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The outstanding property opportunity in 2026 · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast.
0:13
Speaker 2: I'm James Kirby.
0:14
Speaker 1: Welcome aboard everybody, and welcome to the Property Outlook show
0:18
Speaker 1: for twenty twenty six. Now we've looked at investment markets
0:22
Speaker 1: generally last week with Mark Jokum and on Friday, I
0:26
Speaker 1: hope you heard the show with Jem Belou on stock
0:29
Speaker 1: opportunities in particular stock picks in on the ASX for
0:34
Speaker 1: the year ahead. That was a very interesting show. Don't
0:37
Speaker 1: miss either of those. Today we're going to look at
0:40
Speaker 1: what's ahead for you as a property investor with Stuart
0:43
Speaker 1: Weams of the pro Solution Private Client Group. Now, folks,
0:48
Speaker 1: last year, just to set the table out if you like,
0:51
Speaker 1: last year across the board, we saw on eight percent
0:53
Speaker 1: rise in house prices across the national market, which is
0:57
Speaker 1: all very well except as any regular listener to the show, no,
1:00
Speaker 1: that is a there's a lot behind those numbers. There
1:02
Speaker 1: is quite enormous diversity actually of risk and opportunity inside
1:06
Speaker 1: those figures. And I know that we have a sector
1:10
Speaker 1: that Stuart likes and he's going to talk about that
1:13
Speaker 1: in a few moments.
1:15
Speaker 3: How are you, Stuart, I'm really well happy year, James,
1:18
Speaker 3: and happy years all listeners.
1:20
Speaker 2: Happy in a year to you. Let's just take a
1:23
Speaker 2: look before we pin.
1:24
Speaker 1: Down where we think there's opportunities in this market. Certainly
1:28
Speaker 1: where there's I think clear value in this market for
1:32
Speaker 1: any investor. And we were talking before the show about
1:36
Speaker 1: the concept of value vis a VI the share market.
1:39
Speaker 1: I think it's I think that the offerings in property marketer,
1:42
Speaker 1: even though people think, you know, house prices are expensive,
1:45
Speaker 1: I think they are outstanding compared to the share market
1:48
Speaker 1: in terms of value. Because if you're a value investor
1:50
Speaker 1: in the share market, I really don't know what on
1:52
Speaker 1: earth you could be doing day by day. I think
1:54
Speaker 1: some of them are actually drifting. Some of the really
1:55
Speaker 1: well known ones are drifting. You know, they're not sticking
1:58
Speaker 1: to their knitting basically because they're exhausted and tired from
2:02
Speaker 1: being beaten around the ears every year.
2:04
Speaker 2: By growth stocks year after year.
2:07
Speaker 1: Still in terms of our local market in terms of property,
2:11
Speaker 1: tell me what I mean issues are for an investor
2:14
Speaker 1: in the year ahead.
2:16
Speaker 3: Well, it's a really interesting market in terms of the
2:19
Speaker 3: distribution of growth, James, and you sided that figure around
2:22
Speaker 3: eight percent last year, which anyone would look at that
2:25
Speaker 3: and go. It's a pretty healthy year, but the variability
2:29
Speaker 3: and distribution of that growth is so stark, and it's
2:33
Speaker 3: kind of a very unique market too. We've got you know,
2:36
Speaker 3: capital cities like Brisbane and Perth going gangbusters. Melbourne is
2:40
Speaker 3: still the major laggard no matter how you measure it.
2:44
Speaker 3: And then it also seems like a two speed market
2:47
Speaker 3: as well. The lower quartile of property is growing much
2:50
Speaker 3: faster than the higher quartile. In fact, in the last
2:54
Speaker 3: according to Coality, in the last quarter of the twenty
2:57
Speaker 3: five calendar year, in fact, the top quart ile in
3:00
Speaker 3: Sydney went backwards and the top call tile in Melbourne
3:03
Speaker 3: was flat.
3:04
Speaker 1: So the top quartile would be the more expensive properties
3:07
Speaker 1: have actually been falling in price in Sydney, that's right.
3:10
Speaker 3: And in Sydney that'd probably be north of two million dollars.
3:13
Speaker 3: In Melbourne it's probably north of a million dollars. But
3:16
Speaker 3: that upper end of the market, yeah, is certainly struggling
3:19
Speaker 3: towards the lower end of the market. So it's a
3:21
Speaker 3: really unique situation. I guess we're getting used to interesstrate settings.
3:26
Speaker 3: I guess there's macro prudential changes in terms of lending
3:29
Speaker 3: appetite from banks.
3:30
Speaker 4: That we'll talk about.
3:31
Speaker 3: There's a lot of moving parts at the moment that
3:33
Speaker 3: are impacting property.
3:35
Speaker 1: So folks, that's basically the big picture of the helicopter
3:38
Speaker 1: picture if you like, softening at the upper end of
3:43
Speaker 1: Sydney and certainly Melbourne markets in recent weeks, the broader
3:48
Speaker 1: regional issue being the smaller cities breath and Adelaide and
3:52
Speaker 1: Brisbane particularly still going very well, Melbourne and Sydney softening,
3:56
Speaker 1: and the first home buyer layer being the hot layer.
4:00
Speaker 1: To what extent is that related to the introduction of
4:04
Speaker 1: I suppose a historical universal first time buyer deal by
4:09
Speaker 1: the government last year where no limits anyone who wants
4:14
Speaker 1: to buy for the first time this market can get
4:16
Speaker 1: a ninety five percent mortgage. You be like, so, what
4:18
Speaker 1: extent did that underpin this hot market at the lower end.
4:22
Speaker 4: Well, I think it's had a material impact.
4:25
Speaker 3: I think everyone you've had on the show has suggested
4:28
Speaker 3: that whilst it can help more first time buyers into
4:30
Speaker 3: the market, it will be stimulatory from a price perspective
4:33
Speaker 3: because it's demand side rather than supply side. The other
4:37
Speaker 3: thing is there's flow on effects from these policies as well.
4:41
Speaker 3: So anyone would have seen this coming, So anyone that
4:44
Speaker 3: was in that price point would have gone, well, I
4:46
Speaker 3: better get in before all the first time buyers, even
4:49
Speaker 3: if they're not first time buyers. But because I know
4:52
Speaker 3: it's going to stimulate prices, So I get there's a
4:54
Speaker 3: kind of a multiplier effect of these policies because it
4:58
Speaker 3: I think it impacts or encourages people that might not
5:01
Speaker 3: be directly impacted by that policy but want to get
5:04
Speaker 3: into that particular price point. And then where growth flows money,
5:08
Speaker 3: where growth goes, money flows. So if people are saying, hey,
5:12
Speaker 3: that sector of the market is moving, then short term thinkers,
5:16
Speaker 3: which is not the right way to approach, of course,
5:18
Speaker 3: but short term thinkers will be encouraged by that and
5:20
Speaker 3: they'll start to think, well, okay, this is more of
5:23
Speaker 3: an attractive sector. Plus, also with the interest rate retric James,
5:28
Speaker 3: of course, we know it can change very quickly, but
5:30
Speaker 3: at the moment it's more leaning towards flat or rising
5:33
Speaker 3: rates in the future, and so rental you can have
5:36
Speaker 3: a bigger impact as well for investors, particularly with the
5:40
Speaker 3: backdrop of much tighter borrowing capacity. So there's a few
5:44
Speaker 3: kind of moving parts that I guess are encouraging more
5:47
Speaker 3: people to buy at the lower end rather than the
5:50
Speaker 3: upper end at the moment.
5:51
Speaker 1: Right, okay, And there has that sense that there's a
5:53
Speaker 1: thing of getting in, getting into the market, getting into
5:57
Speaker 1: the market because suddenly everyone can I mean by that,
6:01
Speaker 1: I mean fifty thousands will allow you, in theiory to
6:04
Speaker 1: get a loan of a million, but also getting in
6:09
Speaker 1: before interest rates left. Now, we don't know when they're
6:11
Speaker 1: going to lift or how quickly, but we do know
6:13
Speaker 1: that the pricing in money markets suggests is a ninety
6:16
Speaker 1: percent probability that there'll be a redlift the first half
6:18
Speaker 1: of this year.
6:20
Speaker 2: So that's just a fact. We don't that's that we
6:23
Speaker 2: take that as a fact.
6:23
Speaker 1: Right, there's a ninety percent probability are suggested by money markets.
6:27
Speaker 1: So let's put those two things on the table in
6:30
Speaker 1: terms of the nature of the market we're looking at
6:32
Speaker 1: the start of the year. You mentioned macropodential tightening just
6:34
Speaker 1: in a sentence, explained to listeners what that is.
6:37
Speaker 2: It's getting harder to borrow, you might explain, how.
6:40
Speaker 3: Yet, so apro that regulates the bank, So any bank
6:43
Speaker 3: that takes a deposit, if you put money in the bank,
6:46
Speaker 3: they need to be tired. They need to have tighter
6:48
Speaker 3: regulation because people want their money to be invested in
6:51
Speaker 3: a safe way. They are tightening rules. Well, they certainly
6:55
Speaker 3: tightened rules last year for what the banks can lean,
6:58
Speaker 3: particularly on a high day income ratio. So there's tighter
7:02
Speaker 3: regulation around there, which means that it's going to contract
7:04
Speaker 3: borrowing capacity. It's going to attract the amount of loans
7:07
Speaker 3: potentially that the banks will provide. But then there's a
7:10
Speaker 3: second cohort of lenders James, non bank lenders that fall
7:14
Speaker 3: outside of that restriction. And we've seen some non bank
7:17
Speaker 3: lenders tell us, you know, late last year, Hey, we're
7:20
Speaker 3: getting snowed under with applications. We're not going to take
7:23
Speaker 3: any more applications. So I think it will just mean
7:26
Speaker 3: I mean for borrowers out there, they just need to
7:29
Speaker 3: cast in it a little bit wider if they're caught
7:31
Speaker 3: with some of these macro potential try and in the banks,
7:34
Speaker 3: you know, particularly the main big four banks and so forth,
7:37
Speaker 3: if they're saying no to you, it doesn't necessarily mean
7:39
Speaker 3: it's a no. It might just mean you need to
7:41
Speaker 3: go to somewhere else, like a non bank lender, and you.
7:44
Speaker 1: Can go to that somewhere else. I just remember that
7:46
Speaker 1: they're not guaranteed, folks. They're not banks, so they're not
7:50
Speaker 1: they don't have the bank guarantee.
7:51
Speaker 4: They're not guaranteed on the deposit side, James.
7:53
Speaker 3: But if I'm a borrower on the mortgage side, a
7:56
Speaker 3: lot of them, particularly reputable brands, they're very safe. You know,
8:00
Speaker 3: it's okay to borrow from them. It's just whether you
8:02
Speaker 3: want to put your cash with them.
8:03
Speaker 2: That's okay.
8:04
Speaker 1: Another question, good point, and separately, but an issue that
8:08
Speaker 1: listeners probably just came to realize, I think in recent
8:11
Speaker 1: times about limits borrowing limits. On top of that sort
8:16
Speaker 1: of very particular restriction that was brought in late last
8:18
Speaker 1: year about how much you can borrow, and the caps
8:21
Speaker 1: basically on people who are pushing it in terms of
8:23
Speaker 1: how much they want to borrow against their income. There
8:25
Speaker 1: is an ongoing limit also called the mortgage buffer, where
8:32
Speaker 1: the rate you are assessed on is three percent higher
8:35
Speaker 1: than the rate you're talking about. So if you go
8:36
Speaker 1: in and you think you're getting a rate of six,
8:38
Speaker 1: you are, but the bank will test you on a
8:40
Speaker 1: rate of nine. And so those two things they're both
8:44
Speaker 1: basically restrictors, aren't they aren't borrowing, Stuart.
8:47
Speaker 3: They are, but the non bank lenders don't have to
8:50
Speaker 3: use the buffer, James. And so sometimes when we look
8:53
Speaker 3: at more recently at borrowing capacity for a particular borrower,
8:56
Speaker 3: the bank like CBA for example, might lend them seven
8:59
Speaker 3: fifty a non bank lender might be a million dollars.
9:02
Speaker 3: So it can be a material difference in borrowing capacity.
9:06
Speaker 3: But you're right, certainly for the banks there's a greater
9:09
Speaker 3: restriction there. And I don't think Apple is going to
9:11
Speaker 3: relax that. I mean, lending volumes are pretty high at
9:13
Speaker 3: the moment, so you wouldn't think that they would relax
9:17
Speaker 3: those restrictions with that backdrop.
9:19
Speaker 2: Yeah, no, does any talk of that? All right? So
9:22
Speaker 2: that's the let's just sit down. Is the big picture
9:24
Speaker 2: for you folks.
9:25
Speaker 1: That is that the world in which you will be
9:26
Speaker 1: making an investment in property this year. Now, we're going
9:30
Speaker 1: to come back after the break and we're going to
9:32
Speaker 1: go right down into it and we're going to look
9:33
Speaker 1: at where the opportunities and risks may be back in
9:37
Speaker 1: a moment. Hello, Welcome back to the Australians Money Puzzle podcast.
9:50
Speaker 1: James Kirby here with Stuart Wems of the pro Solution
9:53
Speaker 1: Private client group regular on the show, probably the most
9:56
Speaker 1: regular actually of our property guests, and the very the
10:00
Speaker 1: idea person to take us through the outlook for the
10:02
Speaker 1: year ahead. Okay, cut to the chase to it. Let's
10:05
Speaker 1: say I'm want to invest in property. I am agnostic
10:10
Speaker 1: as to where or how. I just want the best opportunity.
10:14
Speaker 1: I'm looking for value. Where might you start looking and
10:18
Speaker 1: then explain to us by that decision?
10:21
Speaker 4: Yeah?
10:22
Speaker 3: Sure, I think looking for value is a good idea
10:24
Speaker 3: because when we make a property decision, hopefully we're making
10:27
Speaker 3: a decade long or more decision. So it's not really
10:30
Speaker 3: about which market do I think is going to outperform
10:33
Speaker 3: over the next twelve months. The better question is which
10:36
Speaker 3: market represents the best value? And ten years from now
10:40
Speaker 3: will I look back and go, gee, I'm glad I
10:42
Speaker 3: bought in that market at that particular time. And I
10:46
Speaker 3: think value is important because you know that's your entry
10:50
Speaker 3: point and the fundamentals of the property is what's going
10:53
Speaker 3: to drive it forward.
10:54
Speaker 4: So we know if we.
10:55
Speaker 3: Buy quality assets at a cheap price, typically our returns
10:59
Speaker 3: are going to be better better than average if you
11:01
Speaker 3: look at the market.
11:02
Speaker 4: So I mean last year.
11:03
Speaker 3: You know, Perth, Brisbane and Adelaide were the standouts there.
11:07
Speaker 3: Perth's only sort of three years into its growth cycles,
11:10
Speaker 3: so I think it's still got plenty of steam left
11:12
Speaker 3: ahead of it and it's the fastest growing market in
11:15
Speaker 3: Australia at the moment. Brisbane and Adelaide are into their
11:18
Speaker 3: eighth year of a growth cycle. And we know, studying
11:22
Speaker 3: growth cycles back to nineteen eighty the average and median
11:26
Speaker 3: length of a growth cycle is bang on ten years.
11:29
Speaker 4: So it doesn't mean that they can't last longer.
11:31
Speaker 3: It just means the closer you get to the ten
11:34
Speaker 3: year period, the greater the probability you're heading into a
11:37
Speaker 3: flat cycle. Whereas I think Brisbane's the outline here because
11:41
Speaker 3: of the Olympics. I think the positive sentiment around the
11:43
Speaker 3: Olympics in twenty thirty two will keep that market, keep
11:47
Speaker 3: fueling that market. But Adelaide I'm a little bit more
11:51
Speaker 3: concerned about. You know, it has negative net into state
11:55
Speaker 3: migration mainly. You know, my guests best guess there is
11:58
Speaker 3: just because of employment, all limited employment opportunities. You know,
12:02
Speaker 3: anyone that's higher income earnie is probably going to go
12:05
Speaker 3: find a job in Melbourne or Sydney or even Brisbane
12:08
Speaker 3: rather than Adelaide. And it's a very I mean it's
12:12
Speaker 3: a very small capital city. So relative value, you look
12:17
Speaker 3: at Adelaide, you go ow, I'd be really concerned about
12:20
Speaker 3: putting more capital into that market. And I'm taking a
12:23
Speaker 3: teen year view here, not necessarily because I mean it
12:25
Speaker 3: still might perform relatively well in twenty twenty six, but
12:29
Speaker 3: I'm taking a ten year view.
12:31
Speaker 4: Melbourne is still the laggard.
12:33
Speaker 3: And if we think that compressed borrowing capacity, both from
12:37
Speaker 3: a point of view of how much can I borrow
12:40
Speaker 3: and then from a cash flow perspective in terms of
12:42
Speaker 3: I'm chasing rental.
12:44
Speaker 4: Yield a little bit more than what I would.
12:45
Speaker 3: If interest rates are lower, and all the data is
12:49
Speaker 3: telling us that lower calltil is the one that's growing
12:51
Speaker 3: the best. I think you put all those things together,
12:54
Speaker 3: I think the apartment investment great older style apartment market
12:59
Speaker 3: in Melbourne rep ends the best value across the country.
13:02
Speaker 3: And again this is on a sort of ten year basis,
13:05
Speaker 3: and the fundamentals are really strongly are James. You can
13:08
Speaker 3: buy these apartments pretty much for land value. You're getting
13:11
Speaker 3: the building for free, and the cost to rebuild that
13:14
Speaker 3: asset today is significantly higher than the market value. So
13:19
Speaker 3: the means developers aren't going to be building apartments in
13:21
Speaker 3: Melbourne until prices rise, and that's just going to put
13:25
Speaker 3: a tighter.
13:26
Speaker 4: Constraint on supply.
13:28
Speaker 3: We know Melbourne in absolute terms has the highest population growth,
13:32
Speaker 3: so that's going to put pressure on that supply demand
13:35
Speaker 3: element there as well. And sentiment will turn around eventually,
13:39
Speaker 3: we know it does. Sentiment drives markets. It will turn around.
13:42
Speaker 3: Whether we need to wait for an election result at
13:44
Speaker 3: the end of this calendar year in Victoria, I don't.
13:46
Speaker 4: Know, but eventually it will turn around.
13:49
Speaker 3: And apartments have been in a flat cycle for about
13:52
Speaker 3: thirteen years in Melbourne, so again we're getting close to
13:56
Speaker 3: a growth cycle.
13:57
Speaker 4: I think.
13:58
Speaker 2: Statistics it would suggest yes.
14:01
Speaker 1: And I'll come back to that one moment, just on
14:03
Speaker 1: the from the broader point, if you've got that apartment,
14:06
Speaker 1: the concept of the apartment, so houses did so work
14:11
Speaker 1: for so long, and then that that the COVID era
14:14
Speaker 1: extended their premium. So the gap tell me if I'm wrong,
14:18
Speaker 1: but the gap between houses and apartments has never been
14:21
Speaker 1: so wide, correct, So does that narrative basically on apartments,
14:27
Speaker 1: does it extend everywhere. Is it something that we could
14:29
Speaker 1: apply across the national market in every city.
14:34
Speaker 3: Yes, but to a lesser extent. So the gap in
14:37
Speaker 3: Sydney is still wide, relatively wide relative to history, and
14:41
Speaker 3: same in Brisbane too well, that gap is starting to
14:44
Speaker 3: close because about two years ago that apartment market really
14:47
Speaker 3: kicked off in terms of growth. So there is a
14:50
Speaker 3: bit of mean reversion going on in other markets, but
14:52
Speaker 3: it's more distinct or most distinct in Melbourne. And I
14:56
Speaker 3: think if we're thinking about relative value, you know, what
14:59
Speaker 3: do you get for your money in terms of the
15:01
Speaker 3: locality of the property, the size and the value of
15:04
Speaker 3: the land component. I think Melbourne represents the best ten
15:08
Speaker 3: year opportunity. Whether it performs this year, who knows so.
15:12
Speaker 1: On the apartment the argument against apartments has been pretty
15:15
Speaker 1: strong for some time. That the simple argument is that houses,
15:19
Speaker 1: standard one houses are a stronger investment you have less land.
15:22
Speaker 1: This is textbook stuff. But then more recently Stewart has
15:26
Speaker 1: been a structural issue, which is they're working from home.
15:31
Speaker 1: Change means that apartments are less attractive as they used
15:35
Speaker 1: than there used to be, particularly one bedroom apartments where
15:38
Speaker 1: a person a person lived in a one bedroom apartment,
15:41
Speaker 1: and the assumption was from the investor side, was that
15:44
Speaker 1: person went to work every day. That's not necessarily the
15:46
Speaker 1: case now for many people. So how do we bet that?
15:50
Speaker 1: How do we work that into the apartments? The apartment opportunity.
15:56
Speaker 3: Yeah, I think the sweet spot is an older style
15:58
Speaker 3: two bedroom apartment. If you can afford a house, I
16:02
Speaker 3: think a house will tend to be a better investment
16:05
Speaker 3: in the long run, and you do have more control,
16:07
Speaker 3: and it will have a higher land value component, all
16:10
Speaker 3: things being equal. So if I was sitting in front
16:12
Speaker 3: of someone that said, oh, look, I can buy two
16:14
Speaker 3: apartments or a house, what should I buy? I would
16:16
Speaker 3: buy a house. So I think houses always be departments.
16:20
Speaker 3: But if I'm in that price point where I can't
16:22
Speaker 3: get into an investment great house and I'm looking for
16:25
Speaker 3: the where can I put my money to get the
16:28
Speaker 3: best bang for buck, I think a two bedroom apartment
16:31
Speaker 3: in Melbourne is a great investment opportunity. And I think
16:35
Speaker 3: you can spend somewhere between say six fifty seven fifty
16:38
Speaker 3: will buy a great property in a quiet street in
16:42
Speaker 3: a blue chip suburb in Melbourne, and there might only
16:45
Speaker 3: be six four to eight on the block.
16:48
Speaker 4: You know.
16:48
Speaker 3: So it's a really relatively large block, six to eight
16:51
Speaker 3: hundred square meters, only four to eight dwellings on that
16:55
Speaker 3: parcel of land, and that's the kind of asset that
16:58
Speaker 3: I think represents the best value. One bedroom apartment I
17:01
Speaker 3: think will still get dragged along with in the next
17:05
Speaker 3: growth cycle, but I think to a lesser extent, and
17:08
Speaker 3: I think two betters have wider appeal for the reasons
17:11
Speaker 3: you decide at least I can, you know, go and
17:13
Speaker 3: occupy that and at leaves use one room as a
17:16
Speaker 3: study or work from home space.
17:17
Speaker 2: Okay, And you mentioned you several times for.
17:21
Speaker 1: The investor who's looking at income primarily over capital appreciation,
17:27
Speaker 1: and I think, I imagine we have a lot of listeners
17:30
Speaker 1: who are doing that right now for the simple reason
17:32
Speaker 1: that on a holistic basis, the share market has been
17:35
Speaker 1: so good, right It's is ten percent every year. We're
17:37
Speaker 1: just a ten percent again last year on the ASX
17:39
Speaker 1: so for any mission fund's doing nine percent, us doing
17:43
Speaker 1: double that. So people aren't looking for income in the
17:47
Speaker 1: share marketer. If there are, this year's success of the
17:50
Speaker 1: share is mincing their years. That's why I combined, for instance,
17:54
Speaker 1: which is a standby stock for so many people.
17:56
Speaker 2: It's got a dividend you live three percent. It also
18:00
Speaker 2: has a four share price.
18:02
Speaker 1: So property in the traditional sense of an asset that
18:09
Speaker 1: is outside the share market, that is not listed, that
18:11
Speaker 1: can pay an income, I think it's coming back into
18:13
Speaker 1: the frame. So tell us about the what is the
18:15
Speaker 1: yield picture here on apartments rusus houses.
18:19
Speaker 3: Apartments would tend to offer a high yield, but look,
18:23
Speaker 3: it's all about growth with respect to investing in property.
18:26
Speaker 3: I think the only focus on yield should be to
18:30
Speaker 3: the extent that you need it from a borrowing capacity perspective.
18:32
Speaker 3: So your bank might say, look, we'll injure this money,
18:35
Speaker 3: but as long as the grocery intol yields at least
18:38
Speaker 3: three percent, for example, Well, if you've got that parameter,
18:41
Speaker 3: then of course you've got to find something that's going
18:43
Speaker 3: to give you more than three percent. But a good
18:45
Speaker 3: way to do it, James, is these older style apartments.
18:48
Speaker 3: Typically they were constructed before nineteen sixty maybe nineteen seventies
18:52
Speaker 3: or you know, before that time, and so a lot
18:54
Speaker 3: of them need kind of a new bathroom, kitchen, some flooring,
18:58
Speaker 3: some window furnishings, these things.
19:01
Speaker 4: So it's a great opportunity.
19:02
Speaker 3: To allocate some of your budget to making those improvements.
19:06
Speaker 3: At least you'll get the depreciation benefits of depreciating the
19:09
Speaker 3: cost of doing that, and it will then increase the
19:13
Speaker 3: rental yield. And so from a and of course you
19:16
Speaker 3: can still add that to your borrowing. So from a
19:18
Speaker 3: cash flow perspective, it certainly enhances the property's value. But
19:21
Speaker 3: at least you're spending most of your money on really
19:24
Speaker 3: the underlying land value initially and then improve the property
19:29
Speaker 3: after that. And I've got some investment great apartments in
19:33
Speaker 3: Melbourne and the yields are sort of four point two
19:35
Speaker 3: four point four and a half percent at the moment growth,
19:38
Speaker 3: so they're pretty they're pretty attracted.
19:39
Speaker 2: They're particularly good.
19:40
Speaker 1: That's particularly good, I imagine, is it compet Let's say
19:43
Speaker 1: Sydney on the same strata would be.
19:47
Speaker 3: Two to three percent in a comparable location in terms
19:50
Speaker 3: of from a blue chip perspective. And Brisbane yields were
19:54
Speaker 3: relatively high, although they'll start being compressed now because they're
19:57
Speaker 3: starting to see a bit of capital growth. So that's
19:59
Speaker 3: your our entry point too. We've got to think about
20:02
Speaker 3: when you buy a property. The entry yield is kind
20:04
Speaker 3: of the most important because that's the actual cash flow
20:08
Speaker 3: that you're going to outlay. How the rental yield changes
20:11
Speaker 3: over time doesn't really matter, because it's really interest costs
20:14
Speaker 3: versus gross rental income that you're getting from the asset.
20:17
Speaker 3: So it's a great entry point to get into the
20:19
Speaker 3: market because to hold that asset and hold that exposure,
20:23
Speaker 3: relative to history, the cost to hold that exposure is
20:26
Speaker 3: relatively low.
20:27
Speaker 1: Okay, we'll be back in a moment, folks. I want
20:29
Speaker 1: to dig deeper here. I think it's compelling. What's steward
20:33
Speaker 1: to see. We'll be back in a moment. Hello, Welcome
20:42
Speaker 1: back to The Australian's Money Puzzle podcast. I'm James Kirby.
20:45
Speaker 1: I'm talking to Stuart Williams and we are talking properly.
20:48
Speaker 1: Outlook for twenty twenty six, folks. I suppose we should
20:51
Speaker 1: have laid it out for you at the start. For
20:54
Speaker 1: what it's worth, the consensus forecast for a national House
20:57
Speaker 1: process in the year aheader is five percent. I think
21:00
Speaker 1: Stewart and I have been around long enough to know
21:02
Speaker 1: that in a way it means almost nothing. They say
21:04
Speaker 1: that every year no one knows what's going to happen
21:06
Speaker 1: next and five percent is such a vague, fuzzy guideline anyway.
21:10
Speaker 1: Just like that, the fact that the property market mid
21:13
Speaker 1: eight percent last year means very little to you if
21:16
Speaker 1: you're sitting in perthin you've done fifteen or twelve, and
21:18
Speaker 1: it means very little to you if you're on your
21:20
Speaker 1: eleventh year with an unsuccessful property investment in Melbourne, which
21:24
Speaker 1: is going nowhere a year after the year. So we
21:27
Speaker 1: put that on the table, but we did need to
21:29
Speaker 1: tell you that I think that is the forecast consensus
21:31
Speaker 1: five percent, and we made the point that rates there's
21:34
Speaker 1: a consensus that rates will rise, not fall, and that
21:37
Speaker 1: there will be at least one rise. I'm certainly comfortable
21:41
Speaker 1: with that out with that outlook from here. So within
21:44
Speaker 1: that context, Stuart has quite i think, come to the
21:47
Speaker 1: party very clearly and said he thinks at this is
21:51
Speaker 1: in terms of what you were going to buy this
21:52
Speaker 1: year would be apartments. He's particularly said that in terms
21:56
Speaker 1: of regionality. We're talking about Victoria Melbourne in particular, and
22:02
Speaker 1: it's a strong idea. I just want to interrogate it
22:04
Speaker 1: a little bit, Stuart. There's a couple of things in
22:06
Speaker 1: the back of my mind. The first one obviously is
22:08
Speaker 1: what has held apartments back all the time.
22:12
Speaker 2: Why want to stop holding them back?
22:14
Speaker 1: The fact that there are a second rate compared to
22:16
Speaker 1: houses as an investment, that you can't control the block
22:19
Speaker 1: they're in, So you could have a beautiful apartment, but
22:21
Speaker 1: it cannot change a bad block.
22:25
Speaker 4: I think it's about relative value, James. So I think
22:27
Speaker 4: you're right.
22:28
Speaker 3: If you've got an apartment market that's fairly priced and
22:33
Speaker 3: a housing market that's fairly priced, you're comparing the two,
22:35
Speaker 3: then I think you'd go, yeah, I want the house
22:38
Speaker 3: because I've got more control.
22:39
Speaker 4: I don't have a body corporate all those sorts of things.
22:42
Speaker 3: But I think the point I'm trying to make here
22:44
Speaker 3: is relative value is so attractive that are offsets some
22:47
Speaker 3: of those negatives.
22:49
Speaker 4: Now, of course, you want to do use due diligence
22:51
Speaker 4: going in.
22:51
Speaker 3: You want to make sure you're buying into a block
22:53
Speaker 3: that is well managed and well looked.
22:55
Speaker 4: You've got a good, well.
22:56
Speaker 3: Functioning body corporate, and that's going through the minue and
23:00
Speaker 3: making sure they've been doing the maintenance and they're allocating
23:03
Speaker 3: enough money to the maintenance fund. All those sorts of things.
23:06
Speaker 3: Because what you don't want to do is buy into
23:08
Speaker 3: a block that's been poorly managed and undercapitalized, because that's
23:12
Speaker 3: going to actually retard your ability to generate that growth.
23:15
Speaker 3: So I think there's some things you can do to
23:17
Speaker 3: sort of mitigate that risk, kind of avoid it. It's
23:20
Speaker 3: always going to be a little bit challenging to deal
23:22
Speaker 3: with the body corporate, but I think you're rewarded for
23:26
Speaker 3: taking that high risk just because of the relative value
23:29
Speaker 3: is so attractive.
23:30
Speaker 2: Okay.
23:31
Speaker 1: One thing we also should have said, and it's sort
23:33
Speaker 1: of implicit, I suppose these days, but it's worth saying
23:35
Speaker 1: it out loud. One of the great attractions of rental
23:39
Speaker 1: property in Australia just now is the endless demand. There
23:44
Speaker 1: is no virtually no risk of that apartment laying empty
23:48
Speaker 1: because we've got one point four percent vacancy rates there
23:50
Speaker 1: aren't changing. I've just seen the leader's supports as tight
23:52
Speaker 1: as ever. Basically, you can rent anything in the cities
23:56
Speaker 1: and I don't think that's going to change.
23:58
Speaker 2: And what do you think, Stuard.
24:00
Speaker 3: No, I mean just because of the cost to build
24:03
Speaker 3: apartments now is so much higher than it was sort
24:06
Speaker 3: of pre COVID, and the prices haven't risen nearly as
24:09
Speaker 3: much as the cost to build these assets, they're just
24:13
Speaker 3: developers just aren't going to build them. Like there's just
24:15
Speaker 3: the supply of apartments is shrinking and will continue to
24:19
Speaker 3: shrink until prices catch up and make them economical. Also
24:23
Speaker 3: to your point, James, in terms of rental yield and
24:27
Speaker 3: weekly rental amount, of course, to rent apartments is more affordable,
24:31
Speaker 3: so your pull of potential renters is much wider than
24:35
Speaker 3: safer houses and particularly premium houses. So your rental vacancy
24:39
Speaker 3: rates certainly at the moment, you know if you lose
24:41
Speaker 3: a tenant, you'll get another tenant inside of a week.
24:44
Speaker 3: You're like, you're not dealing with much vacancy.
24:46
Speaker 1: Yes, and that's not always like that, so it's worth
24:49
Speaker 1: knowing that is basically a positive at the moment.
24:52
Speaker 2: Stuart. One of the things I take it totally.
24:57
Speaker 1: On board that there's value in the apartment market, and
25:01
Speaker 1: we'll take it that it's also the case that the
25:03
Speaker 1: apartment certainly the apartment developers are saying that it's not
25:06
Speaker 1: what they're time to build apartments just now apartment towers.
25:10
Speaker 2: But when it does turn again.
25:12
Speaker 1: One of the weaknesses of apartments is you have a
25:14
Speaker 1: perfectly good apartment and someone opens a tower not far
25:20
Speaker 1: away and there are brand new apartments that are not
25:26
Speaker 1: so different in form and function to yours, and that
25:29
Speaker 1: can really flatten their growth for a long period.
25:32
Speaker 3: Is it?
25:34
Speaker 2: To what extent can you get around that risk?
25:37
Speaker 3: I mean, I think in both Melbourne and Sydney, the
25:39
Speaker 3: government's decided to build these activity centers and so where
25:43
Speaker 3: they're going to have medium density or they'd like to
25:46
Speaker 3: have more medium density.
25:48
Speaker 4: Whereas when I'm.
25:49
Speaker 3: Talking about investment grade apartment, I'm really talking about in
25:52
Speaker 3: a location that's blue chap in a very quiet street. Again,
25:56
Speaker 3: they were built in the sixties and seventies or before
25:59
Speaker 3: that time, So I think, what could happen or we're
26:03
Speaker 3: going to need higher density in our capital cities. That's
26:06
Speaker 3: that's just a case of not if, but when so,
26:09
Speaker 3: I think what might happen is if they do loosen
26:12
Speaker 3: planning restrictions, these complexes will be down bulldozed and instead
26:17
Speaker 3: of building six apartments, they'll build twenty on the same block.
26:21
Speaker 3: And so I think that just improves the underlying land value,
26:24
Speaker 3: the productive value of that land. And I think that's
26:27
Speaker 3: where the upside is for future use of these sorts
26:30
Speaker 3: of properties, so.
26:31
Speaker 2: You have a shot. You have a shot basically been
26:34
Speaker 2: bought off by a developer.
26:35
Speaker 3: Is that what you're saying, Yeah, and buy away from
26:37
Speaker 3: the activity centers like buy in areas where that planning
26:41
Speaker 3: isn't in place yet. I mean it could change, of course,
26:44
Speaker 3: but I think in the future we do need higher
26:46
Speaker 3: density James and the only way we're going to get
26:48
Speaker 3: that well, probably the easiest way, I should say, is
26:51
Speaker 3: to rebuild these apartment blocks as opposed to subdivisions.
26:56
Speaker 4: Or these sorts of things.
26:57
Speaker 3: That's much slower, unlikely to happen in highland value areas.
27:01
Speaker 1: In practical terms, it sounds like buying away from railway
27:03
Speaker 1: station zones because that's the target.
27:05
Speaker 2: Isn't in most cities ye okay.
27:08
Speaker 1: One thing that is of concern I think to investors,
27:11
Speaker 1: certainly on the Australian we can see this already, is
27:13
Speaker 1: that there is a capital against tax inquiry happening in March,
27:17
Speaker 1: with a lot of interest around that because the submissions
27:20
Speaker 1: are already going in and there is a sense that there
27:23
Speaker 1: is a mood where the government could if they wish
27:27
Speaker 1: to change the terms of capital gainst tax, they'd have
27:32
Speaker 1: considerable support to do so the inquiry will take its course.
27:36
Speaker 1: We don't know how it'd lend, but I have a
27:39
Speaker 1: damn good idea that it will lend with some very
27:41
Speaker 1: clear conclusions that a reform and a tailing back of
27:47
Speaker 1: the concessions if you like, on capital gainst tax would
27:51
Speaker 1: be popular. The government can then say it's not our idea.
27:54
Speaker 1: This inquiry has happened and we want to respond to
27:59
Speaker 1: this demand. This is a really fear in markets. I
28:01
Speaker 1: think just now in a cross the investment market, what
28:04
Speaker 1: about property and what might happen?
28:06
Speaker 3: Well, In fact, the Greens are saying that any changes
28:09
Speaker 3: to capital Gains Tax should only happen with property, and
28:12
Speaker 3: the Budget Parliamentary Office has said, and I quote, the
28:16
Speaker 3: top ten percent of taxpayers receive eighty percent of the
28:20
Speaker 3: CGG discount benefit. But another way to say that sentence
28:25
Speaker 3: is the top ten percent are paying more than eighty
28:28
Speaker 3: percent of the CGT tax revenue, which is somewhere between
28:32
Speaker 3: fifteen to twenty five billion dollars a year, depending on
28:35
Speaker 3: what happens in that particular year. And because the marginal,
28:38
Speaker 3: because of our tax system's marginal, it'll be less than
28:42
Speaker 3: less than ten percent are paying more than eighty percent,
28:44
Speaker 3: So of course, if you increase taxes on the top
28:47
Speaker 3: ten percent of taxpayers, of course you're going to raise
28:49
Speaker 3: more revenue. So you know, I think there's that argument there. Look,
28:53
Speaker 3: I think that the fifty percent discounts generous, particularly when
28:56
Speaker 3: you compare it to the old system of indexing the
28:59
Speaker 3: cost pay.
29:00
Speaker 2: This is interesting.
29:00
Speaker 1: You're a property expert and you are saying the same
29:03
Speaker 1: thing as many of these submissions in retrospect. They changed
29:07
Speaker 1: CGT because of inflection at the time in the Howard
29:12
Speaker 1: government in that period. Since that time, with the new
29:15
Speaker 1: arrangement where you get a fifty percent discount, it would
29:18
Speaker 1: seem that if you did the marts, the discount has
29:21
Speaker 1: been generous compared to the old system. So it sounds
29:24
Speaker 1: to me like that's just going to be a laydown
29:26
Speaker 1: for any inquiry. That's going to be the outcome of
29:29
Speaker 1: the inquiry.
29:30
Speaker 3: And my modeling, James, is forty percent discounts more in
29:33
Speaker 3: line with CPI, and a forty percent discount will actually
29:37
Speaker 3: incentivize investors that hold assets for a very long period
29:42
Speaker 3: of time, and that's really what you want to do
29:43
Speaker 3: is attract long term capital to the property market. That's
29:47
Speaker 3: really what's going to help in terms of supply. So
29:51
Speaker 3: whereas the Greens are talking about reducing the CGT discount
29:55
Speaker 3: to twenty five percent, I think that's aggressive, but I
29:57
Speaker 3: think you may as well start aggressive and then compromise
30:00
Speaker 3: from there. So I think the outcome of the reviews
30:03
Speaker 3: probably likely no change or a reduction, a slight reduction
30:08
Speaker 3: in the cost base. But it's not really going to
30:10
Speaker 3: move the dial in terms of whether it's worthwhile to
30:13
Speaker 3: invest in property. The negative gearing benefits, tax benefits are
30:17
Speaker 3: worth a lot more to an investor than the potential
30:20
Speaker 3: payment of CGT, you know, in ten twenty thirty years time.
30:24
Speaker 3: So it's not going to move the dial that much.
30:26
Speaker 1: You're allowing for it as a risk, but do you
30:28
Speaker 1: think it won't move the diet should it come to pass?
30:30
Speaker 1: Very interesting and worth putting in front of the listeners,
30:32
Speaker 1: I think in terms of an issue for this first
30:34
Speaker 1: quarter of the year as an investor, okay, terrific.
30:37
Speaker 2: I think we should leave it just there.
30:39
Speaker 3: Just one other thing in terms of we're going to
30:41
Speaker 3: interrogate the you know, the hypothesis that the apartment market
30:46
Speaker 3: is most attractive. I guess we think about interest rate risk.
30:49
Speaker 3: And you know, the first thing I would say is
30:51
Speaker 3: interest rate expectations can literally change overnight. So whilst today
30:55
Speaker 3: we're contemplating potential rate increases, all that could turn tomorrow,
31:00
Speaker 3: so we can't get too taken away with it. But
31:02
Speaker 3: if we look at what is the implications of higher
31:06
Speaker 3: interest rates with the backdrop of already type boring capacity
31:11
Speaker 3: because of interest rate settings and macro prudential regulation, if
31:15
Speaker 3: we see interest rates go higher this year, I think
31:18
Speaker 3: that'll just compress more people into the apartment market. So
31:22
Speaker 3: I think it will fuel that two speed market rather
31:26
Speaker 3: than disturb it because people, you know, people might be
31:30
Speaker 3: at a sort of a nine hundred thousand dollars price
31:32
Speaker 3: point now, and if interest rates go up, maybe they're
31:35
Speaker 3: pushed down into an eight hundred thousand dollars price point.
31:37
Speaker 3: All of a sudden, They're not buying a villa unit,
31:39
Speaker 3: they're buying an apartment. So I think if investors out
31:42
Speaker 3: there worried about what's the impact of interstrates, I think
31:45
Speaker 3: it's just going to fuel that that lower end of
31:48
Speaker 3: the market and harm the higher end of the market.
31:50
Speaker 1: Okay, interesting, really interesting, and I think persuasive. Stuart terrific
31:55
Speaker 1: and thank you Stuart very much for doing the show today.
31:57
Speaker 1: Great to have a clear outlook for the year head
32:00
Speaker 1: and I really appreciate the fact that you actually took
32:02
Speaker 1: a very strong line and made it very clear what
32:04
Speaker 1: you think is going to happen. Thanks to Leah Samaglu
32:07
Speaker 1: for producing the show today. I see the correspondents are
32:09
Speaker 1: starting to roll in again, folks.
32:11
Speaker 2: That's great.
32:11
Speaker 1: Keep them coming the money puzzle at the Australian dot
32:14
Speaker 1: com dot au. We will resume reading your correspondence and
32:17
Speaker 1: getting it answers for you next week