing something that may be difficult to subdivide or costly.
Kevin: Very good advice. You can see there why you would use someone like Jo and her team at Property Bloom. They’re development project managers. Just go to Property Bloom.
Jo, thank you so much for your time.
Jo: You’re welcome, Kevin. Thank you.
Michael Yardney
Kevin: As the market continually changes, you have to continually be looking at your investments and I guess with all of the strife we’re seeing around the world right now, there would be great temptations to change your strategy. Is it such a good idea? What should you be looking for in a good investment? Michael Yardney from Metropole Property Strategists joins me.
Hi, Michael.
Michael: Hello, Kevin.
Kevin: I’d pose that question of you, Michael. What do you think we should be looking for in an investment?
Michael: One thing that’s certain, Kevin, is there’s no such thing as a perfect investment. In fact, if somebody tells you that they’ve found the perfect investment, be very skeptical and ask lots of questions because chances are they’re trying to sell you something that maybe you shouldn’t be buying.
Kevin: Michael, what should you look for in an investment?
Michael: Kevin, when I look at my investments, I look at a number of factors. First of all, I look for liquidity – in other words, the ability to take my money out by either selling or borrowing against it. I look for easy management. I look for strong and stable rates of capital appreciation, so I want them to grow what I call wealth-producing rates of return. I look for properties that give me a steady cash flow, and I look for something that’s going to give me a hedge against inflation, something that’s going to increase faster than inflation, and also good tax benefits.
So Kevin, I think most investors put money in a number of different things. They’ve got some money in their super, in shares, in property, as well. So that’s, I guess, the same criteria I would look at for any type of investment vehicle. When you look at the major categories of investment, you’ll recognize that not many of them fit the bill of meeting all those criteria.
In this new era, as the market is changing a bit, maybe the long-winded answer to your question is look for investments that are powerful and stable. By powerful, I mean I want investments that are going to act as a hedge against inflation, that are going to grow at wealth-producing rates of return, which means I can borrow against them.
I also look for stability, especially at this stage of the cycle, Kevin. Property values should grow steadily and surely rather than having the major fluctuations like one tends to get with share markets or properties that aren’t in areas that have a large owner-occupier population creating a stability of continuing demand.
Kevin: I guess in fairness, Michael, just to balance the conversation, we might just have a quick look at what are the investment alternatives?
Michael: Sure, Kevin. I think if you look at the alternatives, you can either invest in cash, putting your money in a bank as people used to do in the past. I remember, Kevin, getting 12% or 15% interest on my deposits years ago. Now you get 2% or 3%, so I don’t think that’s an alternative for people wanting to grow their wealth.
There’s shares, stocks, which give you a combination of dividends, so it gives you cash flow and also increased growth, but in my mind, the stock market has the liquidity, it means that you can actually sell quickly, but that foregoes the stability. In other words, you can get 10% or 15% fluctuations in values over days or even sometimes within the same day.
Then there’s real estate, which, in my mind, doesn’t have the liquidity but because it doesn’t have the liquidity, it gives you the stability of not fluctuating too much in price.
The other thing I like about residential real estate as an investment vehicle is it’s the only investment market not dominated by investors. If you think about it, Kevin, 70% of people who own residential real estate are owner-occupiers, and they don’t make the decisions the same way you and I do regarding what’s going to happen to interest rates, what’s going to happen to negative gearing, what happens if the economy goes down. They keep their houses in the long term.
I like investing in a property investment vehicle in residential real estate because, essentially, a market dominated by non-investors, that gives me stability.
Kevin: I guess the other thing, too, at property over shares is that with shares, you don’t really have any control over the value of those shares, whereas with property, you do. You can add value.
Michael: Correct, Kevin, and that’s another reason why at this stage of the cycle, established residential real estate makes a better investment in my mind because you can add value while buying new properties, you’re at least paying full price or maybe a premium.
I also like properties that are more what I’d call “how to” rather than “when to.” “When to” investments, to me, mean you have to actually know the timing of them. You need to know when to buy, when to sell, timing is crucial for these investments. If you buy low and sell high, you’ve done well; if you get your timing wrong, your money can be wiped out, and in my mind, that’s shares, it’s commodities, it’s futures, they’re when to investments.
As I said, I’d rather put my money to what I call “how to” investments, such as real estate, which increases steadily in value and doesn’t have the wide fluctuations in price. While timing is still important with “how to” investments, it’s nowhere near as important as how you buy them, how you add value.
So “how to” investments are really liquid but they do produce real wealth, while most “when to” investments, like the stock market, only produce a handful of large winners and the majority of people getting in those tend to be losers. On the other hand, in my mind, residential real estate produced hundreds of thousands of wealthy people and only a handful of losers.
Kevin: Michael, earlier in our conversation, you were kind enough to tell us what you look for in an investment – just very quickly liquidity, I think easy management, strong stable rates, and capital appreciation, steady cash flow, a hedge against inflation, and you also said good tax benefits. They’re six great things to look for. Are any of those negotiable, or do you look for all of them?
Michael: You’re never going to get all of them in the same investment, so more important to me at my stage of life is stability. I don’t need hassles. I’m not a speculator; I’m an investor, so I want investments that are going to grow at wealth-producing rates of return, so I wouldn’t compromise on the capital growth potential of my investments, Kevin.
Kevin: Yes, thank you, Michael. You answered that very well. Thank you, Michael Yardney from Metropole Property Strategists.
Thanks again, Michael.
Michael: My pleasure.
John Lindeman
Kevin: We’ve spoken many times about the growth in the Sydney market, and there are signs and a lot of people saying that it could just slow down. I wonder what’s going to happen to regional areas. That’s the topic I want to pick up on firstly with John Lindeman who joins me from PropertyPowerPartners.com.au.
John, thanks for your time this morning.
John: It’s a pleasure. Hello, everybody.
Kevin: John, what do you see for the regional areas if there is a bit of a slowdown in some of those cap city markets, particularly around Sydney?
John: When we look at the stats, what we discover is that the more growth there is in a capital city, the more likelihood there is that it will ripple out to the regional areas and, in particular, in Sydney where prices have gone up by about 50% in the last three years.
There is a huge amount of largess coming to the state government through stamp duty. What the government is doing is building infrastructure into the regional areas. That may well be for political purposes, but what it does for us is it ensures that there will be growth in the corridors.
What I mean by that is the Princess Highway going south, the Pacific Highway going north, and the Great Western Highway going west, all of which are being duplicated at huge expense. A lot of the people who were working in the mining boom areas are now working on duplication of the Pacific Highway.
Kevin: Taking you in another direction quickly now, there are a lot of generalizations about the property market – one is that there is only one property market in Australia. But there is the other one I want to pick up on, and that is that property doubles in value every eight years. I know you don’t hold to that, but can we talk about that for a moment? Where did it come from anyway?
John: I think it came from the ’70s and ’80s when property prices actually did do that. But I’ve studied the movement of housing prices from 1901 all the way through to the present time, and it just doesn’t do that. It moves very regularly. Sometimes there are periods of high growth and sometimes very low growth.
Kevin: What sort of annual growth rate would you need to achieve for it to double every eight years, say?
John: You’d need about 9% growth annually. We don’t get that. In fact, when I looked at the stats, what I discovered was that the average rate of growth is doubling in price in about every 12 years, but it doesn’t occur every 12 years. There have been periods where it’s taken 30 years, other times when it’s taken 5 years. The problem with the exponents of the property market cycle is you don’t know what’s about to come; all you can see is where you’ve come from.
Kevin: Some of these generalizations really do make it complicated for people who want to invest in the market – like I said, there is only one market – and that’s highlighted by the fact that there are different growth rates all around Australia really with property, aren’t there?
John: There are. Within capital cities, each suburb can perform very differently, and certainly, in regional areas, some will go up and others won’t. But as a general rule, if you’re looking at growth opportunities as we have in Sydney, there have been huge growth, and that’s likely to flow into the regional areas around Sydney.
Kevin: Housing growth doesn’t necessarily depend on past performance, does it? What are some of the indicators that you look for? I guess it would be true to say, too, that there are some markets that will never, ever improve again.
John: There are, unfortunately, quite a few of them. The main indicators are what the demand for housing is. If you can measure the demand, that is the number of people who want to move into an area, then you can estimate how it’s going to affect housing prices.
Let’s look, say, at the infrastructure boom that’s appearing in New South Wales and the Pacific Highway. What that’s doing, the duplication of that highway, which is over 1000 kilometers long, is generating thousands of jobs. These people are now renting in areas like Taree, Kempsey, Port Macquarie, Ballina, and so on.
The number of people who are doing that is enough to increase the asking rents dramatically. Then what happens, of course, is investors move in and say, “We’ll get some of the largess.” After that – and this is what happened in towns like Moranbah – there was no residual demand. Once the mining boom was over, it was finished.
But what we have here is that these areas will then become more attractive to tourists or retirees because they’re easier to access. I can see long-term growth in areas north, west, and south of Sydney as a result of this huge expenditure of the highways duplications.
Kevin: Would it be fair to say that there are some areas where growth will always be dominant? That is, if you can identify those areas where there is that very strong balance between supply and demand, is that one of the key indicators for you?
John: It is. As long as the demand keeps rising, then, of course, prices or rents will rise accordingly.
Kevin: In closing, what lessons have you learned recently from looking at the cycles?
John: What it’s taught me is that it’s easy to see where you’ve come from but it’s really hard to know where you’re going. An example of that is the mining towns in Queensland – Moranbah, Dysart, and Emerald – which were at the start of the decline when people were predicting that they were at the bottom and about to recover. A lot of investors hung on expecting the rising market to start occurring, but in fact, that was just the start of the huge, enormous, horrible slide.
I think that’s the lesson about the cycle: you don’t really know what’s around the corner.
Kevin: Which makes commentary from people like John Lindeman so valuable and so, too, is his website. It’s called PropertyPowerPartners.com.au. My guest has been John Lindeman.
John, thank you so much for your time and your insight, as usual.
John: It’s been a pleasure. Thank you.
Sally Tindall
Kevin: A study of more than 3000 potential mortgage customers has found an alarming number of people are opting for bigger loans with smaller deposits. The study was taken by comparison website RateCity, and Sally Tindall, who is the Money Editor for RateCity joins me.
Sally, this is somewhat of a disturbing report.
Sally: It is disturbing. We’ve found that our customers using our site are really looking for the smallest deposit possible and they’re looking to take out really large loans. We’ve actually seen an increase over the last five years of 23% in loan size, but they’re increasingly asking for smaller and smaller deposits, and that could be a reflection of the fact that interest rates are so low, so people feel that they’re able to stretch themselves a little bit more and buy a bigger house, basically.
Kevin: Yes, somewhat scary. What do you think of the long-term impacts of this situation?
Sally: It’s an incredibly risky strategy, and it’s also a much more expensive way to borrow, because small deposits actually attract higher interest rates from the banks because it’s risky for the banks to be lending to people with a small amount of equity in their loan, so the customers are really at loggerheads with the banks and they are going to be paying for it in terms of higher rates.
Kevin: Are the banks – do you think – getting a little bit too soft? Are they offering too many sweeteners?
Sally: Well, look, some banks are actually really cracking down on loan-to-value ratios and they’re offering the rock bottom prices of under 4% to borrowers who have hefty deposits of anywhere up to 60%, if you can believe that. But there are some lenders out there that are happy to take on new borrowing at 5% deposit, and that’s where the risks really occur.
We don’t want to see another iteration of the US subprime mortgage market collapsing, so the government regulator is really looking at these people who have got small deposits and so are the banks.
Kevin: This might be a hard one for you to answer, Sally, but I’d really like your opinion on this. We are hearing reports that as a nation, we’re becoming better savers. Do you think it’s just that people have the savings but they’re not prepared to put it into a deposit that they’re opting, as you say, to head toward the lower-interest type loans?
Sally: Look, I think every person has a different reason for wanting a small deposit. It might be that they’re trying to rush into the market before it escapes. It could be that they have some sort of family circumstances where they can only get a small deposit. So everyone is different.
We are actually a nation that’s very good at putting money into things like offset accounts, so we’re quite savvy when it comes to that, but I do think it’s a matter of people wanting to buy larger properties with bigger price tags attached, particularly in markets that are increasing in growth.
Kevin: Do the banks penalize borrowers with little or no deposit – in other words, with higher interest rates?
Sally: Absolutely, and they penalize them quite significantly. Look, we’ve done a bit of research into this, as well, and we’ve found that some of the lowest rates on our books – at 3.89% – are only available to people with a deposit of at least 20% but in some cases, up to 60%. What these banks are telling us is that they’ll give you a good rate but only if you’re a refinancer who’s an owner-occupier and has really stable source of income.
Kevin: Well obviously, it’s good business for the bank to get people on higher interest rates, but do you think at some point they’re going to cut off their book for the low-deposit type borrowers?
Sally: They certainly might. If the global market continues to be in turmoil and the government regulator here in Australia continues to crack down on risky lending – which is ultimately what we’re talking about – then absolutely; we could see the banks starting to say, “No, sorry. You’re going to have to stump up with more than that.”
Kevin: Is the banks’ tightening of lending criteria for investors, is that showing any signs of having some impact?
Sally: It really is. We’re seeing the biggest impact happen in the investor lending market. Back in July of last year, most of the banks introduced differential pricing for investors and owner-occupiers, and immediately we saw that investor lending has dropped dramatically. I think between June of 2015 and December of 2015, there was a massive $2.4 billion drop in investor lending, and so that market signal is working.
Kevin: Sally Tindall, Money Editor for RateCity. Thank you for your time, Sally.
Sally: Pleasure.
Graham Jarry
Kevin: Hot on the heels of my chat earlier in the show with Jo Chivers about splitter blocks, we’re going to share a success story with you now. I’m talking to Graham Jarry, who describes himself as a small, full-time developer.
Graham, thanks for your time, and thanks for sharing your story with us this morning.
Graham: My pleasure, Kevin.
Kevin: Now, we’re going to talk specifically about splitter blocks. Tell me your story. I believe you bought a block, split it, and then sold half off. Was it that simple?
Graham: I sold both off, actually. It is pretty straightforward once you’ve done a couple. I was in and out from settlement-to-settlement in two and a half months.
Kevin: Is that the secret as far as you’re concerned – that you’ve done a few, you know what to expect?
Graham: I did educate myself, but once you’ve done a couple, yes, your costs are pretty well the same each time unless there’s some curve ball thrown up with choosing the wrong spot or something like that.
Kevin: We might talk about a few of those as we continue to talk, but I want to take you back to the first one you ever did. Do you remember what that was, and where was it?
Graham: Yes, it was out in Wynnum West.
Kevin: Wynnum West. That’s in Brisbane, of course.
Graham: In Brisbane, yes.
Kevin: Tell me about that one. Was it a difficult one, or did you go in with your eyes pretty well wide open?
Graham: I went in with my eyes pretty well open. I’d had some education on how to do it originally.
Kevin: What sort of education did you put yourself through?
Graham: I went through a mentoring with a developer who was active in the market.
Kevin: Tell me about the pros and cons of actually splitting a block from your perspective, Graham. You’re obviously able to do this now full-time.
Graham: Yes, that’s correct.
Kevin: Obviously, the pros for you are that it’s giving you the lifestyle that you want and the income that you want, but are there any downsides to it?
Graham: Look. If you pay too much, obviously, you’re not going to be able to make profit out of it. I don’t see many downsides. They’re quick to do. There’s a lot of big blocks around, people wanting to downsize, and that sort of thing. People don’t want large yards these days, and so predominantly, they’re 10 x 40 when you split them. 10 meters wide, 40 meters depth.
Kevin: Tell me about some of the pitfalls that you’ve come across that you think maybe we can learn from, Graham.
Graham: One thing was I had to put a stormwater in one out in Wynnum I did. The stormwater was for the rear blocks. The council wanted me to do that in case they subdivided the back two blocks at any point. The reason for that is with the narrow blocks, it would have been difficult to put stormwater through those blocks with the narrow blocks with the houses over once they were installed, I suppose. That was one that I wasn’t expecting. That cost me an extra $10,000 nearly for that one.
Kevin: What are some of the other additional costs that are associated with splitting a block?
Graham: If they’re already on two lots, which is what I call a splitter block, you’ve just got your costs. Because it’s a business, you pay your stamp duty, legals, and we have to pay GST on the other end because it’s a business. If someone was just doing a one off every now and then, they probably wouldn’t have to pay GST. But as it’s a business, we have to pay GST.
The other costs are normally sewer and water. Sometimes if you’re doing DA for it, the councils may say they want street trees, they may say they want footpaths, things that you just don’t know sometimes. You need to have a contingency in it of a certain percentage to allow for those things when you’re doing your research.
Kevin: How much contingency do you put in normally, percentage-wise?
Graham: For a property around $500,000, I put in a contingency of about $10,000.
Kevin: Let me take you in another direction. You mentioned splitters being basically a block that’s in two lots already. Would you ever look at getting a block that’s not split in two? In other words, you have to go through the subdivision process, or is that too lengthy?
Graham: No. I still do that, as well, because the double lots people look on the Internet and see, “Oh, the 405 now is worth $300,000; we want $600,000.” They’re wanting in price a lot of the time, so it won’t work. So, yes, I definitely do do subdivisions, one into twos, one into threes, one into fours.
Kevin: Good lesson there that if you’ve got a block that is possibly able to be subdivided, it doesn’t necessarily follow that you have two lots of land that are worth what two vacant blocks are worth, because by the time you go through the subdivision, then getting all the services on, there are substantial costs involved there, Graham, isn’t there?
Graham: Yes, there is, and knowing where to go to get that done and to be able to get it done quick, because obviously, holding cost is another pitfall of people getting held up. If they’re not sure what they’re doing, the cost of interest on money and stuff like that can eat into it. The other pitfall really is being able to sell it quick.
Kevin: Well, I suppose good people like you always make things look quite simple. But the message there is always do your homework and make sure you understand what you’re getting into.
Graham, thank you for sharing your experience with us today.
Graham: It’s been my pleasure, Kevin.