Why do many renovation projects fail to make a profit? In this week’s show Jane Slack-Smith reveals the 10 most common renovation mistakes that leave people wishing they have never even started.
Is it time to lock in some or all of your loans into fixed rates?
This is a question many property investors and home owners are asking with interest rates at the lowest they’ve been in decades and competition amongst the banks delivering us some very attractive fixed loan rates.
In this week’s show Michael Yardney shares the 7 key questions to ask and some news about whether he thinks they will go up any time soon.
Making the most of open homes.
If you’re looking to purchase a property, chances are you’ll be attending some open homes in the coming months. Having a systematic approach to check the tangible and practical aspects of each property you visit can help you make the most of your time. Andrew Mirams has some practical tips to help you be successful with open home inspections and the questions to ask while you are at the open.
Property State of origin
We take a look at what’s in the latest Australian Property Investor magazine and find out which state wins in the property state of origin battle.
Listener’s questions
Dr Andrew Wilson, chief economist with the Domain group, joins us to answer questions from Gary and Carolyn about property price growth and how it is influenced by interest rates and inflation and also how to detect if a market you are going to invest in is in balance when it comes to supply and demand.
Both Gary and Carolyn will receive a 12 month subscription to API magazine for sending their questions in.
You could win the same – forward your question or comment through the website.
Transcript
Andrew Mirams
Kevin Turner: Well if you’re like me, and you want to go out shopping for real estate, one of the things that I do not like doing is going out with a real estate agent. I’d much rather go to an open home. Be a lot more relaxed, and you can have a look around in your own time. You can make a list of the properties you want to go and see, and then do it as I say, at your own time. There was a blog article written by a contributor of ours, one of the experts we turn to, Andrew Mirams from Intuitive Finance, about how to get the most out of going to open home inspections. Andrew, how are you?
Andrew Mirams: I’m very well Kevin, thank you for having us.
Kevin Turner: That’s OK mate. Now I understand on your website, you’ve also got a great checklist which we’ll talk about in just a moment.
Andrew Mirams: Absolutely.
Kevin Turner: But what advice do you give to people, I guess based a lot on your own personal experience too, how to making the most out of getting to an open home?
Andrew Mirams: Yeah, look, well the first reason normally people are going to an open home in the first place, Kevin, is because they’re interested in buying.
Kevin Turner: Yes.
Andrew Mirams: So I would suggest that the very first thing that people do is get a finance pre-approval in place. I think we’ve all heard of many stories of people going out and buying something on a weekend and then trotting in and having issues getting finance on a Monday. So get a pre-approval in place would be the very first thing. It’s one less thing you have to worry about while you’re looking at houses.
Kevin Turner: Yeah. OK, and I guess in doing that too you’re going to have a bit of a wishlist aren’t you, of things that you want?
Andrew Mirams: What it normally does is it starts to create, yeah, a mind map for you or something like that, that you’re going to say well, if we’re upgrading or buying our first home or buying a unit, etcetera and it’s for our own livability, there’s obviously things we all want from that. Whether it’s bathrooms, how many toilets, what sort of kitchen you want, how many bedrooms, do you have kids or not, do we want a study, all those sort of little things. I think it’s important to know what you want rather than just going open slather and looking at places.
Kevin Turner: Yeah, one of the things that are most important, it’s almost like having a list and you can almost tick them off whether you do it mentally or physically, doesn’t really matter, but as long as you’ve got that list. I think the other thing too is you go..
Andrew Mirams: I think with that Kevin, the big thing is, it’s really hard if you’re doing a number of things mentally it becomes really difficult.
Kevin Turner: Yeah it does.
Andrew Mirams: I would say technology is really wonderful now with iPhones and cameras and notes, and we have a fantastic checklist on our website which I’ll talk to you about in a minute, but I think it’s take notes.
Kevin Turner: Yeah.
Andrew Mirams: Don’t try and do it mentally, it gets too hard.
Kevin Turner: That’s very good advice. The other thing about being able to go to an open home is that you can actually take your time and really go around at your own pace, because most agents will leave you alone, Andrew.
Andrew Mirams: Absolutely. Look, it depends on the market and what you’re looking at, but generally the agent will be at the front door. They will have their pen and paper ready to get who you are and what you’re doing there. Some people try and play fun and games with that. If you’re actually genuinely interested, give them your details. What have you got to lose? Even spend a bit of time talking to the agent. There’s probably a few things you can ask them, some a bit cheekily, but sometimes the agents are quite forthcoming because again, they’re the middle man and they want to put the two, the buyer and seller together.
Kevin Turner: Just on that point there about making sure that you give your details, you’re right. If you’re serious about it, you’ll want the agent to be able to answer some of your questions. Whether or not you ask those questions at the open homes is going to depend on how many people are there. It’s nothing wrong with asking the agent, are you going to call me back later because there are a number of questions I want to ask you?
Andrew Mirams: Absolutely, I think that’s a great point. Some people are very open and others are more private. If you don’t give them your details and then you fall in love with the place, because it’s the best one you saw on Saturday and then Monday you ring them, and they say they’ve sold it because they’ve accepted another offer and they didn’t know you were interested, well you’re doing yourself a disservice aren’t you?
Kevin Turner: You are indeed. Some of the typical questions that you should ask, we probably should run through a few of those too, as well Andrew?
Andrew Mirams: Well obviously if it’s for auction there is a set date when it’s going to be for sale. But in a current market like we’re enjoying at the moment where it’s low interest rates and quite buoyant markets across the states, I think asking, have you had any offers and has the vendors rejected any offers, is a really important thing. It seems that can often dictate the vendor or the seller’s motivation. Another one is, if it’s for private sale, how long has it’s been on the market? There’s some great tools also you can utilize through good buyers advocates or ourselves. Mortgage brokers will have access to things like RP Data. You can generally get that sort of information as well. Has the building inspection been done? They can be quite costly if you start looking at a number of different places. Often there’s, one has been done and sometimes you might be able to get a copy of it for nothing. I think a great question to ask is, and again, I guess the agents have to be careful with how they answer this, but why are the owners selling?
Kevin Turner: It’s pretty important to know that actually I think, and that is one of the key questions you need to ask.
Andrew Mirams: I agree, you know, if it’s a divorce you know that there’s actually, most likely there has to be a sale, or a deceased estate, the executors don’t want to hold on to it, etcetera. It might give you some ability to negotiate, not always on price, but to meet their motivation.
Kevin Turner: Yeah, you might not always get the answer, but as I said, it is well worth asking the question.
Andrew Mirams: Absolutely, I agree.
Kevin Turner: Things like, when was that house last renovated, and particularly if it’s a unit, asking what the owner cost are, or the fees?
Andrew Mirams: Absolutely, I think that’s a great one. Also if you look around at the appliances, how old are they?
Kevin Turner: Yes.
Andrew Mirams: Do they all work? I think, some people you see when they’re in open homes, they can be quite cheeky. But I think turning on taps and seeing how quick the hot water responds or what’s the pressure like? The little things, you don’t want to buy it and make your biggest investment decision, it’s going to be your home, and realize that the hot water takes ages or the significant expense to get things up to speed where you may or may not want them.
Kevin Turner: Very good advice. Now that checklist you mentioned that’s on your website, tell us a bit about that.
Andrew Mirams: Absolutely. We encourage all our clients when they’re out looking into the market to go to our website. If you go on there, it’s under Handy Tools. Or Tools and then go down, and you drop down on that box to Intuitive Finance Handy Tools. What you’ll see there is a Home Inspection Checklist. We print these off, we’ll give these to clients when they’re looking or obviously you can get on and load it. We generally say take a few if you’re going to a number of houses on the weekend. And when you mention at the start, Kevin, is highlight what’s important to you. We get them to run a highlighter over it, what are the most important things there are, because the checklist has a rating system, poor, average or good. Some people put numbers, depending exactly what they’re looking for. Rather than filling in all the address details on all that, as you walk in, all the agents normally give you a nice pamphlet or flyer, attach that to it, make your notes and comment, and you walk out. What you do is you start to build a nice database of information for yourself.
Kevin Turner: Yeah.
Andrew Mirams: That’s on our website, it’s www.intuitivefinance.com.au. Under Handy Tools and then drop down to the Handy Tools box, and you’ll see the Home Inspection checklist.
Kevin Turner: Mate, a very comprehensive rundown. Thank you very much for sharing that knowledge with us. Andrew Mirams from Intuitive Finance. Mate, thanks for your time.
Andrew Mirams: Pleasure Kevin, thanks.
Jane Slack-Smith
Kevin Turner: It always sounds easy at the outset. I’m going to renovate a property, I’m going to flip it over, make lots of money. Did you know, in fact, that many renovation projects actually fail to make a profit. And there are some very simple reasons why. In this interview with Jane Slack-Smithh, I’m going to take you through, or Jane will take us through the 10 most common renovation mistakes. Jane, of course, from yourpropertysuccess.com.au Jane. Thanks for your time.
Jane Slack-Smith: And thanks, Kevin.
Kevin Turner: What is mistake number one.
Jane Slack-Smith: Look I think that most people concentrate on the renovations and they actually miss the big picture. And that is finding the right suburb to renovate in. So my trident strategy, having three ways to make money, buy below the market, buy in a good capital growth area, and buy to be able to add equity through renovation, allows you to have three ways to make money. and that means that finding the right suburb that’s going to have that capital growth is so important.
Kevin Turner: Yep. Number two.
Jane Slack-Smith: Research, research. So the right street and the right suburb. You really need to have pricing disparity between renovated and unrenovated properties. Often people just find a really good suburb, think it’s all going to happen for them, and they can renovate, and it’s not the case.
You really have to narrow it down to the right street, as well.
Kevin Turner: Okay, number three.
Jane Slack-Smith: It’s the right house. You have to have a house that’s actually fit for the demographic. You need to understand what the demographic is that they want, and renovate to that. You need to understand exactly what the fixtures and finishes should be like. You need to understand what the end value is going to be that you’re aiming for and seeing if you can make a profit with what you can purchase the property for.
Kevin Turner: Do you actually picture the end user, and that actually helps you get the right house?
Jane Slack-Smith: Absolutely. I actually call it an avatar. I’ll have somebody in mind, I’ll name them. If I’m looking at a two bedroom unit, I might have Jen and John who are young professionals and I try to sell them what they want. Maybe it’s security, maybe it’s also good access to Foxtel or whatever, but, car parks, but I try to work out what they want, maybe some fixtures and fittings that are a little bit better than the rest in the area.
Kevin Turner: Tip number four.
Jane Slack-Smith: Buy without emotion. You do all that work, you’ve done all this research to find the right suburb, the right state, the right property, and then all of a sudden you fall in love with the spa bath.
You have to think about this as an investment. This is a business. If you’re going to make money out of renovations, take emotion out of it.
Kevin Turner: Number five.
Jane Slack-Smith: Unrenovated does not equal the capacity to renovate and make money. Just because a property does not have the finishes you think it should have, doesn’t meant that by putting in kitchen, bathroom floor covering that you can actually get the money out of it.
I teach people that every dollar they spend, they should be able to make two dollars. I’ve got a student at the moment who’s just done a property and has made eight dollars for every dollar he spent on the property.
There’s potential out there to do it, but not every property is right for renovation.
Kevin Turner: So, spend a dollar to get two back.
Jane Slack-Smith: Yes, at least.
Kevin Turner: At least, and see if you can get more. What about number six.
Jane Slack-Smith: There’s people who start the renovation with no budget. No budget management throughout the renovation and maybe a limited scope of work. So, they don’t fully understand what work needs to be done. So as the tradie comes and says, hey, what do you think about some dimmer switches for instance you might go yeah, that’s good, when in actual fact it could cost you anther five hundred bucks in a house that has those switches.
Understanding specifically what you want, what your budget is, and managing that budget through the process.
Kevin Turner: Number seven.
Jane Slack-Smith: That brings us to over capitalization. Just because you love caesar stone does not meant that three bedroom house in the outer Sydney suburb needs a stone bench top. Maybe you need to actually have a look at properties that are renovated in the area, the demographic that you’re renovating for, and work out what that finish should look like.
Kevin Turner: Okay, next one.
Jane Slack-Smith: This is the paint before you replace. I’ve had people that take my courses who’ve done fifteen, sixteen renovations and it wasn’t until we talked about the fact you didn’t have to pull the entire kitchen out, you could maybe repaint the bench tops, repaint the tiles, put on new doors that they realized they’re wasting a lot of money by replacing everything, where in actual fact a few little tidy ups and fix ups could save them a lot of money and keep the same finish.
Kevin Turner: And the last couple
Jane Slack-Smith: The DIY trap and the relationships tip. This is a bit about relationship stuff here. The DIY trap is those people who have a go at tiling, or have a go at painting. And really, you know, if it takes a long time, costs a lot of money, sometimes you have to get a professional back in and in actual fact, the property doesn’t look as great as it could do.
Then there’s the relationship twist and that is if you’re having a relationship problem or communication problem, maybe renovating together is not the right thing for you.
If I’m doing a long renovation, I often tell people to take a holiday in the middle of it, take a weekend and plan that from the outset, that if you’ve got some relationship problems, renovation can really be testing.
So just to warn you on a bit of an emotional level, think about renovating with your partner and how you can work with him, and if it really is a good thing for you to do together.
Kevin Turner: Yes Jane, it’s a great way to end a relationship, isn’t it, and that is to actually go into business with someone like that.
Jane, it’s been fantastic. Thank you for sharing those ten with us. I want to say that there’s a heap more advice for you at Jane’s website, yourpropertysuccess.com.au. That course is coming up really soon. We’ll tell you about it. You’ll only have a window of four days to get in, so stand by, and we’ll tell you right here at Real Estate Talk, how you can do just that.
Jane, thanks for your time.
Jane Slack-Smith: Thank you Kevin.
Michael Yardney
Kevin: A lot of chatter at present about whether or not you should fix your interest rates, whether or not you’re going to move much more, but there are seven vital questions you must ask if you are considering fixing interest rates. To help us with those questions, someone who’s probably just been asking himself the same questions, Michael Yardney from Metropole Property Strategists. Is this from personal experience, Michael?
Michael: Kevin, it really is because a couple of weeks ago, I was visited by somebody from the treasury of the National Australia Bank about my own substantial loan portfolio. The bank wanted to protect me and suggested I should be locking in some or all of my interest rates and I almost did, Kevin. Every time I have in the past … not every time, but often when I did in the past, I got it wrong. It was just the time interest rates would drop again. It’s a bit like when I wash my car, Kevin, on the weekend, it’s a sure way to make it rain. That made me wonder maybe it’s worth looking into a bit further rather than just believing what the experts say.
Kevin: What do you think will happen in the near future with rates?
Michael: Kevin, I don’t think interest rates are going to rise any time soon. One reason I say that is what I just said a moment ago because I thought maybe it’s the right time, I’m no expert, but more importantly, I think two bits of news came out recently that made me think differently about locking in right now. One is the Reserve Bank’s lower forecast of economic growth. In other words, you’re not as comfortable with how Australia’s economy is going. Everything we are reading and hearing in the media, it gives me the concern about what’s happening overseas as well. The other thing locally that may affect the interest rates is our rising unemployment levels. To me, both those factors, the low economic growth and rising unemployment levels, mean it’s likely interest rates are going to be remain low for a little while yet.
Kevin: Michael, that’s all very good, but locking in those actually gives you some security or there are some advantages in doing that. What are the disadvantages?
Michael: You’re right, Kevin. Firstly, the advantages, it will give you some certainty of your cash flow commitment, especially if you think that in the future interest rates are going to go up, but yes, there are some disadvantages to them. That’s really why I would be asking some questions first to see what your plans are and how it would affect you.
Kevin: Okay, all right. Let’s do that. Let’s go through those questions now, the seven questions.
Michael: Sure. The first one I ask is, “Am U planning to sell my home during the fixed loan period?” Because if you are, Kevin, there could be a bit of a penalty for breaking your loan commitment.
Kevin: Right.
Michael: The second question I ask is, “Do I actually want excess equity in my property to invest further?” In other words, just refinance the property because with a fixed loan, this may come at a cost that is prohibitive. The other question I ask is, “Do I need an offset account?” A lot of the investors have an offset transaction account. This means that they are going to put their savings there and that gives them a credit balance. They might put their wages there. This credit balance is offset against your loan which means that you’re paying less interest on your investment loan. Interestingly, most fixed rate loan facilities don’t allow an offset account. Most people don’t know that, Kevin.
Kevin: No, I didn’t know that. What about extra payment?
Michael: That’s right. Sometimes you do want to make some extra payments. Some lenders are actually going to restrict how much you’re paying if you’ve got a fixed loan. If you think you may have the ability to make some significant payments over that period, it may be worthwhile only fixing a portion of your loan which I guess brings you to the next question, “Do you fix all of it? Do you do some of it? How much do I need for my portfolio?” If, Kevin, you’ve only got one loan, it’s actually quite possible to have a split facility where if it’s only one investment property, a portion of it is fixed and a portion of it is variable. Often, beginning investors choose to lock in 50% of their loan. I found more substantial investors the larger their loan gets because of the size of their portfolio, they tend to protect themselves by fixing in a larger percentage of their loan.
Kevin: Just on that point, I guess there are two other things that spring from that. One is how long should I fix it and if in fact rates do fall through then what’s it going to cost me, Michael?
Michael: Good question. How are you going to fix … this is a difficult one. If you believe that in the next year or two interest rates are going to go up, and in fact that’s likely to happen, and then they’re going to remain that for a year or two, I think locking in for just one or two, Kevin, is going to bring you out to the variable portion of your loan again at the time interest rates are at their peak. I don’t think locking in for one or two years is enough. You probably need to lock in for a minimum of three years and then possibly even for four or five years. What I tend to do, having a substantial portfolio, is space those out. Some of mine fall due at three years, some at four, some at five so I don’t have a mistake. I made many, many years ago in the early ‘90s where a large percentage of my loan portfolio all became … came out of a low fixed rate into very, very high interest rate environment and that can be stifling.
Kevin: I guess you’re hedging your bets a bit there too. You did say, Michael, at the onset that you had consulted some experts. I think that’s a very good point too that each person is different. They do need to consult and think about their own portfolio.
Michael: Yes, you do. I don’t think you should try and do it to beat the banks, Kevin. You never will. The purpose of doing this is to give you a level of cash flow and security. That’s I guess the last question, “If interest rates do fall further, what would locking in today cost you?” How would you feel if you locked in and all of a sudden the five-year loan facility fell further? Kevin, I know I’ve been in that situation, but what I did was I took comfort in knowing that I wasn’t trying to beat the banks. I have secured my cash flow position. I knew where I was going to be over the next couple of years.
Kevin: Very wise advice. How long is it going to take if you do choose wisely, Michael, how long does it take for you to find out whether you’ve actually made the right decision?
Michael: You are not going to know for 3 or 4 years over the period of your loan and so therefore, do it wisely, ask advice. There are other questions to think about as well such as your job security. Are you going to keep getting the same income? When are you going to stop and have a baby? There are lots of personal factors to consider and see an investment savvy finance strategist to discuss these with. As I said, I’m no expert, but I’m personally going through these thoughts and I think a lot of our listeners maybe, so hopefully that could give us some insight on what to think about.
Kevin: One thing I can assure you of, Michael, is that at some stage in the future, rates will definitely go up.
Michael: Kevin, when we look at that, the interest rates are stimulatory and the Reserve Bank rate is 2.25%.When they do come up, Kevin, it’s probably going to go up substantially because most economists believe that a neutral position is 4%. We noticed interest rates always creep up a bit above that so the reserve bank slows down a booming economy. It’s very likely that the Reserve Bank rate is going to go from 2.25% to at least 4.5%. In other words, it’s going to go up 2.5%. Therefore, my rates which may be around 5% could go up to 7%. For those who are already a little bit tight with their cash flow, that could cause some challenges.
Kevin: Michael, we’re out of time. Thank you very much. I did want to mention before you go, if you like Michael’s commentary on these issues and you’d like to know more, check out his sponsored channel at Real Estate Talk. Just go in the sponsored channel and look for Michael Yardney, click on that and there’s a whole lot more information in there because the Real Estate Talk is of course a lot more than just this show. We have a lot of content on our website. Michael, thank you for putting that there too because it’s very valuable information.
Michael: My pleasure, Kevin.
Nicola McDougall
Kevin Turner: As you know, I’m sure, Real Estate Talk is produced in association with Australian Property Investor Magazine and the cover story in the October edition, which is out right now, is called State by State.
Joining is the editor of Australian Property Investor Magazine, Nicola McDougall. Nicola, congratulations on another great article. Quite timely that this is around football time, too.
Nicola McDougall: That wasn’t a coincidence, Kevin, thanks for realizing that. We thought it was a good time with footie finals happening around the country in September that we paused mid-game I guess, and had a look at some of the results for every state and territory across the country.
Kevin Turner: Were they a surprise for you. First here let me say that the results came from on the house and John Edwards, of course, is featured quite heavily in the article, because he supplied the research on it.
I’ll talk more about a chat I had with him, too, but, were there any surprises in there for you?
Nicola McDougall: Probably not. I won’t give the game away, excuse the pun, but we looked at every state and territory and for the annual growth, it ranges from the last place getter the Wooden Spoon, only recorded growth of zero point four one percent over the last twelve months.
Whereas the winner recorded median price growth of seventeen point four two percent over the past twelve months. That shows you how the different markets are moving and you’ve got some that are just really struggling along there, and not obviously recording much growth at all.
Then you’ve got some states that have had a really big year.
Kevin Turner: We should mention here that the figures we’re talking about are twelve month growth figures of the median price, as I understand it.
Nicola McDougall: Yes, that’s right. Those figures I just quoted were for houses. We do cover the unit growth as well in the story, but the figures that I just quoted were for houses in very state and territory across the country.
Kevin Turner: Let’s get a little bit specific without giving too much away. The battle between Queensland and New South Wales, that’s the east coast, that’s predominately, as well as Victoria, where the bulk of real estate transactions happen, what was the state of origin result?
Nicola McDougall: Well, yeah, good pick there. All I’ll say is the results we found for the property markets are very similar to how the state of origin finished up this year. I think that will be a great surprise to many people. The Sydney market has, they had a great, had a big year.
It’s actually been sort of moving very quickly over the last eighteen months, but the thing is, it actually has been very quiet there for a good part of a decade whereas Brisbane and Melbourne and various other parts around the country, including Perth, over the last ten years have actually had some periods of house growth, where Sidney has flat lined for a very long time.
Kevin Turner: The reports out, too, that Adelaide, while it didn’t come up all that well in this report, is actually showing really good signs of recovery.
Nicola McDougall: Adelaide is in the middle of the pack in the results here, so it’s certainly a place better than Perth in our state vs stae cover story for this month. I guess one thing to consider is that Adelaide it has a median house price of four hundred and twelve thousand dollars.
Brisbane’s median house price now is four hundred and sixty seven thousand dollars. But when you look at Sydney’s, Sydney’s is eight hundred and twenty three thousand and five hundred dollars, so almost double the price of those two other major centres.
Kevin Turner: Not what you’d call really affordable, is it. I was interested too, as I said at the outset, that John Edwards, of course, supplied this data from on the house. One of his quotes is he thinks it’s getting too late to invest in the Sydney market, obviously saying there that, as we see with a lot of hot markets, by the time we hear about them, the heat’s come out of it, to some extent.
Nicola McDougall: Yes, that’s right. I mean, I guess a key part of successful property investing is buying before everybody else does, but that also takes a certain risk profile that you prepare to back yourself and things like that.
Generally speaking, when you’ve got a lot of median house price growth and things like that happening, sometimes it is a bit late.
It depends on what your strategy is. If you live in Sydney, for example, and you have no intention of moving, and you really, really want to get in the market and you’re prepared to wait, you’re prepared to buy property and perhaps not realize a profit for X amount of years, and things like that, you just have to be prepared to be paying top dollar.
There’s not many, or any, bargains probably left in the Sydney market at this point in time. I was down in Sydney a couple of weeks ago at the home buyer’s show, and speaking to another well known property commentator, and an investor came up and spoke to us at the API stand, and he was wanting to know whether he should buy in Adelaide or in SYdney.
Obviously, as I just mentioned, those two areas have very different price points. The advice that was given to that investor was, okay, which area do you think will be worth more money in twenty years’ time.
Kevin Turner: Very good advice.
Nicola McDougall: That’s right. You just have to be prepared. I was just at a dinner a couple of nights ago, and I was sitting next to a chap, a young guy, young married guy with a wife who’s not working because they’ve just had a young baby. He’s in Sydney and he was talking about how he was finding it very difficult for them to be able to buy their first property in Sydney.
So look, it’s never been easy to get into the market, but certainly in Sydney at the moment, for those people that are perhaps buying their first property, it’s doubly difficult.
Kevin Turner: It’s a great article. Lots of insightful comments from John Edwards. Another one I wanted to mention, just in closing out too, it’s hard to understand why Brisbane hasn’t done much better than it has done in the past twelve to eighteen months, which is probably an indication from John that he’s expecting better growth there.
Just as we close out, I want to mention too, that in the article you’re going to be able to read a lot about the icon himself when it comes to state of origin, Wally Lewis, and his story, which is quite fascinating, Nicola.
Nicola McDougall: We’re very pleased the king chose to speak to us exclusively about his property investment journey, so we do have quite a big feature with him in the article, just talking about where he chooses to invest and why he chooses to invest in those areas. Of course, we get him on the record a little bit about footy too.
Kevin Turner: While you’re reading the article too, you can just scan over a code there and watch the video I recorded with John about that article and he goes into a little bit more detail, as well. Nicola, congratulations on a great cover story. It’s called State versus State in the October edition of Australian Property Investor, which is out now.
Nicola, thanks for your time.
Nicola McDougall: Thanks Kevin.
Andrew Wilson
Kevin Turner: Got a couple of questions I wanted to answer now in the show. The first one comes from Gary who says what impact on price growth do interest rates and inflation have? Would you be more likely to see higher growth in a high interest rate inflation type environment? To answer this question, chief economist from Domain Group, Doctor Andrew Wilson joins me. Andrew, what’s your answer for Gary?
Dr Andrew Wilson: Certainly Gary’s on the money there Kevin. We always have that specter of higher interest rates which of course does take the heat out of housing markets particularly because it makes house buying less affordable. Most of the market is generated by mortgage holders buying and selling. Of course when interest rates rise it also means that typically the reserve bank is trying to put a cap on wages growth. It really means we have a stronger economy rather than a weaker economy which means we don’t have the labor to support the demand for labour that we have at that period prices are rising. The reserve bank puts those interest rates up to put a cap on inflation.
Even though, yes it does push down affordability, it is a reflection of a stronger economy. Low interest rates at the moment are good news for mortgage holders. At the end of the day the environment is such that our economy is not producing, I guess, where the reserve bank would like it to be. Those low interest rates, although good news for mortgage holders, aren’t all together a whole good news for everybody.
Kevin Turner: Good. That’s a pretty good answer there for Gary’s question. I’ve got another email that I received from Carolyn at Savvy Home Business. She says recently read an article which said that property prices were largely determined by supply and demand and also to be aware of the amount of property development in the pipeline. How can we find out how many pending property development approvals there are? Where should we go to get that information? Can you help with that one?
Dr Andrew Wilson: Yeah. Kevin look ABS does a monthly series for building approvals. It’s Australia wide and it actually drills down to the suburb level. If you have a close look at that ABS statistical series every month you can get a very comprehensive view of supply. It is building approvals so it’s planned supply, but there isn’t much of a difference between actual on the ground building levels and those that are planned and certainly slightly lower. It gives you a very good indication of where supply is and it also breaks it down into increments of units and houses and even higher in lower density units. ABS is a good source for the supply model.
Kevin Turner: There you go. Carolyn asks a slightly deeper question too, Andrew while I’ve got you on the phone. How can we tell when an area might be changing from a balanced supply/demand to much more supply? What are the indicators?
Dr Andrew Wilson: Rents, Kevin, are probably the first cab off the rank. An interesting scenario we saw in Perth last year was a big rise in rents in Perth which was a reflection of a surge in population from particularly east coast job seekers moving into the west at that period. Now of course demand for units, or for rental properties was the first cab off the rank when we saw a very strong increase in rental demand there.
That just showed an imbalance between supply and demand on the demand being exceeding supply. We’ve seen the other way track at the moment in Perth where rents are falling back to, I guess, a more rational level. That reflects, once again, that rebalancing. I think the rental market is actually a good forward indicator particularly in capital city markets of that supply/demand imbalance.
Kevin Turner: Is it much of a lag time there to when those adjustments in rents come through?
Dr Andrew Wilson: There’s not- Kevin really if we do see significant imbalances. Another example of course is that high rise market in Melbourne in the CBD where we’re tracking weakened rentals there. There was a big supply coming through in that market. Rents are struggling to keep up with the higher levels of supply compared to demand in that market. The rental market’s a good indication of overall balance and rents do track prices, Kevin, so over the medium term movements in rents track movements in prices and vice versa.
Kevin Turner: There you go. Comprehensive answers for both Gary and Carolyn there. Gary and Carolyn thank you for sending those questions in to us. In return for that, we are going to give you a 12 month subscription to Australian Property Investor Magazine. If you’ve already got a subscription to it, we’ll extend your existing subscription by 12 months. You too could win one of those as well. Just send your questions or any comments into us here. Just do it through the website.
In closing, thanks to Doctor Andrew Wilson for being with us and answering those questions. Andrew thanks for your time.
Dr Andrew Wilson: Pleasure Kevin.