Okay, now, but perhaps not so good later.

The Federal Government secured a compromise with the Greens so they could pass their $10 billion Social Housing Fund.

Now, if you haven’t been putting in the effort to understand what that really means, and I don’t blame you, let me quickly explain.

The Government isn’t going to spend $10 billion on housing.

They are going to invest $10 billion into the future fund.

The future fund has to earn a profit on that money, and it’s that profit that will go towards building housing.

In the last five years, the Future Fund has returned 7.8%, so at that rate, it would take about 12-13 years before $10 billion on housing was actually.

So, the Government announcement might better be reworded as

We will spend $780 million a year on social housing, maybe.

It just depends on how much our investments return, last year wasn’t great, we lost money but still, what’s an announcement without spin.

If I convert that back into actual properties, that’s about 800 houses a year. Australia needs over 150,000 new houses yearly to keep up with population growth.

I can’t help thinking that the $10 Billion social housing initiative is a far better headline than a plan!

What’s more interesting to me, and should be food for thought for our landlords, is that this bill passing will probably lessen the airtime the Greens have been receiving with their calls for rent caps and rent freezes. But not hearing them in general media isn’t the same thing as them going quiet.

The call for rent increase caps and freezes has one keen voter group listening: renters.

No surprise there. One survey suggested 75% of all voters think there should be some limit on rent increases. While rent stress continues, so will that idea, and the Greens are seen as the only ones saying they can do something about it.

Several federal and state Labor seats have renters make up a considerable portion of their primary voters. Tanya Plibersek has more renters as voters in her seat than any other group. In NSW, the top 5 state seats with the highest rent stress levels are Labor seats.

The Greens will keep pursuing the argument because they want more renters to vote Green rather than Labor. That could make Labor members more agreeable to further tenancy law changes. Tenancy is the NSW State Government’s responsibility.  The possibility of their Rent Commissioner following the ACT government and capping rent increases is entirely possible.

We should have at least two more years of rent increases before the market settles down. Those increases won’t be as large as we have had but they will still be felt.

The next NSW election is about three and a half years away, so maybe everyone might have moved on before then. Or not. They brought in the rule of only one rent increase a year when rents were going backwards.

My industry didn’t fight the change instead saying, ‘We can’t imagine a time in the future when more than one increase a year could ever be necessary.’

Sometimes I think we really are all caught up in an episode of Utopia.

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Author: Stephen Jackson

Who knows!

Shortest newsletter ever!!

However, as a Landlord, four changes will make our Residential Tenancy Law very different from what we currently have. I explain them and their impact in this quick 10-minute read.

Stay calm; we’ve got this.

National Cabinet Announcements on ‘A Better Deal for Renters’

An older client of ours has rung us several times concerned that the Government will reintroduce Protected Tenancies and rent freezes. She grew up with the rents of her parents’ investment properties being controlled and not being able to evict tenants. The thought of repeating that experience is just too frightening. I doubt we will go back to those days, but we will have some challenges with this new wave of tenancy reform.

Consistency in Tenancy legislation across the states and territories

Consistency is a hope more than a prophecy. Getting the states to mirror legislation is tough, and with laws that really would make sense harmonising, like taxation and employment, the states still won’t do it. Each state has its own politics, even across the same parties. Pretty much every Prime Minister has, at some point, left a meeting of State and Territory leaders mumbling about herding cats and needing whiskey or a gun.

What will continue to happen is that Queensland, NSW, and Victoria will look at each other to see what laws have been put in place and how well they have worked or not. For example, the new NSW Rental Commissioner is an idea copied from Victoria. Bond boards are similar, and versions of the New South Wales Consumer and Administrative Tribunal apply in most states.

The Rent Commissioner will be the one we (as agents) need to watch. Her brief is to make it ‘Fairer for Tenants’.

Tenant security

This one falls into the ‘You win, I lose’ camp. Increasing a tenant’s right to stay in a property can only be done at the expense of an owner’s freedom to issue notice. The big one here is the ending of No Grounds Notice to Quit. A no-grounds notice is a termination notice from a landlord to a tenant during a Periodic lease. In NSW, we are allowed to terminate periodic leases without giving a specified reason.

In the ACT, that power has been removed. An owner can terminate a tenancy to sell a property, move into it or renovate. They have to provide proof, and if they are found to have fabricated ‘facts’, they are liable to penalties and compensation. In Victoria and Queensland periodic leases can no longer be terminated without a reason though you can still terminate a lease at the end of the initial fixed term.

You can bet that we will have some version of this law. There might also be a push to have longer leases as the norm rather than 6- and 12-month terms. How they achieve that, I don’t know, but they keep talking about it.

Minimum standards

In NSW, we have had minimum standards for rental property for many years. The only change I expect is that the laws around mould will tighten up. Right now, tenants must prove that a mould problem is caused by the property rather than their behaviour. When these claims go to tribunal, tenants are fine at proving the mould exists and that it has caused them a loss or health issues. However, they usually struggle to prove the property and not them caused the mould.

The ‘if in doubt, it’s the owner’s fault’ rule always applies at the tribunal. We can prove pipes, walls and ceilings/roofs aren’t leaking. Design issues such as bathrooms, laundries without exhaust fans, and kitchens without range hoods that extract steam to the outside can be a challenge.

A change in legislation around minimum standards may make proving the problem is caused by the tenant quite a bit harder, particularly for older unrenovated properties.

Limitations to tenant information

This change sounds like a rather pedestrian data privacy policy, and in the main, it is. There is a single line in the policy announcement that does catch an agent’s eye, though.

They have suggested that certain types of information cannot be asked of a tenant or as part of our reference checks. In particular, whether there has been a dispute between a tenant and a past landlord or agent. We always ask agents, “Has an applicant been challenging to deal with”?

Our new Rental Commissioner says this is something that should be changed in our Tenancy Act. That will score points with the Tenants Union and Greens party.

We have far more issues with tenants who are difficult to deal with than tenants who fail to pay rent, and removing our ability to know if a tenant is likely to be difficult is concerning.

How will we adapt?

In summary, very little will change because of these announcements. But changes to our Tenancy law driven by the NSW Rent Commissioner are inevitable.

The days of a property being ‘good enough’ for a tenant are ending.  You’ll need a property in good condition to avoid issues and attract the tenants you want.

Tenant turnover will increase. If we have issues with a tenant in the first six months of the lease, we will need to give notice before the fixed term expires. The approach will have to become,

If in doubt, move them out.

There won’t be an option to wait and see. Once the initial fixed-term lease period of the lease expires, our ability to terminate a problem tenancy will effectively expire with it.

Need some advice? Contact us today 😉

Author: Stephen Jackson

The dead cat bounce.

It is a terrible term, particularly if you like cats. It’s a phrase to describe a short-lived recovery in the middle of a longer, more severe decline.

The idea behind it is that even a dead cat will appear to jump up momentarily when it falls, hitting a ledge before continuing its journey to the bottom. It’s a visual metaphor (sorry if it’s sticking in your mind) coined by ‘sensitive’ financial analysts back in the 1980s when they were describing the short-lived share price increases during the stock market’s fundamentally longer-term falls. The stock market falls were largely caused by rising interest rates and the end of cheap money that allowed businesses to stay in business while being inherently unprofitable.  If you know the term, zombie businesses, you know what I’m talking about.

Those interest rate rises back then had a double effect on real estate.  Firstly, as stock prices fell, people invested more in real estate, and real estate prices rose fast.  But growth in asset values, when other assets are falling, can only last for so long. The real estate market turned down in 1990 and fell until 91-92. We watched many people decide they weren’t going to sell at a loss and instead choose to hang on to their properties.  Sales volumes fell, but prices held over 1993 and then they didn’t.

Eventually, people realised they still really did need to sell because they needed something bigger, smaller, newer, cheaper, and so on. The market fell again between 1994 and 95. Property Economists describe this period as two separate downturns, because the upturn in the middle lasted 12 months and saw modest gains.  The constant driver was high-interest rates, and property sellers and real estate agents saw the market as one long, painful correction.

What’s happening now seems very familiar.

The RBA increased the Cash Rate from 0.1% to 4.1% over the last 14 months. Real estate prices fell during 2022, and there has been modest price growth this year.  A fall in the numbers of property for sale has driven growth. In actual terms, numbers of properties sold across Sydney from April 2022 to April 2023 have fallen 29.1% compared to the previous 12 months (reported by CoreLogic).

At the same time, buyer interest, as measured by Realestate.com, has almost doubled. That indicates buyers are no longer waiting for the market to fall further; they want a home now, and they think maybe the market has bottomed. And they’re right, at least for a little while.  But am I the only one that’s asking, ‘If buyer interest has doubled while properties for sale have decreased 30%, why hasn’t the market gone through the roof!?’

How long this aberration lasts depends on when we have another increase in interest rates and the interest rises, we have had finally wash through the economy.  And then there are the people coming to the end of fixed-interest loans.  This event is constantly being talked about probably because it sounds so dramatic.  And it is, particularly if you are someone going through it. The full effect on people takes about six months after they have changed to variable interest, not before. I’ve dealt with people who were forced to sell by their bank. They hold on for as long as possible, often longer than they should.

The mortgage cliff is thought to be in September this year. In that case, forced property sales will start happening in February next year or even July.

There are more than enough predictions on further interest rate increases, so I won’t argue how much they are yet to go up and why. But the thing about interest rate rises is the lag.

Many people remember 17.5% interest rates.  They happened in 1990.  The market didn’t really start to fall until 1991 and it didn’t stop falling until 1994 well after interest rates started to come down. People tend to think that an increase immediately causes people to change their purchase decisions. And they do, but the flow-through effects of those changed purchase decisions take time to have the biggest effect. Unemployment, recession, forced sales, tighter finance, businesses struggling, and lower pay rises or even falls in pay all take time. As Ernest Hemmingway said,

“How did you go bankrupt?”

“Two ways, gradually, then suddenly.”

But the market always has an upside and downside at the same time. The unit market property values will be more resilient. Higher interest rates always translate to higher rents. And higher rents lead to more investors buying units and holding onto the units they already have.

Houses are a different story. Land tax will continue to punish house investors. The State Government will not be willing to soften the blow as it seeks to keep its revenue coming in. The number of people buying blocks of land to build duplexes has remained high. Any decent block of land for sale has just as many duplex builders as home buyers at their auctions. That will change as the margins get tighter and banks become more cautious.

From 2015 to 2022, houses rose far more in value than units.

The reason for the disparity in unit values between 2112 and 2111 postcodes is because of the volume of new units built in Ryde which has distorted/overwelled the median values.

If you own an older unit (over 30 years) then 2111 postcode is probably a better guide.  If you own a unit that is relatively new then you’ll be more like the 2112 postcode.

Yes, that hurts if you own a unit.  You’ve done well if you own a house and owner-occupiers own most houses. The trouble for owner occupiers is that you must sell and downsize to get your hands on the profit, which is many years away for most of us.  The next few years will probably see some level of correction, with units doing better than houses.  But then possibly,  they won’t.  It might not sound like it from this market update, but the more I watch people and real estate, the less I think I know.

Author: Stephen Jackson

New units are getting better; well, maybe some are.

If you are considering buying a new unit you now have some options that you didn’t have a year or two ago.

The appointment of the NSW Building Commissioner in 2019 has been one of the better changes our previous NSW Government made to improve the quality of high-rise residential development.

For years the axiom in real estate was ‘never buy new’ and many of us in real estate used the definition of new as ‘built in the last 10 years’.  That’s typically how long it took to discover all the issues in a new building and work out if they could be resolved and by who.

Understanding the cause of a building problem is really just the start. Being able to get the problem fixed has been the real nightmare. Think Opal Towers. The problem has been in large part because of insurance and liability. Without getting into the blow-by-blow sequence of things, most people who buy a new unit assume that the builders’ insurance works like car insurance or home insurance. Something goes wrong and the insurance company steps in and takes over and gets the property fixed. If someone else should pay then that’s between the insurance company and them.

This concept is called ‘first resort’. When something goes wrong, the insurer is your first resort. Unfortunately, there is also a concept of ‘last resort’. Put simply, when everything else has been tried and failed, then the insurance will step up and pay. One of these insurances of last resort is Home Warranty Insurance which must be included in building contracts over $20,000. If something goes wrong and the builder is dead, gone into liquidation or cannot be found, then that insurance will cover you. If the builder is still around and won’t fix the problem, nor will the insurer. Your only alternative is to sue for breach of professional liability.

That means not just a lot of legal costs that you may not get fully back but years of time preparing your case, getting experts to confirm the issue and the loss of property value while the dispute remains unresolved. The biggest challenge is proving something specifically was done wrong or that something wasn’t done that should have been done.  Just because the building is falling down doesn’t prove fault. Forget the idea of saying, what else could it be. That was the problem with Opal Towers. Everyone had to sue everyone else, and no one was allowed by their insurers to accept fault or blame.

And when high profile failures like this happen, it’s not just the owners of the building that suffer loss. In the case of Opal Towers, it was reported that the surrounding building also had their property values discounted by buyers. When there is doubt and fear, everyone gives it a wide berth.

So now to the changes 

iCIRT rating system

iCIRT stands for the Independent Construction Industry Rating Tool. It’s a star rating system that awards up to 5 stars to builders and developers who are deemed to be more trustworthy to deliver a more reliable outcome. The more stars, the more confident the ratings agency is of the professional. They look not just at their track record but their capitalisation, business partnerships and directors, industrial disputes, payment to contractors and so on. They even look at the businesses they do business with so if a business is found to be doing work for a 0 star business, or worse having a 0 star firm doing work for them, their own rating will come down. And I thought google reviews were tough.

And the stars are coloured based as well.  They get Gold stars if they have been fully cooperative and consented to all requests of the ratings agency for information. Those stars become Silver or Bronze if they were less forthcoming.

So how good is it?

Well, you might remember the name ProBuild which went into administration beginning of 2022. The ratings agency saw red flags in ProBuild’s data as early as October 2019.

We also know of stories of buyers not going ahead with a purchase from a low rated builder and instead buying in another building built by a company with a far better rating.

Right now not all companies are rated. The ratings agency will rate a company if they are asked by a building regulator or Government official or by the company themselves. That will change and more will be rated across more professions including lawyers and accountants and even Strata organisations. Now that will be fun to watch.

Banks will also be using iCIRT to inform their decisions about lending on particular building.

As of yet there isn’t any real right of appeal. If a builder disputes the rating, he can talk, give more info, plead, and cry but he can’t take them to an independent body for review.

With a higher star rating, buyers can be more confident the builder will come back to fix any issues and there will be less issues to fix.  That translates to less headaches and more importantly less strata maintenance costs over the long term. And that hopefully translates to lower levies and better resale.

Providing the system remains reliably applied, it has a lot of power in changing the culture of construction. Builders and developers liquidating the company to avoid legal issues won’t be able to walk away and start a new company. The agency checks past directorships and issues with those building as well.

Is the system perfect, heck no! But it is making the truth about a builder’s quality of work a lot more transparent that has been the case in the past. And its power is already showing. I checked with an agent who sells a lot of new units off the plan and asked if it was having an effect, were buyers asking about it. He proudly told me all his builders and developers have 3 stars and they promote it to buyers. That’s the lowest rating given. The ratings agency doesn’t give 1- or 2-star ratings.

At some point, house builders will also be subject to this rating system and in time homeowners will say,

This is my new home; it was built by a builder with 4 stars.  

Just what we need, a new status symbol.

To find out more go to  www.buildrating.com

Decennial Insurance

Decennial insurance is new.

The term Decennial comes from the fact the insurance covers a 10-year liability. This insurance has been available overseas but is now being offered in NSW principally off the back of the building reforms happening in our state.

The big difference with type of insurance is that it is a ‘first resort’ policy. If there is a building fault, the insurance immediately looks at what needs to be done and gets it organised. Resolving who is at fault and why, happens later and independent of the unit owners.

If it had been in place with Opal towers, as soon as the issue was realised, the residents would have been provided with accommodation (the insurance covers that) while the insurer appointed engineers and consultants to resolve the issue. The work would then have then been completed and the owners moved back in.

The policy is only available to builders the insurer is confident of (naturally). They generally will have an iCIRT rating and more importantly the insurer will be using their own Certifier monitoring everything from designs all the way through construction before signing off on the job. Without their signature, the policy won’t be issued at completion so it’s in everyone’s interest to get it right.

It’s the independence of that second tier of certifying that is so powerful. In the past, the only certifier employed was employed by the builder so if in doubt, it got waved through. Now, if in doubt, it has to be fixed.

Buildings without this insurance will still use the existing system of a building bond. It costs the builder 2% of the construction value and covers the building for only for 2 years. After that, the builder gets the bond back.

There are plenty of stories of builders who had reported to them issues in that 2-year period.  Instead of fixing the issues properly, some builders did patch up jobs while they waited for the 2-year period to expire. After 2 years, the builder would get their bond back and the problem would reappear.

Add to that, many issues only become apparent after that 2-year period is up. Once the bond is paid out, the only way forward for a strata plan was to sue the builder’s professional indemnity insurance.

This Decennial does away with all that and runs for 10 years. To be clear, the value to a buyer of a unit in a building that has this insurance is the hope and expectation that a strata plan will ever need to call on it.  Most insurance doesn’t make things safer. It just reduces the financial risk if it happens. We expect this policy will reduce the chances of things going wrong. That is far better than any amount of getting something fixed.

In time I expect we will see the value of these unit blocks that have this insurance rising above those that do not have it. And that value difference is likely to last a lot longer than 10 years.

The previous NSW Government commissioned a report to look at the feasibility of making Decennial Insurance mandatory for all high-rise residential construction in NSW. That’s how it is in some other countries. We will just have to wait and see if the new Government continues with the same speed of building reform we have been enjoying.

Unintended consequences.

I wanted to write an outline to what I think will happen to the rental market now that we have had a change in State Government.

We will have changes to our tenancy laws. A landlord’s ability to give Notice to Quit to tenants will be curtailed but the primary message in this newsletter is that the changes planned will ultimately increase rents and hurt a lot of tenants as well. That’s the Law of Unintended Consequences.

Where to start?

Towards the end of 2019, the Coalition Government changed the Residential Tenancy Act so that rents could only be increased once every 12 months. At the time of the change, rents in Sydney had been drifting down for more than three years.  The idea of a runaway rent market was a fantasy. All too often, we assume problems are conquered when in fact they are just in remission, waiting for the right circumstances to reappear.

According to SQM Research, the average advertised rent for a unit in Ryde has increased by 48% from March 2022 to March 2023. Before you gasp and shout ‘that’s insane’, just know this. Over the last ten years this same rent index has grown at a rather sedate 3.7% per annum. The rental market is moving back to the long-term trend; this is a correction; the system isn’t broken!

Now back to the law of ‘one rent increase every 12 months’. Firstly, that law hasn’t reduced the amount of any increase, it’s probably increased the amount of any increase. In the past we could move rent up in smaller bites, wait 6 months and then step the rent up again. Now there is no way to be flexible.

Secondly, a lot of owners have found that having increased the rent just 3-6 months ago, they still end up being way below market. Faced with the financial pressures of rising interest rates, some Landlords are opting to give notice to their tenants and then re-rent the property at whatever the current market will pay. That might sound mercenary, but for some landlords, financial pressures have meant they give notice to vacate and rerent it or they sell and get out.

Less freedom to say ‘no more’   

Suppose a tenant was challenging to get along with or they weren’t looking after the property as well as we would like. In such cases, we can bring the relationship to an end. An owner could say to a tenant, ‘I don’t want to continue doing business with you’.

In Victoria and Queensland, they have limited a landlord’s ability to issue a ‘no grounds, 90-day notice’. NSW Labor’s policy platform is the same.

Let’s look at Brisbane. Last year the number of properties rented out in Brisbane fell by 17.8%. That’s not the number of properties advertised for rent; that’s the total number of properties being rented. At the same time, Queensland has had record immigration, with an extra 14,000 people moving to the state. The tenants’ union in that state is asking for rent control. Initially the Deputy Premier said they would prefer not to intervene. Now they are ‘actively considering it’.

I suggest the Queensland Government can’t cure a lack of housing by capping rent increases.

New Zealand as an example  

In New Zealand, the story is more extreme. The Government did what our politicians have been too scared or sober (depending on your political leanings) to do. They got rid of negative gearing. Their intention was to make housing more affordable by stopping investors from buying property. NZ now has twice the homeless population rate of Australia and the highest amongst OECD countries.

House prices in NZ are falling, but tenants aren’t buying in the numbers the idealists thought they would. People who need a home to live in can’t simply go and get a loan to buy a house just because an investor isn’t wanting to buy it. They need a deposit and an income that a bank will lend on. Simply stopping investors from buying doesn’t fix a saving and income problem.

As The Sydney Morning Herald suggested,

‘Australian governments might be wise to pay attention to what has happened in NZ, to think of it as the ‘Kiwi in the Coal Mine’ if you like.’

Certainly, Governments can make it easier for wealthier tenants to buy their first property, but they must be careful. Remember the financial crisis in 2008? The US removed many of the financial controls on bank lending so that it became too easy for people to get loans to buy property. We all found out that giving mortgages to people who can’t afford to pay them back never works out well for the economy or the borrowers they thought they were helping.

I’m not suggesting Australia will do the same thing as New Zealand. Paul Keating (now there’s a name you don’t hear anymore) abolished negative gearing back in the 80s. While he still allowed investors to claim borrowing expenses against the rental income, any shortfall had to be accrued and deducted from future income. New investors had to wait until their property’s net income was positive or when they sold before they could deduct the losses from previous years. Within a short time, he reversed the law.

There is a heap of debate about why he changed his mind. Many economists and political platforms still argue for the abolition of negative gearing. They argue that Paul Keating’s experiment didn’t fail, and everything was going well. The problem they suggest was that pressure groups like high-income earners and the Real Estate Institute were telling fibs and making the public and the politicians scared. How about that? Paul Keating’s problem was a lack of self-confidence!

Don’t expect Land Tax to get fixed

And even when Governments don’t change things, things still change.

Land Tax is an excellent example. The land tax percentage and the system of property values were designed years and years ago. The Valuer General used the concept of Unimproved Capital Value of a property which often sat at about half or even less the property’s actual value. No one complained until someone took the NSW Valuer General to the High Court of Australia. The High Court ruled that these values were rubbish. The Valuer General was told to look at actual market values, which is why your Unimproved Capital Land Value is going through the roof. The land tax percentages haven’t been changed, so land tax is now a massive cost to anyone with a house for rent.

With the change in Government, you can expect Land Tax to remain in the Too Hard basket. Where the Liberals were changing it to a broad tax system that would have meant more people paying far less and abolishing stamp duty, the new Government will more than likely leave it how it is.

And leaving it how it is will no doubt cause more landlords who rent out houses to reconsider the return on the asset and sell up.

Social housing

Neither side of politics can fund the volume of social housing needed to look after all the vulnerable members of our society. 30% of households across Australia rent. Government housing makes up a small percentage of that supply.

Everyone relies on private landlords providing housing to those that don’t own and are nota able or ready to buy their own home. Both sides of politics and every level of society needs housing.

When Mr Keating reintroduced Negative Gearing, one of the strongest lobbyists wasn’t the Real Estate Institute, it was the NSW State Government which was Labor. Rental accommodation was drying up in the areas of Sydney that were traditional Labor Voters lived.   I think that will happen again. It’s the lower income tenants that suffer first from rent rises and reductions in housing.

Market economics always has the last say

The rental market in Australia is very close to the theoretical definition of a Pure Market Economy.

Pure Markets have many sellers and buyers. In this case, I’m talking about landlords and tenants. No one gets to set the market price; every tenant is in competition with other tenants looking for property and every landlord is in competition with other landlords leasing their properties. The market is constantly adjusting to balancing demand and supply. And that adjustment, as many people now realise, can be incredibly quick and without regard to an individual’s situation or capacity.

There is one significant difference between a Pure Market and our rental market. Pure Markets, by definition, do not have any Government interference.

I don’t think government intervention is necessarily bad. In many ways, I prefer them intervening and creating laws that stop things running amuck. Imagine being back in the 60’s when to get a tenant out of your property required employing a solicitor and going to court to prove a contract breach. It was a nightmare and costly.

The Rental Market is, at its most fundamental, an investment market that provides rental accommodation as a by-product, not as its primary goal. No owner buys an investment property and says, ‘Now I can give someone a home’. A tenant is an income stream and a maintainer of the property.

Mistakes in predicting the impact that changes in laws will have on markets often happen because  people think about the ‘average’ person.

If laws change and make it harder to kick a tenant out or limit an owner’s ability to increase rent, will the average landlord sell?  No, they won’t but the average landlord isn’t the issue.

Like any group of people, there are those that think and behave very close to average and there are those that don’t. And it’s this second group that drive the change in the market.

Brisbane dropped nearly 18% of rental property driven by a myriad of financial and legal changes affecting property. The owners of the remaining 82% absorbed those changes. If the politician had talked to the public before bringing in the new laws, they would have been rightly confident that the vast majority of landlords would be ok. But it wasn’t the 82% of landlords who absorbed the changes in the market that have caused Brisbane’s rental crisis. It’s the 18% that didn’t.

There is no us and them

A lot of political/tribal thinking likes to suggest there are good people on our side and bad people on the other. The market is neither good nor bad, its ambivalent. It isn’t driven by heartless landlords not caring about the little people. The market doesn’t care about heartless landlords either, it just doesn’t care; full stop.

And it has absolutely no interest in what any individual thinks. It only reacts when things aren’t in balance. There is massive danger in believing your pet theories. You will find evidence to support and ignore evidence that challenges.

In Queensland the Greens are calling for rent control to fix Brisbane’s rise in rents. They are far more confident the problem is driven by Landlords that are bad and profiteering and far less convinced that the problem is a reduction in supply (fallen 17.8%).

Poker is both a game of chance and skill. Players’ behaviour is often studied and researched by psychologists. One key difference between professional gamblers and amateurs is that professionals close out a hand far quicker. The Amateur is more likely to keep putting money in the pot hoping that the next card will make the loosing hand a winner. The mathematical possibility of that happening is real, the mathematical probability of it happening is not. So very few of us can back up and reverse course when we have already sunk time and money into our plan and theory.

A Government’s ability to guide the rental market is far less God like and far more Priest like. They can make an appeal to the congregation to do the ‘right thing’ but at the end of the day they are bystanders. Every change of law intended to make the system work ‘fairer’ invariably changes how each of us see the alternatives, the risks, and the benefits. Some decide to get out, the market balance moves, and some tenants end up worse off.

We are dealing with a market mechanism that doesn’t care about what we want to happen.  My logic and predictions may be right or wrong, that isn’t as important, only what happens is. Paul Keating was able to step away from his reasoning, or ego, and the beliefs he and others held about negative gearing and see the evidence that others were getting hurt. I fear the ones who will get hurt are the ones those well-meaning politicians are convinced they will be helping.

Author: Stephen Jackson

Most would say it depends on who you ask. A better idea is to think about compared to what?

According to Domain, the median rent in Sydney is now $550 per week. Darwin is also $550 per week while Canberra is higher at $600 per week.
But are these rents really that high?

Well, probably not.

Looking at our own postcode of 2112, the average advertised rent has risen by a touch over 15% in the last 12 months. That is a solid jump but 12 months ago we were in the middle of the pandemic and vacancy was terrible and tenants hard to find. The market back then had fallen in our area by 15-20% so really this jump in rents is better seen as a correction, rather than a boom. But you know headlines, if it bleeds, it leads as they say.

So, let us do a little comparison between now and 7 years ago, back in 2015

The average asking rent of a property in Sydney is now somewhere between 5-10% more than it was in 2015. Ignoring the ups and downs, rent has averaged a 1% increase each year.
Average Wages on the other hand have risen by about 17% since 2015.

And using June this year compared to June 2015, Sydney’s inflation has risen a touch over 17%. Property prices on the other hand have risen by 44% since the end of 2015

And because the question is always asked, is property or shares better? Between August 2015 and July 2022, The ASX rose 23.5% and no this doesn’t include dividends but make your own call on that.

All these figures are constantly changing. Inflation is rising faster than wages, rents are rising and property prices falling so think about these figures as a reflection of the past, not a prophecy about the future.

Property values will fall more and then they will rise again, and the cycle will keep on repeating. And maybe keep in mind that while you might never get rich from rent, the capital gain is not half bad.

Author: Stephen Jackson

The official cash rate has increased to 0.85%, with most expecting the rises to continue. Whenever interest rates rise, most of us think about how it will affect housing prices. And it is no wonder, housing makes up more than $9.5 trillion of our nation’s wealth. Superannuation, by comparison, is worth $3.5 trillion and Australia has the 4th largest superannuation pool in the world. I suspect we are the most real estate centric nation on the planet.

But what do changes in the official cash rate mean for property prices?
1% increase translates to about a 15% fall in property prices. They’re not my figures, they’re Christopher Joye’s, and I’ve linked a recent article he wrote if you want to get into the detail.

https://www.livewiremarkets.com/wires/wiping-1-5-trillion-off-house-prices-will-force-rba-to-pause-after-100-150-basis-points-of-rate-hikes

Christopher’s premise is that we are far more sensitive to interest rate rises than the RBA’s own modelling suggests. This is coming from someone who worked for the Reserve Bank, runs one of the most successful investment firms in Australia and employs more people with PHD’s in Mathematics than any other qualification. He has also been annoyingly right with his predictions of property prices for longer than I can remember. If you are betting on real estate, his opinions are a lot sounder than most of the banks’ economists, I suspect. And as I understand him, this is the short version of what he thinks will happen.

If the cash rate rises between 1-1.5%, property prices will fall between 15-25%. It sounds terrible, but I don’t think all that pain will be shared evenly, at least not in our area.

Short history summary.
In January 2017, the average asking price of a unit was about $785,000 (there were a lot of new units on the market). At the same time, the average asking price of a house was $1,273,000. The price ratio between the two was roughly 40:60. Putting it another way, if you had to pay $1 to buy a unit, you would have to pay $1.50 to buy a house. That price ratio between units and houses has been around for quite a long time and up to then had been pretty stable. At least that was the case until recently.

In January this year, the average asking price of a unit was $734,000 (yes, it had gone backwards), but a house had risen to $2,067,000. That relative value was now close to 25:75. Again putting it in dollars, if a unit cost $1, a house was close to $3. The market for houses had taken off while the unit market did nothing. There are lots of reasons why houses did better than units. Overbuilding of units and rental returns crashing are two of the biggest. Now that divergence between the unit and house markets seems to be correcting.

According to SQM research, the asking price of houses in our area has dropped 6.6% in the last three months. For units, that drop is just 0.3%. It is not a large disparity, but it is enough to show how interest rates are impacting the unit and house markets differently.

For the last five years, unit buyers have been predominately owner-occupiers. Investors who generally made up 50% of unit buyers before 2017 dropped back to about 20% of unit buyers between 2017 and now. Investors haven’t returned yet but that may not be too far off.

Vacancy rates in our area are now under 2%, and that is the first time since 2017.

As vacancy falls, rents increase. Rents that fell during Covid are coming back up to pre-Covid levels. If things keep going as they are, we could see investors buying back into the unit market and unit prices climbing even as interest rates rise.

How long might that take? I think by the end of this year.

Author – Stephen Jackson

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The updated Tenancy regulations come into effect 23rd March 2020 and pretty much every agent out there is working out how to set up the systems necessary to ensure they comply. In the meantime, this is a summary of the main changes:

Smoke Alarms

We have now moved back to the early days of smoke alarms where landlords and their agents have to check the batteries of smoke alarms each year unless the batteries are the non-replaceable kind.

It is pretty clear if you have a cheap smoke alarm then you are going to have an ongoing annual expense of having them checked and batteries replaced. Many agents use fire inspection companies to check the smoke detectors, but at $100 a year, it is an expense that we think can be avoided.

Breaking Lease fees

This change makes fixed-term leases far more advantageous to the tenant than for the owners. If a tenant decides to break the lease and move out early, they will have to pay 4-weeks rent as a penalty if the lease still has more than ¾ to run. It is 3-weeks when the lease has more than ½ its time to run, 2-weeks if it has more than a quarter of its time to run and only 1-week if it is in its last quarter. A tenant breaking lease in the last half of the lease has to pay less rent to you than if the lease was up and they had to give 3-weeks’ notice. This change is ridiculous.

Disclosure Statement

This change is fairly sweeping and probably means we will need a statement from an owner each time we lease a property. The disclosure requires us to advise tenants, of special works occurring at the strata, of any changes to by-laws and whether there is a strata committee set up to look at selling the block off to a developer. If we don’t advise the tenant, then the Tribunal will be able to award compensation to the tenant for moving costs, and that can be expensive.

We will be sending a more detailed description to our clients on how these changes will affect your tenancy and how we plan to protect you.

If you have been a property investor for longer than the last five years, then our reports on the market probably seem a little alarmist. There are swings and roundabouts in every market and good times don’t last forever but then neither do hard times either.  The rental market, probably more so than the sales market, is far more seasonal in its behaviour. December is a horrid time to try and lease out a property and February and March see our highest demand.

Cyclical variations in the rental market tend to follow the changes in interest rates with falling interest rates washing through to lower rents. Right now, interest rates are the lowest I can remember and the tsunami wave of new property hitting the market has changed the renting atmosphere. To appreciate how much things have changed, we need to look at some key statistics: these come from SQM research for postcode 2112 which includes Ryde, Denistone East and Putney. The numbers are drawn from property advertised on the internet. To give you a more long-term view I’m comparing November 2019 with November 2010.

 Real rent growth is negative

In 9 years, rents haven’t moved much at all. For houses, if you consider inflation, they have gone backwards. And with units, the figures are skewed. Predominately in 2010, the average unit on the market for rent was an older build. In 2019 the properties for lease had a far greater proportion of newly built units with far higher rents.  If we could compare like for like, with the same mix of property, in 2010 and 2019, unit rents would not have increased any more than houses.

In nine years, the Ryde are has gone from being one of the highest in demand rental markets to one of the most oversupplied. There are now more than 8 times the number of properties looking for tenants as there were back in 2010. Our area has been hit so badly by this increase in rental property that REA (Realestate.com.au) say that Ryde and our surrounding area is the 76^th least sought-after area in Australia. Parramatta is the worst at 79^th. This ranking is based on the number of properties for lease on their website as compared to the number of ‘for lease’ searches for that area. We still have people looking for rental property, just not as many proportionally to other areas.

How tenants search and select

I don’t have information on how tenants used to look for property ten years ago, at least not in a way I can compare to right now. Again, REA has been doing research. These figures relate to the Ryde and surrounding area.

How many properties:

In a potential tenant’s search – 60+

Does a potential tenant inspect – Average – 4

Do they apply for -Average – 2

And even though a tenant applies for only 2, 90% are offered both properties they apply for. And again, according to research, 90% take their first choice. The second application is submitted because they want a backup, not because both properties are equal in appeal.

Tenants are inspecting only 1 in 15 properties available to be viewed. This result is a new world. Landlords have worked on the idea that if it were on the internet, a prospective tenant would inspect it because ‘that’s what I would do’.  With the greatest respect, unless you have been a tenant recently, this is a very different world to the one you once knew.

Vacancy

These statistics come from SQM research again for postcode 2112

Now, these figures aren’t published but rather calculated from the above. They are rough figures but indicative.

It is going to take a while for the market to absorb this vacancy and oversupply and return to stability. Realestate.com told us that they had tracked similar market statistics across other capital cities. They suggest the Brisbane market had a similar building boom several years ago and it took well over two years for the oversupply to be absorbed once building stopped.

We will have to see If they are right, it may mean that for the next 2-3 years owners might best approach this market as one they ride out rather than fight.

If your property is currently rented, focus on

• Keeping good tenants
• Consider improving the property with your tenants in place (we are doing a lot of this, and it is keeping tenants in place)
• Accept a lower rent if a good tenant asks for a rent reduction (we are seeing smaller rent reductions being negotiated than would be the case if the property were to come vacant)

If the property is coming up for rent, focus on

• Getting the property’s presentation right first before you market
• Market the property as well as or better than at least 90% of your competition
• Make your priority a great tenant who will stay rather than a great rent that won’t

This market isn’t going to be permanent. The best strategy is to think long term.

What they can write computer programs to do today is nothing short of amazing.

We have just secured access to a wonderful new program.

It combines data about each property’s details, council zoning and planning codes for its location and the cost of construction to quickly workout the development potential of nearly any property in our area.

Many properties in our area have some development potential but most are not financially viable.

This program will generate a financial feasibility report including the cost of construction, what the finished development could sell for and what a developer should pay for your site.

And it can do this in minutes rather than days.  Seriously, it’s amazing!

Want to know your property’s potential?

Click on the link below from our website so that we can send you back a quick assessment of your property’s potential.

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https://property.archistar.ai/landing/jacksonrowe/report