Latest / The Money Puzzle / Investment Lending Hits All-Time High: What’s Driving the Surge?

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Investment Lending Hits All-Time High: What’s Driving the Surge? · The Money Puzzle

0:10
Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: Stuart Weems, sitting in for your usual host, James Kirby.
0:16
Speaker 1: I'm a financial advisor and host of my own podcast, Investopoly,
0:20
Speaker 1: and I'm honoured to be your host for today's episode.
0:23
Speaker 1: I've got some really surprising numbers to share with you folks.
0:27
Speaker 1: Over the past five months, so since February, new investment
0:31
Speaker 1: loan volume has increased by 47%. So investment lending is
0:36
Speaker 1: now at a record high, No surprising that Western Australia,
0:39
Speaker 1: South Australia and New South Wales lead that charge, although
0:43
Speaker 1: lending in Victoria wasn't too bad either. So this comes
0:46
Speaker 1: as a real surprise to me given the current backdrop.
0:49
Speaker 1: And the current backdrop is we've got interest rates almost
0:52
Speaker 1: at two-decade highs, so it hasn't been this high since 2007.
0:55
Speaker 1: We've got new interest-only loans have fallen from 40% of
0:59
Speaker 1: all new loans in 2017 to just about 10% today.
1:06
Speaker 1: So investors really aren't borrowing on interest-only basis. Then we've
1:10
Speaker 1: got higher property taxes, land taxes, levies, surcharges, all those
1:14
Speaker 1: sorts of things. And of course, tenancy rules over the
1:17
Speaker 1: last few years have become a lot stricter with things
1:19
Speaker 1: like notice periods and limits on rent hikes and those
1:22
Speaker 1: sorts of things. So I was really surprised that the
1:25
Speaker 1: investor market is running so hot. An organisation called Property
1:30
Speaker 1: Investment Professionals of Australia, or PIPA for short, produces an
1:34
Speaker 1: investor survey every year. This year's survey was released on
1:38
Speaker 1: Friday and included responses from about 1,300 investors. I wanted
1:43
Speaker 1: to share some key highlights from that survey. So the
1:46
Speaker 1: first one is 14% of investors sold at least one
1:50
Speaker 1: property last year. Now about 40% of those investors held
1:53
Speaker 1: that asset for more than 10 years, so there's a
1:57
Speaker 1: bit of cash in some of that equity. But the
2:00
Speaker 1: main reasons for selling were increased holding costs and increased
2:04
Speaker 1: land tax and government charges. Most of the sales occurred
2:08
Speaker 1: in Queensland, although Victoria wasn't too far behind that, although
2:13
Speaker 1: fewer investors sold in Victoria in the last year than
2:16
Speaker 1: the previous year, 22% versus 25%. General investor sentiment is down.
2:23
Speaker 1: That's probably no surprise, or it's not really in line
2:26
Speaker 1: with the figures, though. 46% of investors think now is
2:29
Speaker 1: a good time to invest compared to 62% back in 2021.
2:34
Speaker 1: And the biggest concern for investors is government interference, things
2:38
Speaker 1: like rent freezes, those sorts of things. Regarding holding costs, 80%
2:44
Speaker 1: of landlords said they would pass on those higher holding
2:46
Speaker 1: costs to renters, and 13% said they would consider selling
2:50
Speaker 1: as a result of higher holding costs. So we know
2:53
Speaker 1: those holding costs ultimately aren't good for renters. And surprisingly,
2:58
Speaker 1: Melbourne is considered the best place to invest because Now,
3:02
Speaker 1: of course, a healthy property investment market is critical for
3:05
Speaker 1: a couple of reasons. Firstly, private investors in Australia provide
3:09
Speaker 1: about 90% of rental accommodation. And secondly, they make up
3:13
Speaker 1: about a third of the market in terms of buyers.
3:16
Speaker 1: The other two thirds are own occupiers, of course. So
3:20
Speaker 1: today I wanted to delve into this data and explore
3:22
Speaker 1: what is driving this hot property investor market in Australia.
3:26
Speaker 1: And then also, how should investors navigate some of the
3:29
Speaker 1: current challenges? And I've got a perfect guest to do that.
3:33
Speaker 1: He's a licensed real estate agent in many states of Australia,
3:37
Speaker 1: a qualified mortgage broker, founder of Empower Wealth, host of
3:41
Speaker 1: the Property Couch podcast, and chair of the not-for-profit organization,
3:46
Speaker 1: Property Investor Council of Australia. Boy, that is a mouthful.
3:50
Speaker 1: It's his first time on the show. Welcome, Ben Kingsley.
3:53
Speaker 2: Thank you, Stuart. Thanks for having me.
3:55
Speaker 1: My pleasure. Ben, let's start with the dramatic rise in
3:59
Speaker 1: investment lending. Was it a surprise to you? And I'd
4:02
Speaker 1: be really interested in your thoughts around what is driving this?
4:06
Speaker 1: What is the demographic of the investors? And geographically, where
4:09
Speaker 1: are they investing?
4:11
Speaker 3: Yeah, so I think more broadly, am I surprised that
4:13
Speaker 3: property prices have continued to grow in most parts of Australia,
4:17
Speaker 3: given those 13 rate rises that we've seen? The short
4:19
Speaker 3: answer to that is yes. But then when you look
4:22
Speaker 3: under that, obviously, we're also talking about the situation where
4:25
Speaker 3: we have strong employment and strong government employment in education
4:29
Speaker 3: and health services. So that certainly meant that we haven't
4:32
Speaker 3: had that typical correction that we would normally get. But
4:35
Speaker 3: when I look at the numbers of 47% increase over
4:38
Speaker 3: a five-year period, I do want to put that into
4:40
Speaker 3: some context. So when I look at that, I look
4:44
Speaker 3: at the batch of time. And so inside that period,
4:47
Speaker 3: we saw in 2021 into 2022, we had this rocketing
4:52
Speaker 3: property price boom on the back of record low interest rates.
4:56
Speaker 3: And I think when we look at that data over
4:58
Speaker 3: that five-year period, we're still catching that very strong growth
5:01
Speaker 3: level in that earlier stage. So that's showing up in
5:04
Speaker 3: the numbers. So when we start to think about the
5:07
Speaker 3: base effect and what's happening in this current time, we
5:10
Speaker 3: are definitely starting to see a slowing in those numbers. Well,
5:13
Speaker 3: the numbers still look good because the base effect over
5:15
Speaker 3: the last 12 months is also quite low because we
5:18
Speaker 3: bottomed out off the back of that previous boom that
5:21
Speaker 3: we had at the back of COVID. So What I
5:24
Speaker 3: tend to interpret into that data, because this has been
5:27
Speaker 3: puzzling me, Stuart, for a while, I feel like the
5:30
Speaker 3: demographic is, so those property investors that might have been
5:33
Speaker 3: investing for the decades and those older property investors, I
5:37
Speaker 3: suspect some of those are taking profits and cashing out.
5:40
Speaker 3: We saw that a little bit in the survey results
5:42
Speaker 3: that we got from PIPA as well. And I think
5:44
Speaker 3: that the new demographic, so the new investor that's coming in,
5:48
Speaker 3: is that next generation investor.
5:49
Speaker 2: But they are very.
5:51
Speaker 3: Focused in on being forced into that affordability belt because
5:56
Speaker 3: of the borrowing power restrictions we've got in place and
5:59
Speaker 3: those types of things. So it really is quite an
6:01
Speaker 3: interesting dynamic that we've got in the market at the moment.
6:04
Speaker 1: Yeah, because when you look at the loan volume, it's
6:07
Speaker 1: based on loan sizes, right? So it's the amount of
6:10
Speaker 1: money that's really moving into that property market. And I
6:13
Speaker 1: don't know, you probably saw it, Ben, but CBA released
6:17
Speaker 1: a really interesting slide in their results in terms of
6:20
Speaker 1: who's doing that borrowing, in terms of average family size income.
6:24
Speaker 1: And it showed that very wealthy people, family incomes, I
6:28
Speaker 1: can't remember, something like $ 250, 000 or $ 300, 000 or above, were
6:32
Speaker 1: responsible for most of the borrowing there. So are you
6:37
Speaker 1: suggesting that that volume is really driven by two cohorts,
6:41
Speaker 1: if you like, a cohort that's not really impacted by
6:44
Speaker 1: borrowing capacity and the cohort that is impacted by borrowing
6:47
Speaker 1: capacity that's forced it to go into a lower price point?
6:51
Speaker 3: Yeah, no doubt there has been investors who might be
6:54
Speaker 3: wanting to add to their portfolio and just simply can't
6:57
Speaker 3: because the borrowing power restrictions that are currently in place
7:00
Speaker 3: through the 3% buffer rate are tapping them out of that.
7:03
Speaker 3: And so that does mean that obviously the people who
7:05
Speaker 3: can invest are usually the higher income earners. So I
7:08
Speaker 3: definitely feel like we're seeing a bit of that. In
7:11
Speaker 3: terms of, there is some green shoots in that sort
7:13
Speaker 3: of younger demographic, that really young aspiring investor sort of
7:17
Speaker 3: early 20s to mid 20s that are attempting to get
7:20
Speaker 3: in the market, but they are very much reliant on
7:22
Speaker 3: higher rental income to be able to get into that market.
7:26
Speaker 3: But they are definitely forced into that sort.
7:28
Speaker 2: Of entry level.
7:29
Speaker 3: So call it sort of 400,000 as the sort of
7:32
Speaker 3: price point that they're hunting. And unfortunately, the unintended consequences
7:36
Speaker 3: of that is that puts pressure in the first home
7:38
Speaker 3: buyer market in those particular states and territories. So that's
7:41
Speaker 3: why we've seen the more affordable states performing very well
7:44
Speaker 3: compared to your more traditional New South Wales and Victoria
7:47
Speaker 3: or Sydney and Melbourne markets where property prices are significantly higher.
7:52
Speaker 1: And the interest-only lending has a big impact too, right?
7:55
Speaker 1: Because if you're an investor and you borrow on an
7:57
Speaker 1: interest-only basis, then your holding cost is substantially lower than
8:01
Speaker 1: say someone that's forced to or decides to make principal
8:04
Speaker 1: interest repayments on their loan. Those numbers are pretty stark.
8:08
Speaker 1: What's your advice typically to investors and particularly investors that
8:12
Speaker 1: want to get into the market? Is it interest only
8:14
Speaker 1: or principal interest repayments?
8:16
Speaker 3: To your point, I haven't seen them fall from traditionally 40%
8:19
Speaker 3: now down to 10% in the last seven years.
8:21
Speaker 2: It's really clear to me that this has been a manufactured.
8:25
Speaker 3: result of macro prudential interference in the marketplace. So let
8:29
Speaker 3: me explain that a little bit. Firstly, what we've seen
8:32
Speaker 3: is when APRA basically came in and put a throttle
8:35
Speaker 3: on the amount of interest only lending and then the
8:38
Speaker 3: amount of investment lending that you could get on your book.
8:40
Speaker 3: So they've started to manipulate that. The banks then said,
8:42
Speaker 3: if you're going to manipulate the ability for us to
8:44
Speaker 3: grow our business, we're going to start charging a premium
8:47
Speaker 3: for that type of product.
8:48
Speaker 2: So effectively, we started.
8:50
Speaker 3: To see price buffers or increases in the interest rates
8:53
Speaker 3: if you are going for an investment loan. And then
8:56
Speaker 3: if you're going for an interest-only investment loan on top
8:58
Speaker 3: of that, we basically saw that happen. So the unintended
9:01
Speaker 3: consequences of those types of actions are that if you
9:04
Speaker 3: take out a loan over 30 years, but you've got
9:06
Speaker 3: a five-year interest-only period, then the repayment calculations potentially be
9:11
Speaker 3: based on 25 years instead of 30 years P & I.
9:14
Speaker 2: And obviously the holding costs are higher.
9:16
Speaker 3: So it is manipulating on a case-by-case basis, more people into...
9:21
Speaker 3: taking a P & I loan, potentially over a 30-year period,
9:25
Speaker 3: as opposed to traditionally what we would have done, say, 10,
9:27
Speaker 3: 15 years ago for an investor, is their owner-occupied debt,
9:31
Speaker 3: their non-deductible debt, we would make that P & I,
9:33
Speaker 3: but we'd have interest only on their investment.
9:35
Speaker 2: Which was their deductible debt.
9:37
Speaker 3: So now, because of that separation or that cost base,
9:40
Speaker 3: it really does come down to doing a case-by-case number
9:42
Speaker 3: analysis to see whether it's worthwhile doing interest only or
9:46
Speaker 3: worthwhile doing P & I. And in this particular case,
9:48
Speaker 3: it does look like P & I is winning because
9:51
Speaker 3: of that price differential in those interest rates.
9:54
Speaker 1: So in your experience with your clients, do you see
9:56
Speaker 1: more borrowers going on P & I for investors of course?
10:00
Speaker 2: Yeah, we do. We do.
10:01
Speaker 3: I mean, that has been that trend up until before
10:04
Speaker 3: we saw those sort of market manipulations.
10:07
Speaker 2: It wasn't the trend.
10:08
Speaker 3: We'd probably do 99% of those loans interest only on
10:12
Speaker 3: the investment side, but we're starting to do a little
10:14
Speaker 3: bit more based on what does that mean for borrowing power?
10:18
Speaker 3: What does that mean for the cost of funds. Because
10:20
Speaker 3: if it means that the investor can't accumulate more properties
10:25
Speaker 3: in a quicker period of time, and we have to
10:26
Speaker 3: wait that little bit of extra time to get that
10:28
Speaker 3: additional borrowing power, then we're potentially better off going P &
10:31
Speaker 3: I to just make those holding costs a little bit lower.
10:35
Speaker 1: So what would your advice be to investors and obviously
10:38
Speaker 1: listeners for this podcast? They're obviously interested in the property market,
10:42
Speaker 1: whether they're in there already or looking to get in there.
10:45
Speaker 1: Would you What sort of balancing act would you make
10:48
Speaker 1: between minimising the holding costs in return for maximising your
10:52
Speaker 1: budget to get into the market versus trying to minimise
10:55
Speaker 1: those holding costs as much as possible, even if there's
10:58
Speaker 1: a consequence associated with obviously budget perspective?
11:01
Speaker 3: Yeah, to your point, Stuart, there's trade-offs everywhere in what
11:04
Speaker 3: we're talking about here. And I think that's why it
11:06
Speaker 3: really is advantageous to get some professional advice and have
11:10
Speaker 3: a look at your personal circumstances. So we always try to,
11:14
Speaker 3: with our modelling process, We try and make sure that
11:16
Speaker 3: we're optimising, but we're optimising also based on risk profile
11:20
Speaker 3: and risk appetite and then any of those changes in
11:23
Speaker 3: those circumstances. So if we can model to get an
11:27
Speaker 3: optimised purchase price at a certain level and that sort
11:30
Speaker 3: of fits into those cash flow levels and we can
11:33
Speaker 3: potentially get that P & I, we may look at that,
11:36
Speaker 3: but we'd also have a look at the consequences of
11:38
Speaker 3: interest only in terms of whether that allows us to
11:41
Speaker 3: get the second or third property.
11:43
Speaker 2: I mean, we're not an aggressive advisory firm.
11:46
Speaker 3: We're very passive in terms of how we like to
11:48
Speaker 3: treat our customers.
11:49
Speaker 2: So two or three really good properties.
11:51
Speaker 3: Over a long period of time, supplementary to super, means
11:55
Speaker 3: that hopefully that customer in retirement will be self-funded. They'll
11:58
Speaker 3: have a nice passive income coming off their enroll, as
12:01
Speaker 3: well as their super to live a very comfortable retirement.
12:05
Speaker 2: Yeah, great.
12:05
Speaker 1: Let's talk about investor sentiment now. And we've seen that
12:08
Speaker 1: come off in those PIPA results, which isn't surprising, of course,
12:11
Speaker 1: given the backdrop of all the changes that have occurred
12:14
Speaker 1: and particularly higher taxes, especially in Victoria. I did some
12:19
Speaker 1: work on holding costs a little while ago and looked at, historically,
12:23
Speaker 1: I used to, when I was doing projections for clients,
12:27
Speaker 1: used to assume that our expenses would be about 25%
12:30
Speaker 1: of gross rental income. which would account for all expenses
12:34
Speaker 1: such as management and maintenance and rates and insurance and
12:38
Speaker 1: those sorts of things. Now, I've seen that rise to 30%, 35%.
12:42
Speaker 1: What's your experience, Ben? Have you done any work on this?
12:45
Speaker 2: Yeah, no, 100%. They've definitely risen.
12:48
Speaker 3: And that has been, again, part of these unintended consequences
12:52
Speaker 3: when you get regulation and minimum standards and higher, not
12:57
Speaker 3: only just interest rate costs, but also I think what
12:59
Speaker 3: you're referring to is interests and all of the sort
13:02
Speaker 3: of compliance costs in terms of getting the gas permits
13:05
Speaker 3: and all of those types of things in terms of
13:07
Speaker 3: safety certificates and all of those costs. And even the
13:11
Speaker 3: property management fees are increasing off the back of the
13:14
Speaker 3: higher level of regulations and rules that they need to
13:18
Speaker 3: administer to.
13:19
Speaker 2: Yeah, it's definitely been clear that has happened.
13:22
Speaker 3: And that is obviously putting, again, further pressure on the
13:25
Speaker 3: owner of the property running their small private rental accommodation business.
13:29
Speaker 2: And they're passing on some of those costs to the renters. Yeah.
13:33
Speaker 1: And I want to ask you about how investors or
13:35
Speaker 1: your advice to investors navigate some of those changes. Before
13:38
Speaker 1: I do that, of course, some of these changes are necessary.
13:42
Speaker 1: It's important to protect renters and renters' rights, of course.
13:46
Speaker 1: And there are, I'm sure, some landlords out there that
13:49
Speaker 1: aren't fair and aren't providing accommodation that is of a
13:54
Speaker 1: sufficient standard. So How does a government, and obviously this
13:57
Speaker 1: is a problem that we've all got state-based regulation here,
14:01
Speaker 1: but how do governments sort of navigate that? They've got
14:03
Speaker 1: to find a balance between protecting renters, but also making
14:07
Speaker 1: sure we're still attracting private investors into the market.
14:11
Speaker 3: Yeah, and it really is a strong debate that's going
14:14
Speaker 3: on between the sort of both parties. We want a
14:17
Speaker 3: symbiotic relationship between the customer being the renter and obviously
14:21
Speaker 3: the business owner. The business owner wants a satisfied customer
14:25
Speaker 3: being the renter in their property and experiencing quiet and
14:28
Speaker 3: safe enjoyment.
14:29
Speaker 2: Of the property.
14:30
Speaker 3: But ultimately, we also want to make sure that in
14:32
Speaker 3: the event that there is difficulties in running that relationship
14:36
Speaker 3: and they have conflict, how do we resolve those types
14:39
Speaker 3: of things? And that's the fear that we've got at
14:41
Speaker 3: the moment in terms of what's happening around these tenancy
14:44
Speaker 3: reforms and basically where the owner does feel like they're
14:47
Speaker 3: losing a the future investment and the confidence in terms
14:55
Speaker 3: of wanting to come into the property investment space versus,
14:59
Speaker 3: I mean, at the end of the day, the household
15:00
Speaker 3: has a choice about where they invest. They can go
15:02
Speaker 3: and invest in ETFs or the share market directly, or
15:05
Speaker 3: they can invest in rental accommodation through commercial or residential,
15:09
Speaker 3: which is what we're talking about. So I'm really concerned
15:12
Speaker 3: about the level of reforms that are taking place, and
15:15
Speaker 3: it's certainly affecting the sentiment and confidence of for future
15:19
Speaker 3: supply of those investment dollars coming in. And we're talking
15:23
Speaker 3: about tens of billions of dollars here, Stuart, in terms
15:26
Speaker 3: of that's on an annual basis. That's what it equates to, right?
15:29
Speaker 3: So if those states or territories overreach when it comes
15:33
Speaker 3: to the reforms that they put in place, the unintended
15:36
Speaker 3: consequences are we don't get that supply. And when you
15:39
Speaker 3: don't get that supply, you obviously then start to see
15:43
Speaker 3: this rental crisis getting worse, the political pressures associated with that.
15:47
Speaker 3: but also higher rents being passed on to those tenants
15:50
Speaker 3: because of all of these additional costs that were being
15:54
Speaker 3: experienced by these reforms.
15:57
Speaker 2: Yeah.
15:57
Speaker 1: And as any experienced investor will tell you, there's one
16:00
Speaker 1: thing that doesn't change is change in itself, of course.
16:03
Speaker 1: So it's ever changing. So what would your advice be
16:07
Speaker 1: as a seasoned investor yourself? What would your advice be
16:11
Speaker 1: to new investors getting into the market or contemplating investing
16:15
Speaker 1: investing in property and maybe scared off by some of
16:18
Speaker 1: these changes?
16:19
Speaker 3: Yeah, so I've been doing this for 30 odd years,
16:22
Speaker 3: but I've never seen the concentration of a reform like
16:27
Speaker 3: we're seeing at the moment. So I can look at
16:30
Speaker 3: evidence that's happening internationally in terms of places where they've
16:34
Speaker 3: tried to introduce things like rental freezers and even banning
16:38
Speaker 3: negative gearing like what's happened in New Zealand. And now
16:40
Speaker 3: they're reversing out of those positions because they started to, again,
16:45
Speaker 3: realise that at the end of the day, the only
16:47
Speaker 3: way you can increase supply is either through private investment,
16:53
Speaker 3: which is obviously what mum and dad investors do, or
16:56
Speaker 3: it's through government investment. And that is very expensive. So
17:00
Speaker 3: private investment is usually more efficient. And so ultimately, what
17:04
Speaker 3: we do see is over those sort of decades that
17:06
Speaker 3: I've been doing it, there might be an overcorrection that occurs.
17:09
Speaker 3: And so we recorrect back to getting that balance right.
17:12
Speaker 3: And then over that longer period of time, we've seen
17:15
Speaker 3: obviously property prices perform very well in those sort of
17:19
Speaker 3: more affluent areas and through economic activity. And that ultimately
17:24
Speaker 3: ends up in the land values in those particular areas.
17:26
Speaker 3: So it really is quite concerning for me that it's
17:29
Speaker 3: becoming a political hot potato, as opposed to having a
17:33
Speaker 3: bit of common sense around the fact that if we
17:36
Speaker 3: want to get this supply to market, we've got to
17:38
Speaker 3: make sure that the there's confidence of supply and not
17:42
Speaker 3: too many reforms that are going to come in that's
17:44
Speaker 3: going to cause any type of concern for those investors.
17:46
Speaker 3: It's very expensive to actually invest in residential property in
17:50
Speaker 3: terms of the cost to get in with stamp duty
17:52
Speaker 3: and all of those setup costs and also the exit
17:54
Speaker 3: costs associated with that as well. We want long-term investors
17:58
Speaker 3: in the market that can provide ample amounts of private
18:01
Speaker 3: rental accommodation to accommodate effectively the 90% of the population
18:06
Speaker 3: who are happy to engage in a contract and have
18:09
Speaker 3: that safe and quiet enjoyment of the property, as opposed
18:11
Speaker 3: to what we're seeing right now is reforms for potentially
18:14
Speaker 3: the 10% of the marketplace, which are having challenging times.
18:18
Speaker 3: And we're looking to potentially ramp up the levels of
18:21
Speaker 3: power that those people have, but it's affecting the other 90%
18:24
Speaker 3: of the market that was working quite smoothly. I think
18:27
Speaker 3: you can see there that I'm a bit more of
18:29
Speaker 3: a free market operator than someone who likes to see
18:32
Speaker 3: lots of reform and regulation coming in to this particular space.
18:36
Speaker 1: Yeah, and I think I agree with your observation in
18:39
Speaker 1: terms of the amount of changes that have occurred both
18:41
Speaker 1: within lending and then with property in of itself in
18:45
Speaker 1: terms of how it affects tenants and also landlords has
18:48
Speaker 1: been significant over the last seven years. But we can't
18:51
Speaker 1: back away from the fact that really probably the only
18:55
Speaker 1: way they're going to solve the rental crisis, or at
18:57
Speaker 1: least a big proportion of it, is attracting more private
19:00
Speaker 1: investors into the markets. And I think as investors ourselves,
19:03
Speaker 1: we can take some solace from that, that this may
19:06
Speaker 1: be just a point in time situation. Anyway, that's very interesting.
19:09
Speaker 1: We're going to take a short break and that's exactly
19:11
Speaker 1: what I want to talk to Ben about when we return.
19:13
Speaker 1: So we'll be back in a moment. Hello and welcome
19:21
Speaker 1: back to the Australian's Money Puzzle Podcast. I'm Stuart Williams
19:24
Speaker 1: and I'm talking to Ben Kingsley, founder of Empower Wealth
19:27
Speaker 1: and chair of the Property Investors Council of Australia. So, Ben,
19:31
Speaker 1: in our first segment, we talked about the fact that
19:34
Speaker 1: private investors are supplying a lot of rental accommodation in Australia.
19:38
Speaker 1: So they're going to be a very important part of
19:42
Speaker 1: the solution moving forward. And whilst that might not be
19:45
Speaker 1: obvious to particularly new investors at the moment, it just
19:48
Speaker 1: all looks like downside opportunities. and risk, the reality that's true. Now,
19:52
Speaker 1: if we reflect back on how do we solve this
19:55
Speaker 1: rental crisis, of course, the government's talked about a couple
19:59
Speaker 1: of different levers that it can pull in terms of
20:02
Speaker 1: building more dwellings, more property. So hopefully the thesis around
20:06
Speaker 1: that is obviously the higher the supply, the cooler prices
20:09
Speaker 1: might be and the greater the supply of rental accommodation
20:12
Speaker 1: there'll be. Of course, there's then also trying to increase
20:17
Speaker 1: density in areas that have already built up. So I'd
20:20
Speaker 1: like to ask you a little bit about that. So
20:21
Speaker 1: let's start with the supply thing. And I guess the
20:23
Speaker 1: cornerstone of the government's idea is really this national housing
20:27
Speaker 1: accord of the target of building a million homes in
20:30
Speaker 1: the next five years. how is that going to, firstly,
20:35
Speaker 1: what do you think about that? And then secondly, how
20:37
Speaker 1: is that going to impact investors from a returns perspective
20:42
Speaker 1: and then from a decision-making perspective? Should they change their
20:46
Speaker 1: decisions as a result of this policy?
20:49
Speaker 3: Stuart, I think this is probably the really interesting part
20:52
Speaker 3: of the question. And before I answer that, what I
20:55
Speaker 3: want to say is, how did we get here? Like,
20:57
Speaker 3: why are we now seeing these $ 10 billion pledges and
21:00
Speaker 3: all this money being thrown at the solution? And that's
21:03
Speaker 3: because unfortunately what we have seen is a deterioration of
21:07
Speaker 3: that private investment. Let me share with you some of
21:10
Speaker 3: those stats from the ATO. And I like the ATO
21:12
Speaker 3: stats because effectively that's all the tax returns that go in.
21:16
Speaker 3: Now the data is a little bit lagged, but it
21:18
Speaker 3: really does start to show a trend.
21:20
Speaker 2: So let me give you a bit of an idea.
21:21
Speaker 3: In the last five years, so from financial year 18
21:26
Speaker 3: to the latest data at the end of financial year 2022,
21:30
Speaker 3: what we've seen is there's been an increase of 1.02%
21:33
Speaker 3: or on average around 22,000 individuals who have been investing.
21:41
Speaker 3: So we've got about 2.3 million property investors in Australia.
21:45
Speaker 3: And so that's growing on average at 22,000. Now, if
21:48
Speaker 3: we go and have a look at the previous five
21:50
Speaker 3: years before that, it was growing at 3% or an
21:52
Speaker 3: average of 60,000 additional investors every year. So it was
21:56
Speaker 3: meeting that population movement. And now we're creating the critical
22:00
Speaker 3: supply of rental accommodation. The previous five years before that,
22:05
Speaker 3: sort of from 2008 to 2012, it was also growing
22:08
Speaker 3: at an.
22:08
Speaker 2: Average $ 60, 000 per year.
22:11
Speaker 3: And the previous five years before that, it was growing
22:13
Speaker 3: at 4% or $ 56, 000 per year. So we are now
22:17
Speaker 3: at a stage where there is a deteriorating number of
22:21
Speaker 3: investors coming into the market. So what does that unfortunately mean?
22:25
Speaker 3: The government has to come in and throw the checkbook
22:27
Speaker 3: at it. And that's exactly what we've got is a
22:29
Speaker 3: scenario of the government coming in and throwing the checkbook
22:32
Speaker 3: at it. When if they hadn't have started to implement
22:35
Speaker 3: the APRA macro credentials, if they hadn't started doing all
22:38
Speaker 3: the reforms and they had to let the free market
22:41
Speaker 3: operate as a free market should, then all of this
22:43
Speaker 3: money that the government's throwing at it and all of
22:45
Speaker 3: the higher taxes that we have to then charge or
22:48
Speaker 3: the higher debt that the governments have to take on
22:51
Speaker 3: is a byproduct of poor policy. and poor decisions that
22:55
Speaker 3: are being made. And so this is what really gets
22:57
Speaker 3: me obviously frustrated in terms of that story. So are
23:00
Speaker 3: they going to meet their targets of 1.2 million properties? No,
23:04
Speaker 3: they're definitely not going to meet that. And if we
23:06
Speaker 3: have a look at also some of the other legislation
23:08
Speaker 3: that's also been changing over the past few decades, we've
23:12
Speaker 3: now got so much of the onus is on the
23:14
Speaker 3: developer to actually build all of the supplementary infrastructure in
23:18
Speaker 3: the greenfield areas. and the parks and the gardens and
23:22
Speaker 3: the upkeeps of those types of things, that all flows.
23:24
Speaker 2: Into the property prices of the land.
23:26
Speaker 3: So we're now starting to see 35% to 50% of
23:30
Speaker 3: the land value, all being government taxes and charges. Now,
23:34
Speaker 3: that's not going to help with affordability if the government
23:37
Speaker 3: can't provide that basic infrastructure that's going to be around
23:40
Speaker 3: for decades. But unfortunately, to get these greenfield estates built,
23:44
Speaker 3: the developer needs to put the money up up front
23:48
Speaker 3: to be able to develop all of those. So we've
23:50
Speaker 3: got so many problems when it comes to the way
23:53
Speaker 3: in which the regulators and the decisions that we're making
23:57
Speaker 3: around supply of land and availability and the value of
24:01
Speaker 3: that land based on all of these fees and charges
24:04
Speaker 3: that are constantly being levied on to the developers and
24:07
Speaker 3: levied on to investors to keep the economy running and
24:10
Speaker 3: keeping the revenue in the government pockets because they keep
24:13
Speaker 3: wanting to spend all this money.
24:14
Speaker 1: Yeah, so if I turn it on its head and
24:16
Speaker 1: think about it then from an investor's point of view,
24:18
Speaker 1: I guess what you're saying is there's no chance that
24:20
Speaker 1: they're meeting their target in terms of an influx of
24:23
Speaker 1: supply of new dwellings. And notwithstanding, because of exactly how
24:27
Speaker 1: you've stipulated that developers have to pay for a lot
24:30
Speaker 1: of this infrastructure, that the price of new dwellings isn't
24:34
Speaker 1: going to be any cheaper than what it is today.
24:37
Speaker 1: And so I guess from an investor's point of view...
24:41
Speaker 1: That's good news, isn't it? It's a supply-demand sort of
24:44
Speaker 1: argument that then the existing stock should benefit from price growth,
24:48
Speaker 1: irrespective of these policies or the desire, the political desire
24:53
Speaker 1: to build more.
24:54
Speaker 3: Yeah, I agree with that to a point. Because of
24:57
Speaker 3: government intervention, it's very true that it makes supply constraint,
25:02
Speaker 3: demand is usually there, so that puts.
25:04
Speaker 2: Pressure on price. But I'd much prefer.
25:07
Speaker 3: the value of the investment to appreciate based on economic
25:12
Speaker 3: activity and economic prosperity and growth. So in other words,
25:15
Speaker 3: because once you keep doing this through a restricted marketplace,
25:20
Speaker 3: then unfortunately, you then start to see the government again
25:22
Speaker 3: getting into the market and manipulating the other side of
25:25
Speaker 3: the equation. And they're starting to introduce things like a
25:29
Speaker 3: 12-month annual reviews on rents. And there's always going to
25:32
Speaker 3: be pressure politically in terms of maybe rental freezes like
25:36
Speaker 3: we saw during COVID.
25:37
Speaker 2: And those types of things.
25:39
Speaker 3: It just makes no sense to me at all that
25:41
Speaker 3: we would continue to try to keep putting layer of
25:44
Speaker 3: regulation on regulation to try and fix a problem that's
25:48
Speaker 3: easily solved in terms of less regulation, less red tape,
25:52
Speaker 3: and let the market determine what that will be. And
25:54
Speaker 3: then ultimately, that creates prosperity and jobs and opportunities. When
25:59
Speaker 3: those new homes are built, there's people moving to those homes.
26:02
Speaker 3: There's new jobs in those local areas. That is how
26:05
Speaker 3: economic prosperity works. It doesn't work through constant government intervention
26:10
Speaker 3: and all of these sort of mechanisms that, you know,
26:13
Speaker 3: the macro prudential mechanisms that really do slow down the
26:17
Speaker 3: ability and confidence to invest over the longer term. And
26:21
Speaker 3: you and I are big advocates of investing for the decades,
26:24
Speaker 3: not necessarily for a couple of years. And that's the
26:27
Speaker 3: sort of economic prosperity that's going to drive future long
26:31
Speaker 3: term price growth of land and ultimately those improvements on
26:35
Speaker 3: the land.
26:36
Speaker 1: Yeah, I don't disagree with you. I just don't think
26:38
Speaker 1: it's going to happen. So from an investor perspective, I'm
26:41
Speaker 1: not too perturbed by the desire to build more. Let's
26:45
Speaker 1: just talk very briefly about trying to change density in
26:50
Speaker 1: established areas. I was really interested to read a letter
26:53
Speaker 1: that the largest council in Melbourne sent to its occupants
26:59
Speaker 1: to say that the Victorian governments instructed them, and this
27:01
Speaker 1: is just an example, instructed them to increase the number
27:04
Speaker 1: of dwellings in that locality by about 2050 by about
27:10
Speaker 1: 67,000 dwellings and there's about 70,000 dwellings in the area
27:13
Speaker 1: as well so double the density in that particular area
27:17
Speaker 1: and the state government's obviously trying to take a little
27:20
Speaker 1: bit more power away from the councils in terms of
27:22
Speaker 1: approving this sort of stuff and I think I read
27:26
Speaker 1: a I try to find this article, but I read
27:28
Speaker 1: about 20 years ago in a paper to say, someone
27:31
Speaker 1: did a study to suggest that actually density hasn't changed
27:34
Speaker 1: in our blue chip suburbs for many decades, which is
27:40
Speaker 1: a concern. What do you think, if I'm an investor
27:43
Speaker 1: in those localities, will density, do you think density will
27:47
Speaker 1: change over time? Or do you think this will be
27:50
Speaker 1: just another failed attempt?
27:52
Speaker 3: I think there's really no choice that we need to
27:54
Speaker 3: start thinking about how we appropriately add density in as
27:58
Speaker 3: opposed to, I got a similar letter in my municipality
28:02
Speaker 3: as well. And there's winners and losers in terms of
28:05
Speaker 3: street blocks about where they say, this is the area
28:08
Speaker 3: here and now you can start building blocks of flats. Now,
28:12
Speaker 3: so there are winners and losers from an investment point
28:14
Speaker 3: of view. When you think about a rezoning story there,
28:18
Speaker 3: then the productive use of that land has a potentially
28:21
Speaker 3: higher value. So there might be a windfall associated with
28:26
Speaker 3: that as well. But what we've also got to understand
28:29
Speaker 3: in some of these areas that owner-occupiers have invested their
28:34
Speaker 3: money to live in these locations is in some respects
28:38
Speaker 3: because of the restrictions around planning guidelines and what can
28:42
Speaker 3: be built there. So they love their amenity, they love
28:44
Speaker 3: their exclusiveness, and that's fine. And that's what, again, creates
28:48
Speaker 3: that underlying land value around that exclusivity or scarcity of
28:52
Speaker 3: that land. So I've been a big advocate of that
28:55
Speaker 3: over decades. And I know you have as well, Shield,
28:57
Speaker 3: in terms of that's why land so close to large
29:00
Speaker 3: urban development areas is so exclusive and worth so much
29:04
Speaker 3: per square metre. But if you then overlay that sort
29:07
Speaker 3: of density story on that, there will be some winners
29:10
Speaker 3: and losers when it comes to that story. So if
29:11
Speaker 3: you're sitting on a nice parcel of land and you
29:15
Speaker 3: get the opportunity, instead of turning that one into two,
29:18
Speaker 3: to turning that one into a block of 10 flats
29:20
Speaker 3: and From an investment point of view, if you can
29:22
Speaker 3: find the capital to do that, that could be a
29:24
Speaker 3: significant uplift in terms of the profitability and income that
29:27
Speaker 3: you could get off that property. But I do see
29:29
Speaker 3: it from the other side of the coin, and that
29:31
Speaker 3: is that 70% of the people that are gonna be
29:34
Speaker 3: affected are going to be the owner occupiers in that
29:36
Speaker 3: particular location. So I see the argument always being difficult.
29:39
Speaker 2: And that's why my view on this.
29:41
Speaker 3: I've had a sort of policy idea on this for
29:44
Speaker 3: a long time. And that is that if you have
29:46
Speaker 3: a percentage rule, so here's an example. If you have
29:50
Speaker 3: a street that has just freestanding single homes on that street,
29:54
Speaker 3: you can have what we call the 1% rule. So
29:56
Speaker 3: anything on that street, you can turn 1% of the
29:58
Speaker 3: properties on that street into duplexes. And if you've got
30:01
Speaker 3: a rule that you're allowed duplexes, you can turn 1%
30:03
Speaker 3: of those into townhouses, i.e.
30:05
Speaker 2: Three to the site.
30:06
Speaker 3: So what you're doing is you're doing it sensibly, and
30:09
Speaker 3: it still gives you plenty of ample places around the
30:12
Speaker 3: city to be able to keep adding to that. But
30:14
Speaker 3: what you aren't going to be doing is adding six
30:16
Speaker 3: blocks of high-rise apartments or medium-density apartments in three streets,
30:20
Speaker 3: which then just make those streets untenable to live because
30:23
Speaker 3: of parking, traffic, Noise, all of those other things. So
30:27
Speaker 3: I think that's going to be the political backlash that
30:29
Speaker 3: we're going to see from silly policy like that. But
30:32
Speaker 3: the 1% rule is something that you would think NIMBYism
30:35
Speaker 3: wouldn't necessarily push back on because if they know that
30:38
Speaker 3: streets already had that allocation, well, then they look at
30:41
Speaker 3: the next street and that sort of balances out how
30:44
Speaker 3: quickly we build that density up.
30:46
Speaker 1: Yeah, I think, again, from an investor's point of view,
30:49
Speaker 1: and that's what we're here to really talk about, is
30:51
Speaker 1: I think it's going to be a net positive. If
30:54
Speaker 1: they do increase density, as you said, the land becomes
30:56
Speaker 1: more productive and arguably more valuable.
30:59
Speaker 2: Very interesting.
31:00
Speaker 1: We're going to take a short break, and when we
31:01
Speaker 1: come back, we're going to answer a listener question about
31:04
Speaker 1: renting out your home. Back with you in a moment.
31:12
Speaker 1: Hello and welcome back to the Australian's Money Puzzle podcast.
31:15
Speaker 1: I'm Stuart Weems and I'm talking to Ben Kingsley, the
31:18
Speaker 1: founder of Empower Wealth and chair of the Property Investors
31:20
Speaker 1: Council of Australia. Ben, I just want to ask you
31:23
Speaker 1: one more question before we get into a listener question.
31:26
Speaker 2: Sure.
31:27
Speaker 1: And it's related to obviously you're trying to attract more
31:29
Speaker 1: private investors to the market, which I think ultimately a government,
31:33
Speaker 1: whether it's this government or the next one, whatever it
31:35
Speaker 1: might be, will need to do to really create some
31:39
Speaker 1: economic prosperity because we need to continue to increase our population,
31:44
Speaker 1: economic growth, and we need people to be able to
31:47
Speaker 1: have houses to do that. Do you have any good
31:50
Speaker 1: ideas that they could implement to attract more private investors
31:54
Speaker 1: to the market?
31:55
Speaker 3: I think that the number one thing that they need
31:58
Speaker 3: to do is give us confidence that they're not going
32:01
Speaker 3: to keep changing the rules. Like in any sort of industry,
32:05
Speaker 3: when there's uncertainty around government policy, there's a lack of investment.
32:09
Speaker 3: People basically sit on their hands and make no investment.
32:12
Speaker 3: So we need assurities around that. We also need to
32:15
Speaker 3: then look at, okay, what are the incentives to attract
32:18
Speaker 3: our investment dollars in?
32:19
Speaker 2: So I couldn't agree with you more, Stuart, in respect
32:22
Speaker 2: of it's just unavoidable.
32:24
Speaker 3: There's no way known that build to rent or super
32:27
Speaker 3: funds or government are going to build the supply that
32:30
Speaker 3: we need. So private rental accommodation must be in the
32:34
Speaker 3: mix and it will consistently be the biggest portion of
32:38
Speaker 3: the mix. So you've got to make sure that the
32:40
Speaker 3: incentive is there. And so if I look at an
32:42
Speaker 3: example of what Western Australia did recently, in terms of
32:45
Speaker 3: attracting from short-term rental accommodation into longer-term rental accommodation, they
32:50
Speaker 3: offered a $ 10, 000 incentive to move that product or that
32:54
Speaker 3: stock out of short-term into long-term.
32:57
Speaker 2: So any of those types of things would be really important.
32:59
Speaker 3: I would also start to say to governments, it's counterintuitive
33:03
Speaker 3: what you're doing about higher taxes and charges. Yes, you've
33:06
Speaker 3: got a lot of debt to pay off, but ultimately
33:08
Speaker 3: you've got to keep growing that economic pie. The situation
33:10
Speaker 3: here in Victoria, where we saw the land tax increases
33:14
Speaker 3: and another 615,000 investors experienced land tax bills for the
33:19
Speaker 3: very first time this year, that's a disincentive. And so
33:23
Speaker 3: ultimately higher land taxes and higher holding costs means that
33:26
Speaker 3: at the end of the day, the investor is collecting
33:29
Speaker 3: rent and giving it out to everybody else. we need
33:32
Speaker 3: to make sure that there's enough return on investment for
33:34
Speaker 3: those investors. So start thinking about how you would incentivise
33:39
Speaker 3: that investment. And you're not going to do that through
33:41
Speaker 3: higher taxes and charges. And then you've got to take
33:43
Speaker 3: negative gearing and capital gains tax changes off the table.
33:47
Speaker 3: Because again, if we don't get that confidence of supply
33:50
Speaker 3: and that confidence of what's going to happen, we'll see
33:53
Speaker 3: this continue to be challenging for some investors in some markets.
33:58
Speaker 1: Yeah, I like the idea. An embargo on any changes
34:00
Speaker 1: would give investors a bit more confidence. Okay, let's get
34:04
Speaker 1: into a question here from Sam. And I'll read it
34:07
Speaker 1: out to you, Ben, and then I'll give you the
34:08
Speaker 1: difficult task of answering it, of course. It's twofold. Anyway,
34:12
Speaker 1: Sam writes, suppose one was to move out of their
34:15
Speaker 1: principal place of residence and rent it out but not
34:18
Speaker 1: tell their home loan provider, so still pay the cheaper
34:21
Speaker 1: rate on their loan. This must happen all the time.
34:24
Speaker 1: Any adverse consequences? resulting from this? And then he goes
34:28
Speaker 1: on to say, now suppose that person wanted to go
34:30
Speaker 1: and buy a new primary place of residence before selling
34:34
Speaker 1: their old one. Do they need to declare the original
34:36
Speaker 1: loan when applying for a new one? I would assume yes.
34:40
Speaker 1: And what about the fact that their old one is
34:43
Speaker 1: a home loan rather than an investment loan?
34:45
Speaker 3: Yeah, it's a good question, Sam. Look, if you read
34:49
Speaker 3: your mortgage documentation, the bank has a right to be
34:53
Speaker 3: informed and kept informed about any significant changes to your circumstances.
34:59
Speaker 3: If you don't inform that bank, then potentially one could
35:02
Speaker 3: argue that you're in breach of contract. And we do
35:05
Speaker 3: know that obviously some people might just be naive or
35:07
Speaker 3: not be aware of that. And so their circumstances change
35:10
Speaker 3: and they don't tell the lender, then ultimately they still
35:13
Speaker 3: might be achieving the higher or better interest rate, the
35:16
Speaker 3: cheaper interest rate. But in theory, they're meant to be informed.
35:20
Speaker 3: And what we are now starting to see is some
35:22
Speaker 3: lenders are doing data matches with certain data companies around
35:27
Speaker 3: rental alerts of properties that are being rented. And they're
35:30
Speaker 3: contacting those owners and basically saying, is it true that
35:34
Speaker 3: your property is now an investment property? If it is,
35:36
Speaker 3: then we're going to adjust your interest rate to the
35:39
Speaker 3: appropriate interest rate and change the status of your property
35:42
Speaker 3: from a principal place of residence loan into an investment loan.
35:46
Speaker 2: So that's part one of that.
35:48
Speaker 3: Part two of that, when it comes to your principal
35:50
Speaker 3: place of residence, there's two components there. One is obviously
35:53
Speaker 3: a tax component and really from the tax officer's point
35:56
Speaker 3: of view, keeping them informed or declaring principal place of
35:59
Speaker 3: residence is only a moment in time that you may
36:02
Speaker 3: need to do that. They're interested in terms of making
36:04
Speaker 3: sure that you're appropriately apportioning any interest cost as a
36:08
Speaker 3: deduction against an investment property associated with that. But coming
36:11
Speaker 3: back to the lender story, yeah, as you're putting your
36:14
Speaker 3: application in, you don't want to be committing any type
36:17
Speaker 3: of fraud or any type of misinformation on your loan application.
36:22
Speaker 3: So 100% you need to be upfront and thorough. And
36:25
Speaker 3: if you're working with a broker or someone who says,
36:28
Speaker 3: let's not necessarily tell them the truth, the whole truth
36:31
Speaker 3: and nothing but the truth, then be very careful there
36:34
Speaker 3: because you are in cohorts with that broker in terms
36:38
Speaker 3: of committing fraud. And so I would always say, play
36:41
Speaker 3: a straight bat, tell the truth, because that's effectively what
36:44
Speaker 3: needs to be in play. Now, and if your lender
36:46
Speaker 3: is then too expensive based on that, and you want
36:49
Speaker 3: to prove a point, then go and shop around. Use
36:51
Speaker 3: your broker to shop around for a better lender that's
36:54
Speaker 3: going to give you a cheaper rate, or maybe not
36:56
Speaker 3: even charge you for having an investment loan versus a
36:59
Speaker 3: principal place of residence loan. And there are some of
37:02
Speaker 3: those lenders who are coming out with more and more
37:04
Speaker 3: of those products. And it does frustrate me that investors
37:07
Speaker 3: have to pay a premium when there's no factual evidence
37:10
Speaker 3: to suggest that an investor loan is more riskier than
37:15
Speaker 3: an owner-occupier loan. In fact, the evidence suggests the other way.
37:19
Speaker 3: that more owner-occupied loans go bad than investor loans go bad.
37:22
Speaker 3: But unfortunately, APRA doesn't see it that way and the
37:26
Speaker 3: lenders are taking advantage of that opportunity.
37:28
Speaker 2: Yeah, good advice, Ben.
37:30
Speaker 1: If a broker or a lender in a branch suggests
37:32
Speaker 1: that you shouldn't be open and honest about declaring your
37:35
Speaker 1: assets and liabilities, don't deal with that person would be
37:38
Speaker 1: my advice. That's really interesting, Ben. Thanks so much for
37:41
Speaker 1: coming on the show and sharing your insights and advice.
37:43
Speaker 1: I'm sure our listeners definitely enjoyed it. And just a reminder, folks,
37:47
Speaker 1: if you have any questions or feedback, we'd love to
37:50
Speaker 1: hear from you. The email is themoneypuzzle at theaustralian.com.au. Please
37:54
Speaker 1: keep those questions coming. James Girard will be back with
37:57
Speaker 1: you on Thursday, and I'll be back next Tuesday. I've
38:01
Speaker 1: another interesting show lined up to explore what economic fundamentals
38:05
Speaker 1: we need to be concerned with as investors. I really
38:08
Speaker 1: hope you enjoyed today's show, and if you have, please
38:10
Speaker 1: share it. I've been Stuart Williams, and until next week,
38:13
Speaker 1: bye for now.
38:16
Speaker 3: Thank you.