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

Demand for property is genuinely outstripping supply. A strengthening economy, solid jobs market and historically low-interest rates that appear locked in for at least the medium-term add to the demand for property.

The latest figures show the national stock of homes for sale is 28.5% lower this year than the five-year average. Over the same timescale, new listings are down 12.9%. That’s a tight supply.

Auction clearance rates across Sydney have come back a little but are still over 65% which is still a massive performance. Homes are selling one week faster on average than they were a year ago. And the Australian real estate market overall is now valued at over $8.1 trillion. That’s more than a $1 trillion increase in 12 months. And a large part of that boom has been driven by price growth in our country towns and regional areas.

So if you are thinking of buying and selling in a hot market, these are some of our ideas that might help you plan your way forward.

What does better look like?

Moving to a different suburb or property style – considering a sea or tree change – can be a dream come true or a nightmare in the making. The difference between it being a step up or a step backwards is how well you know what you want and your willingness to try before you buy. If you don’t know for sure that your next purchase is right for you or you’re worried about not finding a suitable property to buy, consider renting while you assess your options. Renting can be challenging right now in many of our booming markets, but unless you are confident that you have the ‘where and what to buy next absolutely right, test areas and property types by renting. Keep your current property and even rent it out to even up the cash flow. Many who have used this system discovered things about an area or style of home they hadn’t appreciated. That insight let them refine their criteria, so when they did buy and sell, they were happier and better off than they would have been otherwise.

The market is always local

Regardless of the national or capital city headlines, property prices are all about local markets. Always check what is happening to prices in our neighbourhood, and more importantly the area you are thinking of buying.

With real estate, there are always longer term ‘swings and roundabouts,’ as they say. Some areas and types of property are just not doing as well as others. Right now, that’s because of long-term changes in how we live. Much of our white-collar workforce are looking to work from home at least a couple of days a week. Units that were always in demand by students, investors and first home buyers are less in demand. That may change back, but no one knows when. The key thing if you are selling or buying is to know your local market. Headlines about the national market are just headlines. There is plenty of essential data on each local market, so ask us, we can help.

Is your home hot?

The market may be on fire, but how do buyers feel about your particular property type? While all boats float in a high tide, some property types will be more in demand than others from suburb to suburb. So if you’re selling an unrenovated and dated property in a market of all near new homes, even a hot market may not offer the dividends you hoped for. On the flip side, if you’re selling a large family home in an area clamouring for upgrades, you could be in luck. But don’t think you have to accept the status quo. Marketing and targeted affordable renovations can change a property from being a wallflower to finding a market niche with buyers falling over themselves to secure. A property doesn’t need to be the most popular; it just needs to appeal to a few buyers. Marketing and presentation are about targeting and focus.

Watch the supply and demand curve

The economic data points that make this market look like it will continue to grow can change quickly. Changes to interest rates, employment or even the calling of an election can soon turn up or down the heat in the market. It pays to be vigilant. It also pays not to get caught up with every press release and prediction of the market. No one ever reads the market flawlessly, and even the best get it wrong more often than they get it right. What we know right now is that our economy will more likely get stronger rather than weaker. We are heading towards winter, which is usually always a time of fewer homes for sale. We can probably expect strong prices off the back of low supply for a few more months to come. When eventually interest rates start to climb, that’s when things will turn down, or maybe not, who knows, so be safe. Plan for the long term, make sure you can afford the rise in interest rates and know that at some point, the market will change.

What’s your life plan?

Regardless of what the market is doing, the most important thing is to consider your personal life goals and the role that property plays in these. Your property is likely to be your largest financial asset – and your shelter, security and place to raise your family. Lifestyle desires should influence when you want to sell, not just money and optimising the market. If this feels like the right time for you, then get into the market.

Sell or buy first

This is the question people have argued about forever. In a rising market, buying before selling can be scary but not as frightening as having sold and watching the market climb further and more out of reach with each day. That’s the stuff of nightmares and cold sweats. Having to buy something that’s not ideal just because you are under pressure to find something is really not smart. Think about buying with a delayed settlement. You’ll be able to sell in this market with out too much issue. If you aren’t sure on the property you want to buy or the area you want to buy in, think about moving into the area and renting. You’ll be surprised how much better you’ll understand the area, the better properties for what you need and you’ll be on the spot when the right home comes on to the market.

We can help

If there is a way we can help, don’t hesitate to reach out. We’d be happy to explain local prices, buying trends, time-on-market expectations and the type of marketing campaign that will maximise the value of your home.

Property is a tremendous long term asset, so are we. Talk to us.

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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.

I have had so many people invite me into their homes over the years, wanting an idea of value and chat about the market. It’s a delightful part of the job. You learn about their life and the history of their home, and often the focus is on how things have changed for them and how their home doesn’t quite suit them as well as it did when they first bought it. Most people love their home and the area they live in, they feel comfortable and safe, but family grows up, and things change.

I met with some friends this last weekend, two of their daughters have got married and moved out, their youngest has finished university and has her first job. They are looking forward to being empty nesters, to coming home and finding the house and the washing and everything there precisely as they had left it. I remember when my son moved out of home, discovering the pure joy of finding the food we left in the fridge still there. You love your children, but it’s the parents that sometimes rediscover the pleasure of being independent.

My friends have a big home, 4 bedrooms, study, stairs and plenty of bathrooms. A great family home but possibly not as ideal for them now that they start their retirement. As an agent, you learn never to give friends real estate advise unless they really, really want it. Family is different, they ask your opinion and then tell you you’re wrong.

Treading carefully, I asked where they thought they might move to. And I heard the same thing I have heard so many times before. We don’t know. Downsizing is something everyone sees sense in, but most have no idea how to go about it. When you were buying your current home, you were upgrading, moving into something bigger, closer to where you wanted to be, you were stretching your budget and what you could buy. It may not have been perfect, but you could always renovate later.

Downsizing is driven by different needs requires a few different ways of thinking. Upsizing is a need for space and location. Downsizing might seem to be about reducing space, but it’s not. It is about things that you are yet to fully appreciate and understand. Let me tell you about Jan.

Jan called me down to her property to get an update on her villa’s value. She was divorced, had bought the villa 5-6 years before and by all appearances was comfortable, happy and well suited to the home. As an agent, you pick up pretty quickly if a home doesn’t suit a person and vice versa.  She showed me around, we chatted about what she had done to the property, and we then sat down and I showed her some of the properties that had sold nearby. To me, she seemed to have no reason to move, and so I asked her, ‘Why would you move from here, it seems to suit you so well?’

Her answer took me back a little because it was so definite and yet so vague. She wanted to be somewhere where there was more life and things to do. But where that was, she didn’t know.

‘How do I find where I should buy if I have no idea what I want?’

What a great question. It’s the same question my friends were asking, just not in the same form. Most people, when they talk about downsizing, talk about single level, no stairs, low maintenance, and so on. They talk about what they don’t want in their current home rather than what they do want in the next one. Knowing what you don’t want is important, it’s just not enough.

Back to Jan. I was also taken back by her openness and by my own lack of process as to how to systematically find the next place to live. What is the logical sequence you should employ? Most people who are empty nesters think about selling only in so much as ‘We will probably only move when we have to, because the place is too hard to look after or our health has got to that point, or we need the money’.

Ask yourself this question. If I didn’t own this home today but instead had its monetary value sitting in a bank account ready for me to spend, would this be the home I would buy? If you hesitate, it’s because you realise that there are different things you need, and you don’t have a clear idea as to what they are. Now back to Jan

I asked her to look at Realestate.com using the money we estimated for her villa and what that might buy in different areas. I had her consider anywhere from the lower mountains all the way through to Mosman and the City. Her job wasn’t to find areas she liked but to eliminate the areas and property she didn’t like. Unless there was a firm no to something, it was kept on the list as possible. This was about increasing options, not reducing them. Once she had a list of potential areas, she went out and checked out a few open houses in each location to see what she could get. Again, not looking for Mr Right but rather, getting rid of all the Mr Wrongs.

Her reduced list of property types and locations would have common themes. We just had to find what they were. Realised that certain things would make her happy, and the same with the characteristics of certain places. Now we had a profile of what good looked like.

This process was surprisingly fast, like 4 weeks fast. In that time, Jan had identified places she would have never considered, but when we talked through what it was about them, the same things kept coming up. And again, I found this next bit interesting. She decided to sell, and I mean really decided, like not going to be talked out of it. Jan didn’t know what she was going to buy exactly or where, but she knew it existed and she was more than comfortable to look for a place at the same time hers was on the market. I realised there is no certainty in buying a selling a home. Instead, if you have enough confidence and clarity in what you are doing. If you know it is going to make you happier even though everything isn’t totally apparent. It’s about being confident you’ll work it out as you go. Remind you of what you were like when you were buying?

Jan found a newer unit in Crows Nest, one flight up and with a lift. She would walk across the Harbour Bridge a couple of days a week, had her cats (I swear, one was the size of a horse and not to be messed with) and shops and café’s all round. You might be thinking, that’s an obvious place to move to, but Jan had never lived anywhere near there before. It was only obvious when she stopped looking for what she was missing and allowed herself to explore and discover.

There is a fascinating Ted talk by Barbara Oakley on Learning how to Learn. She described the mind trying to resolve a problem much the same way a pinball machine will bounce the pinball around. Struggling with a problem is like you have too many bumpers in the machine. The pinball gets stuck in one corner, bouncing around and then running down the side of the machine and out. By removing some of the things you ‘know’ and allowing the mind to consider more, a solution will come.

The world has changed a little since Jan sold and bought. We have drunk plenty of coffee together over time, and to my great relief she has always maintained how happy she is with her decision.

I made a different suggestion to my friends. I asked them to check out what the ‘Walk Score’ was for where they lived. Walk Scores are generated by a private company for every address in Australia, Canada and the USA. They calculate how liveable a location is based on what amenities you can walk to from that address. I then suggested that they look at as many other suburbs as they can to see how they compare. It was surprising to them that their own home didn’t score as well as they thought. That’s not surprising to me. They bought the home for size, driving time to where they needed to work and what was best for their growing family. It was the right answer for those needs. The thing for them is that what they want and need has changed. That means the answer must as well.

Walk Scores also allowed them to start identifying what is so good about other places. They don’t have to agree, but at least it will get them thinking about what would be useful and what wouldn’t.

My concern for my friends is that they probably have another 20 years living in their own home before they even consider retirement places. I’ve seen people who have grabbed the problem and found a solution that has made them happier. I’ve also seen too many people avoid dealing with the problem and still been okay. But okay wasn’t as good as it could have been.

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.

Try it out!

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