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Melbourne property: Bargain basement or 'Loserville'? · The Money Puzzle

0:09
Speaker 1: Hello and welcome to The Australian's Money Puzzle Podcast. James
0:13
Speaker 1: Kirby here, Wealth Editor at The Australian. Welcome aboard, everybody.
0:16
Speaker 1: And I have Mr.
0:18
Speaker 2: Week.
0:18
Speaker 1: Thank you very much, James Gerrard, who handled and ran
0:22
Speaker 1: the show two episodes last week. Very good. I've listened
0:25
Speaker 1: to them both. Very, very interesting. I want to pick
0:29
Speaker 1: up something, actually, that we've been talking about on the
0:31
Speaker 1: show for some time. And look, this could be on
0:36
Speaker 1: the show. We talked earlier. This time last year and
0:40
Speaker 1: for a long time about how Perth, for instance, as
0:43
Speaker 1: a property investor, if you were prepared to invest interstate,
0:47
Speaker 1: Perth was the market to be in. And, you know,
0:51
Speaker 1: it really has been an exceptional market for anyone who
0:55
Speaker 1: did that. to the point actually that this week they're
0:58
Speaker 1: talking about parts of the market and part of overheating.
1:02
Speaker 1: It's a small market in relation to the bigger market
1:05
Speaker 1: I'm going to talk about today, which is Melbourne. So
1:08
Speaker 1: Melbourne's the second biggest market in the country. It's 5
1:11
Speaker 1: million people. It's going to be bigger than Sydney relatively soon.
1:15
Speaker 1: It's a sort of inexorable march of the housing estates
1:18
Speaker 1: at the edges of the city, which can't happen in
1:21
Speaker 1: Sydney because of national forests. But what it means is,
1:25
Speaker 1: that it should be a hot property market. It's not,
1:29
Speaker 1: it's the opposite. It's the weakest market in Australia. And
1:32
Speaker 1: the question from an investor point of view is, is
1:35
Speaker 1: this the bargain, not just of the year, but is
1:37
Speaker 1: this one of the real bargains, perhaps of the decade
1:41
Speaker 1: in property for investors in Australia, or actually is the
1:46
Speaker 1: state sinking? As some would suggest, And certainly, the numbers
1:51
Speaker 1: in property are pretty bad. It's the weakest price market.
1:54
Speaker 1: Increases is the weakest in Australia. It is the weakest
1:58
Speaker 1: investment market. And beyond doubt, investors are leaving the state.
2:01
Speaker 1: And we see that right across all the news media
2:05
Speaker 1: reporting that quite faithfully in recent times. So I thought, well,
2:09
Speaker 1: let's have a look at that. Let's also have a
2:10
Speaker 1: look at immigration cuts, what they might do for property
2:13
Speaker 1: or do against property. and a few other issues that
2:17
Speaker 1: I want to pick up on with our guest today,
2:19
Speaker 1: who is a regular on the show, Bruce Bramall of
2:23
Speaker 1: Bruce Bramall Financial and Financial Advisor, author and operator extraordinaire.
2:28
Speaker 1: How are you, Bruce?
2:29
Speaker 2: Well, thanks, James. Yourself?
2:31
Speaker 1: Good, thank you.
2:32
Speaker 2: That's good.
2:33
Speaker 1: What you should know, you've written books on this area,
2:36
Speaker 1: you're in the thick of it, and you are a
2:38
Speaker 1: Melbourne-based property and financial advisor. So, Bruce Bramall, I put
2:43
Speaker 1: you on the hot seat and I say, Is this
2:47
Speaker 1: market just slowly sinking or is it actually an opportunity
2:50
Speaker 1: for investors all around Australia? It's the second biggest city
2:55
Speaker 1: and it's hanging behind everybody. Is it going to catch up?
2:59
Speaker 2: Look, I think inevitably it will. I'm probably a straw
3:03
Speaker 2: hats in winter sort of guy. My goals for investment,
3:07
Speaker 2: I think in a relative sense, Melbourne is probably undervalued
3:11
Speaker 2: at the moment. From an investment sense, James, I've only
3:16
Speaker 2: ever believed that there are three markets worthwhile pursuing because
3:21
Speaker 2: they've got economies that are big enough and they are Sydney, Melbourne, Brisbane.
3:26
Speaker 2: At the moment, the property prices are Sydney. What property
3:31
Speaker 2: prices should be is Sydney, big gap Melbourne, reasonable gap Brisbane,
3:35
Speaker 2: followed by, I don't really care too much after that,
3:37
Speaker 2: but Adelaide, you know, Melbourne. But they're the three property
3:41
Speaker 2: markets that I speak to clients about and that we
3:44
Speaker 2: assist clients buying in. At the moment, the gap is Sydney,
3:49
Speaker 2: Big Gap, Brisbane, and Melbourne are sitting third. Now, in
3:54
Speaker 2: my opinion, that is a pricing error.
3:58
Speaker 1: That's against the natural order of things, is it?
4:01
Speaker 2: The natural order of things is Sydney, Big Gap, Melbourne,
4:03
Speaker 2: Big Gap, and Brisbane. Now, back in about 2014, following COVID,
4:11
Speaker 2: The state government up there, they're closing schools and shutting
4:15
Speaker 2: hospitals and sacking teachers and nurses, the same as Canada
4:17
Speaker 2: done in Melbourne in the early mid-90s. Brisbane's property price
4:24
Speaker 2: fell to about fifth or sixth. It was Sydney, Melbourne,
4:27
Speaker 2: I think at the time it was sort of Perth. Canberra, Adelaide, wherever,
4:34
Speaker 2: but Brisbane was sitting about fifth or sixth. And we said, well,
4:39
Speaker 2: there's a pricing error going on here. So through 2014, 15, 16, 17,
4:42
Speaker 2: I think into 18, we bought a lot of property
4:47
Speaker 2: with clients in Brisbane. And that's proved to be correct.
4:53
Speaker 2: Brisbane suddenly, subsequently post 2020 and 2021 started moving back
4:58
Speaker 2: into sort of third spot where it should and has
5:00
Speaker 2: now overtaken Melbourne in the last six months or so.
5:03
Speaker 2: It's now sitting second. The natural order of things is
5:09
Speaker 2: out of it. Melbourne's property prices are being impacted by
5:12
Speaker 2: a bunch of things, including the land tax increases, which
5:17
Speaker 2: have come through in recent times. It's only in the
5:20
Speaker 2: last sort of few weeks or a month or so,
5:22
Speaker 2: I think, that the people have been started to hit
5:25
Speaker 2: with their bills. But obviously, they've been known have known
5:28
Speaker 2: that this was coming for some time and have been
5:30
Speaker 2: reacting to that.
5:31
Speaker 1: But you're getting, basically, you're getting higher interest rates and
5:34
Speaker 1: you're getting higher taxes combining at the same time.
5:39
Speaker 2: I think for a lot of, you know, there's a
5:41
Speaker 2: lot of people who are being hit with land tax
5:43
Speaker 2: for the first time in Melbourne. If you're an investor,
5:47
Speaker 2: when they dropped it from land tax from a threshold
5:50
Speaker 2: of $ 300, 000 to $ 50, 000, it's just going to pick up
5:52
Speaker 2: anybody who has a.
5:53
Speaker 1: Anybody, yeah.
5:55
Speaker 2: But a lot of people who might have we're already
5:58
Speaker 2: paying land tax or have multiple properties or something like that,
6:02
Speaker 2: they're probably seeing a doubling of the land tax that
6:04
Speaker 2: they're paying. Land tax is a tax deduction. So the
6:08
Speaker 2: state government receives the money, but you get back a
6:11
Speaker 2: portion of it from the federal government. But still, it's
6:17
Speaker 2: an extra increase at a time of high inflation and
6:19
Speaker 2: higher interest rates or normal interest rates.
6:22
Speaker 1: So if you were marginal, if you were only hanging on,
6:25
Speaker 1: it could push you outward.
6:27
Speaker 2: Yeah, absolutely. I think that's what we're seeing in Melbourne
6:30
Speaker 2: at the moment. In particular, people are seeing those higher
6:34
Speaker 2: costs of things. So it's having more– it's a part
6:38
Speaker 2: of having an impact. But your question is, is it
6:41
Speaker 2: a bargain of our time or people are buying, are
6:46
Speaker 2: they losers? I think sort of medium to long term,
6:50
Speaker 2: I think Melbourne is probably underpriced in a relative sense
6:53
Speaker 2: compared to the other two markets which we would invest in,
6:55
Speaker 2: which is Sydney and Brisbane.
6:57
Speaker 1: Okay, so, but you don't detect, in the way that
7:02
Speaker 1: you detected and encouraged investors who were open to investing
7:08
Speaker 1: anywhere in the country into Brisbane, are you at the
7:12
Speaker 1: start of that process now or has it even begun?
7:16
Speaker 2: Investing in Brisbane?
7:17
Speaker 1: Investing in Melbourne. On the basis that the natural order
7:21
Speaker 1: will restore itself.
7:22
Speaker 2: Yeah, yep, that's one of the reasons. There was a
7:24
Speaker 2: period back, I think it was, 2001, 2003, somewhere around there,
7:30
Speaker 2: or it might have been the late 90s, I think
7:33
Speaker 2: it was early noughties, where Melbourne got within $ 3, 000 of Sydney. Yeah.
7:40
Speaker 2: I think it was 306 versus 303, or maybe 303
7:43
Speaker 2: versus 300 for the median property price. And that was
7:45
Speaker 2: another signal. The natural order of things should be Sydney,
7:48
Speaker 2: big gap Melbourne, reasonable gap to Brisbane. And that was
7:51
Speaker 2: probably a screaming buy time for Sydney property prices because
7:57
Speaker 2: all in a relative sense, a relative sense, they had
7:59
Speaker 2: to pick up. And sure enough, it did. I wasn't
8:01
Speaker 2: a financial advisor at the time. I was still a journalist.
8:05
Speaker 2: But there are times where you just see the natural
8:09
Speaker 2: order of things fall out of place. And I think
8:11
Speaker 2: we're probably in one of those situations now with Melbourne.
8:14
Speaker 1: That's really interesting. It's like the property version of the
8:18
Speaker 1: share market, isn't it, where they have the reversion to
8:20
Speaker 1: the mean. And that can be a very reliable way
8:25
Speaker 1: for value investors. And the other thing, of course, is
8:29
Speaker 1: that interstate investing is so much easier now. I mean,
8:33
Speaker 1: you really had to be quite a sophisticated operator once
8:35
Speaker 1: upon a time. to do that. But these days with
8:39
Speaker 1: everything online and digital, et cetera, it is not difficult
8:43
Speaker 1: at all. I have done it. And the difference, in fact,
8:46
Speaker 1: it was Brisbane and the difference between having a property,
8:49
Speaker 1: investment property in Melbourne and Brisbane was very, very, very little.
8:53
Speaker 1: When I sold that property, there was some particular state differences,
8:59
Speaker 1: but they were not significant at all. And I think
9:02
Speaker 1: more and more people are doing that. And that notion,
9:05
Speaker 1: I think we can... the active investor in property, folks,
9:09
Speaker 1: I'm sure a lot of our listeners are of this
9:14
Speaker 1: frame of mind that they are agnostic, if you like,
9:16
Speaker 1: as to where the property is. And if you take
9:19
Speaker 1: that strict investment criteria and that approach, then I think
9:23
Speaker 1: it is definitely worth having a look at the Melbourne
9:26
Speaker 1: market now in the way that we were talking about
9:29
Speaker 1: looking at Perth a year, a year and a half ago. Okay,
9:33
Speaker 1: one other thing, I suppose, on the big picture, Bruce,
9:36
Speaker 1: for property, if you take it that the prices, home
9:42
Speaker 1: prices in particular, and the entire economy, if you like,
9:46
Speaker 1: have been underpinned by immigration and immigration numbers. And it
9:51
Speaker 1: does explain to a significant degree the 1% vacancy rates
9:56
Speaker 1: and the relatively strong price increases in homes, even though
10:02
Speaker 1: rates were going up all through that process. Then if
10:07
Speaker 1: there's immigration cuts and they are starting now with two things,
10:12
Speaker 1: an attempt to bring the broad number back to traditional
10:15
Speaker 1: sort of levels rather than from the exceptional levels they
10:18
Speaker 1: were at post-COVID, And a big cutback, big cutback in
10:21
Speaker 1: international students, which is already hitting the share market, for instance, IDP,
10:26
Speaker 1: the big private education, down by a third or so.
10:30
Speaker 1: About 2,000 jobs already lost in that sector, private education.
10:34
Speaker 1: But for a property investor, do you think it will
10:39
Speaker 1: hit property prices? And where might it hit property prices,
10:43
Speaker 1: immigration reductions?
10:45
Speaker 2: Yeah. So you started off this question or this talk
10:49
Speaker 2: about the big picture. So there's no direct correlation between
10:53
Speaker 2: one thing moving on to the next. But at the moment,
10:57
Speaker 2: the biggest problem is supply can't be increased. They're struggling
11:01
Speaker 2: to increase supply. There are restrictions on supply getting new
11:05
Speaker 2: property on board. So what can they control as in governments,
11:11
Speaker 2: as in federal government? They can control demand. And part
11:13
Speaker 2: of that demand comes from bringing in however many hundreds
11:17
Speaker 2: of thousands of people that we bring into the country
11:19
Speaker 2: each year. So reducing the number by whatever it is,
11:25
Speaker 2: tens of thousands, 100,000, whatever the case may be, will
11:30
Speaker 2: slow down the increase in demand for property. It's sort
11:33
Speaker 2: of basic economics 101. and that should have an impact.
11:38
Speaker 2: Does it mean the property prices are going to fall? No,
11:41
Speaker 2: it doesn't mean that that's going to happen. Normally, you've
11:43
Speaker 2: got to have a couple of things line up for
11:45
Speaker 2: property prices to fall, but it certainly takes upward pressure,
11:50
Speaker 2: some of the upward pressure away. You take out 100,000
11:52
Speaker 2: people a year for the next two years, five years,
11:55
Speaker 2: or whatever it is, you've got an extra 200,000, 500,000
11:57
Speaker 2: fewer people needing to move to find a place to live.
12:05
Speaker 2: So it should have an impact. It might just slow
12:09
Speaker 2: the rate of growth of property prices. It might make
12:12
Speaker 2: them stagnate. It might make them go backwards. But does
12:16
Speaker 2: it hit property prices? It will have an impact on
12:18
Speaker 2: property prices. It doesn't mean it's going to make it
12:20
Speaker 2: go backwards. It might just, you know, having an impact
12:23
Speaker 2: on property prices and just slow what might have happened from,
12:27
Speaker 2: you know, 9% growth per year down to 6% growth
12:30
Speaker 2: per year. It might have been slightly negative. So, yes,
12:35
Speaker 2: you take away some demand. It has to have an
12:38
Speaker 2: impact on property prices, but it doesn't mean it's going
12:41
Speaker 2: to fall. Okay.
12:43
Speaker 1: Now, as an advisor, tell me about your clients. If
12:46
Speaker 1: they're looking at the numbers, they see that the property
12:49
Speaker 1: prices are running broadly similar to stock prices at the moment.
12:54
Speaker 1: The ASX is going to come in at about 9%
12:56
Speaker 1: for the year, and you chuck in dividends, and you're
13:00
Speaker 1: certainly on 13%, so better than property. again, for the
13:03
Speaker 1: second year in a row. But property doing better than
13:07
Speaker 1: most people would have thought with the rates not falling,
13:10
Speaker 1: though the people had expected that they would. So when
13:14
Speaker 1: you get the clients in the door and they're active investors,
13:18
Speaker 1: they have a broad portfolio, what's the mood? Are they
13:21
Speaker 1: impressed with the fact that property is still going up
13:24
Speaker 1: under these conditions? Is there any sense of what outlook
13:29
Speaker 1: they have?
13:31
Speaker 2: Yeah, sort of. fewer conversations about, I guess, about new money,
13:36
Speaker 2: but going into investment markets, then there might have been
13:41
Speaker 2: in times gone past, but it seems to be picking
13:45
Speaker 2: up again, as in it was quite more about managing
13:50
Speaker 2: what you had and making adjustments to what you had. Certainly,
13:53
Speaker 2: you know, during COVID, there was a period there where
13:55
Speaker 2: it was saying, don't, that's obviously three, four, where are we,
13:58
Speaker 2: four years ago now. Yeah. And coming out of that,
14:01
Speaker 2: there seemed to be some opportunities and there were, you know,
14:05
Speaker 2: the same thing, straw hats in winter. You try to
14:10
Speaker 2: buy assets when they're undervalued rather than when they might
14:13
Speaker 2: be at reasonable valuation or even a full valuation. And,
14:18
Speaker 2: you know, that's what you're constantly trying to do as
14:21
Speaker 2: an investor if you're making active investment decisions, which property,
14:25
Speaker 2: you know, residential property has to be an active decision.
14:29
Speaker 2: You can't index it. So I think in recent times,
14:35
Speaker 2: people are sort of, yeah, okay, we'll manage to get
14:39
Speaker 2: through the higher interest rates. For those people that have,
14:42
Speaker 2: I'm not saying this is everybody by any stretch of
14:44
Speaker 2: the imagination, there's more pain out there than there is.
14:46
Speaker 2: People are seeing things very positively. But for those people
14:50
Speaker 2: who are seeing it positively, and they're looking to do
14:55
Speaker 2: some investing. Property is not right for everybody. It scares
14:59
Speaker 2: a lot of people off just talking about debt and
15:00
Speaker 2: tenants and all the things that necessarily come with property.
15:04
Speaker 2: But for those people who are comfortable with the debts,
15:07
Speaker 2: with dealing with tenants, with constant changes to the laws
15:11
Speaker 2: in regards to what landlords are going to provide, then
15:15
Speaker 2: there's the potential to get into property. But anybody who's
15:19
Speaker 2: getting into property needs to understand that You really have
15:22
Speaker 2: to have a mindset of buying a property for forever
15:26
Speaker 2: or at least having your head 10 years. Why? Because
15:29
Speaker 2: the costs of getting into and out of property are,
15:32
Speaker 2: in Australia, fairly obscene. 10 years.
15:36
Speaker 1: Yeah, 10 years is your benchmark. 10 years.
15:38
Speaker 2: Yeah, 5% a flea give or take to get into
15:42
Speaker 2: a property, particularly in Victoria. South Australia, I was surprised
15:46
Speaker 2: the other day to find that certain places are more
15:49
Speaker 2: expensive than Victoria. Yeah. But somewhere between 4% and 6%
15:52
Speaker 2: is the stamp duty to get in. To get out
15:56
Speaker 2: of the property, you've got about 3% in agents' fees
15:59
Speaker 2: and marketing and advertising and all those other things there.
16:01
Speaker 2: So the cost of getting into and out of a
16:03
Speaker 2: property is 7% to 10%. So very difficult to make
16:09
Speaker 2: money on that in the short term. A property needs
16:11
Speaker 2: to be a medium-term investment. Well, long-term. It needs to
16:16
Speaker 2: be a long-term investment depending on how you see medium
16:19
Speaker 2: and long-term, but Anybody that's going to go into property,
16:22
Speaker 2: I say, you've got to have a minimum of 10 years,
16:23
Speaker 2: but the preferable holding time for property is forever. Okay.
16:28
Speaker 1: We'll hold that thought right there. We'll take a short
16:31
Speaker 1: break and we'll come back and pick up on that issue.
16:35
Speaker 1: Hello and welcome back to the Australian's Money Puzzle podcast.
16:39
Speaker 1: I'm James Kirby, the wealth editor at The Australian. I'm
16:42
Speaker 1: talking to Bruce Bramble, who is a financial advisor and
16:46
Speaker 1: author and regular contributor to News Corp. uh in the
16:51
Speaker 1: area of investment and wealth and we were just talking
16:55
Speaker 1: just repeat the number of you would bruce it was
16:57
Speaker 1: really interesting about buying property five your costs the whatever
17:02
Speaker 1: the cost of the property is five percent of that
17:06
Speaker 1: cost is going to be uh you you need five
17:09
Speaker 1: percent of that cost going in and you need about
17:11
Speaker 1: three percent going out of the far side is that
17:13
Speaker 1: what you were saying.
17:14
Speaker 2: Yeah, roughly. Yeah. Somewhere between four and six, but probably
17:17
Speaker 2: north of five, largely five and a half percent to
17:21
Speaker 2: get in stamp duties. And potentially, if you're using a
17:24
Speaker 2: buyer's advocate, another 2% on top of that, roughly, some
17:27
Speaker 2: of them flat fees. But around that five to 6%
17:30
Speaker 2: mark and to get out, the cost of selling, advertising,
17:34
Speaker 2: agents charge about 1.5 to 2% plus GSC. So there's
17:37
Speaker 2: a good portion of it, but then you've got advertising
17:39
Speaker 2: and marketing and some other costs and conveyancing and whatever
17:42
Speaker 2: else on top of that. So to get out, you're
17:45
Speaker 2: probably around that three, somewhere between two and a half
17:47
Speaker 2: and three and a half percent most of the time
17:50
Speaker 2: to get out of a property.
17:52
Speaker 1: Yeah, that's very, very interesting. As you say, you can't
17:54
Speaker 1: index it. It's a big ticket acquisition, and you have
17:58
Speaker 1: to go in boots and all basically every time. You
18:00
Speaker 1: can't buy a bit of a property, as to say,
18:02
Speaker 1: or unfortunately sell a bit of one. So one thing
18:06
Speaker 1: that's come up on the show, before we go to questions–
18:09
Speaker 1: is several people who I do admire and respect on
18:14
Speaker 1: the show making the point that the units, the house
18:20
Speaker 1: prices overshot through COVID and post-COVID because of that whole
18:25
Speaker 1: thing of space being so exceptionally valued, personal space being
18:30
Speaker 1: so exceptionally valued when we were all locked in our homes,
18:34
Speaker 1: but that the units fell behind, way behind, and in
18:37
Speaker 1: that same theme of reversion to the mean that we're
18:41
Speaker 1: talking about how the sort of natural order of things,
18:44
Speaker 1: the units haven't been doing as well as units normally
18:49
Speaker 1: do for some years. And there's a strong sense that
18:51
Speaker 1: they may catch up. Looking forward, if someone was coming
18:55
Speaker 1: to you and said, I can buy a property anywhere
18:56
Speaker 1: in the country, I don't mind where, I'm ready to go.
19:01
Speaker 1: The only thing I want to make a decision on
19:03
Speaker 1: is a unit over a house. I know the basics.
19:06
Speaker 1: I know that a unit is easier. It is costless
19:11
Speaker 1: to buy simply because they cost less, but nothing to
19:15
Speaker 1: do with value. I know that there's less maintenance. I
19:18
Speaker 1: know homes are standard on home is a lot more maintenance.
19:21
Speaker 1: And I have been hearing that units are set to
19:25
Speaker 1: do better per annum for a while than houses in
19:28
Speaker 1: catching up post-COVID. What would you say to that person?
19:33
Speaker 2: First of all, James, I'm going to ask you some
19:35
Speaker 2: definitional questions here, if you don't mind. So a house
19:40
Speaker 2: is pretty simple. A house is a property or a
19:45
Speaker 2: building on land. There's no touching or whatever are you
19:50
Speaker 2: suggesting that a unit is more like medium density high
19:53
Speaker 2: density where walls are touching and all that sort of
19:55
Speaker 2: stuff because there's.
19:56
Speaker 1: I know the definition of units is very messy it
19:59
Speaker 1: includes townhouses it shouldn't let's just talk about apartments make
20:02
Speaker 1: it simple.
20:02
Speaker 2: Yeah okay so i'd separate them in three so houses
20:06
Speaker 2: um At the other end, apartments or flats. And in
20:10
Speaker 2: the middle is what I call units, which might be,
20:12
Speaker 2: you know, the old quarter acre block that's got split
20:15
Speaker 2: and there's three sort of townhousey unity sort of things
20:19
Speaker 2: on it that might have a bit of common area,
20:20
Speaker 2: but there's no real, you know, they've each got their
20:23
Speaker 2: own yard and they're not, so I'd sort of call
20:28
Speaker 2: those three. So, So from an investment perspective, again, I
20:32
Speaker 2: split residential property into two sorts. One is a home.
20:38
Speaker 2: A home's got to meet an emotional need. It needs
20:40
Speaker 2: to be where you want to live, which might be
20:44
Speaker 2: a lifestyle or near schools or near family or your
20:46
Speaker 2: work or something like that. Homes need to meet emotional needs.
20:51
Speaker 2: An investment is about one thing and one thing only,
20:53
Speaker 2: and that is making money. And you want to maximise
20:56
Speaker 2: your chances of doing that now. I'm a very strong
21:00
Speaker 2: believer that one of the main ways that property appreciates
21:09
Speaker 2: in value is via land content. So one of the
21:14
Speaker 2: rules that we use for helping clients purchase property is
21:18
Speaker 2: minimum land content of 30%. That's specifically designed to knock
21:22
Speaker 2: out property. what we're just referring to as flats and apartments. Yes. Why?
21:27
Speaker 2: Because it is land that appreciates buildings, depreciates buildings, literally
21:33
Speaker 2: start to fall apart from the moment that you, since
21:36
Speaker 2: before they're built. So you've got to spend an ever
21:38
Speaker 2: increasing amount of time. So from an investment perspective, you know,
21:44
Speaker 2: in a relative sense, if units have done poorly or
21:48
Speaker 2: not as well as houses in the past, my belief
21:51
Speaker 2: is that that will always be the case. However, you
21:53
Speaker 2: can get to a stage where units have underperformed more
21:59
Speaker 2: than they should have underperformed versus house and land. There
22:03
Speaker 2: might be some relative value there. But again, as we
22:05
Speaker 2: were just sort of talking about earlier, the cost of
22:07
Speaker 2: getting into and out of property and trying to get
22:09
Speaker 2: that call right is very difficult.
22:12
Speaker 1: Okay, you're sceptical. You're sceptical about whether it's really changed.
22:16
Speaker 1: It's interesting, just for what it's worth, there were two theories,
22:20
Speaker 1: if you like, about why units will, outpace standalone properties
22:26
Speaker 1: in the immediate future. One was the catch-up basically, reversion
22:30
Speaker 1: to the mean. But the other was that the theory
22:32
Speaker 1: always had been, you know, don't buy apartments because if
22:35
Speaker 1: you buy an apartment as an investor, the problem is
22:37
Speaker 1: that they can always build more. But the argument this
22:43
Speaker 1: year and next year was they can't build more. The
22:47
Speaker 1: building approval process in Australia is basically ground to a halt.
22:52
Speaker 1: there's less being approved this year than last year nationally.
22:55
Speaker 1: And that was an interesting argument, which I'm sure the
22:57
Speaker 1: listeners will make up their own minds about, just to
23:00
Speaker 1: finish off on that one. Okay, why don't we take
23:02
Speaker 1: the first question of the day from Ram Nish, R-A-M-N-I-S-H. Hi,
23:07
Speaker 1: Ram Nish. My wife and I own an investment property interstate.
23:11
Speaker 1: There you are, you see, in another state, agnostic as
23:14
Speaker 1: to where Ram Nish bought his land with development potential,
23:18
Speaker 1: five townhouses, he thinks. By the way, any answer here
23:21
Speaker 1: is never advice. Okay, this is information only. But here's
23:25
Speaker 1: the killer. He says, we don't have development experience. Have
23:28
Speaker 1: you come across arrangements or joint ventures between landowners and
23:33
Speaker 1: builders where the landowner contributes the land and the developer
23:35
Speaker 1: builds the townhouses? I expect that goes on all the time,
23:39
Speaker 1: but I don't know the mechanics of it. Would you
23:43
Speaker 1: be familiar with that, Bruce?
23:47
Speaker 2: Look, I have spoken to a few organisations, I guess,
23:52
Speaker 2: over time where they've targeted older Australians who might have
24:00
Speaker 2: an old house on a big quarter-acre block, possibly bigger,
24:03
Speaker 2: where the house is built at the front or the
24:05
Speaker 2: back and there's the opportunity to release some capital by
24:08
Speaker 2: getting a developer to come in and develop a second
24:10
Speaker 2: unit or something like that on the property so the
24:13
Speaker 2: person who owns the land gets paid out. So I've
24:16
Speaker 2: no doubt that there would be developers out there who
24:19
Speaker 2: would consider doing that. Talking about the actual example that
24:23
Speaker 2: you've given here, I don't know of any groups that
24:26
Speaker 2: do that, but I'm sure somebody would. Massive warning sign
24:31
Speaker 2: or red flag, if you're considering doing this, you need.
24:34
Speaker 2: really good legal advice to make sure that it's watertight.
24:38
Speaker 2: You're dealing with developers and a whole bunch of risks
24:41
Speaker 2: that you wouldn't otherwise face if you were doing it yourself,
24:44
Speaker 2: or you would still face, but even higher risk, I guess,
24:47
Speaker 2: in this sort of situation. So make sure you get
24:49
Speaker 2: really strong legal advice before entering into any agreement. So
24:54
Speaker 2: off the top of my head, I can't think of
24:56
Speaker 2: any that I know that do this, but there's bound
24:57
Speaker 2: to be. There's bound to.
25:00
Speaker 1: So step one is get yourself a top-class property lawyer,
25:03
Speaker 1: and no doubt the property lawyer will know who's who
25:05
Speaker 1: in the game.
25:06
Speaker 2: Potentially, yeah, but I'd probably put some feelers out. I'd
25:12
Speaker 2: probably put some feelers out and just go and speak
25:14
Speaker 2: to a few developers who might want to do it,
25:16
Speaker 2: but do not sign anything without having your lawyer do
25:19
Speaker 2: it properly. They'd find somebody who's potentially prepared to do
25:24
Speaker 2: it for you and then get legal advice, really serious
25:27
Speaker 2: legal advice before signing anything.
25:29
Speaker 1: Very good information there. And Ramnish, neither option is easy.
25:33
Speaker 1: So neither option is easy. And obviously both options can
25:37
Speaker 1: be rewarding long-term. I hope that was helpful.
25:41
Speaker 2: Okay, we'll take a short break.
25:42
Speaker 1: We'll be back with the last two questions in one moment. Hello,
25:45
Speaker 1: welcome back to the Australian's Money Puzzle podcast. James Kirby here.
25:48
Speaker 1: It's Tuesday. We're talking property. I'm talking to Bruce Bramall,
25:52
Speaker 1: financial advisor. Andrew asks, if I had a mortgage, this
25:57
Speaker 1: is one of these, we get these sort of questions
25:59
Speaker 1: all the time. We have some awfully clever listeners who
26:02
Speaker 1: are always doing computations. Andrew says, if I had a
26:05
Speaker 1: mortgage for a thousand a week and interest rates went
26:08
Speaker 1: up so that my payments were 1500 per week, what
26:11
Speaker 1: is the end journey of my extra 500? I don't
26:13
Speaker 1: believe it goes to bank profits, but maybe it goes
26:15
Speaker 1: to treasury bonds. In other words, Is the extra interest
26:19
Speaker 1: that mortgage owners are paying off simply going to restore
26:22
Speaker 1: the money printing done during COVID? Is it a tax
26:26
Speaker 1: without being called a tax? Well, Andrew, I don't see
26:29
Speaker 1: how the banks should give you a loan that they
26:34
Speaker 1: don't make any money off or they'd have to close down.
26:36
Speaker 1: So your interest payments are going to have to be
26:40
Speaker 1: bigger than cash. That's only fair that the RBA official
26:44
Speaker 1: rate is there and then the rates go up from there.
26:48
Speaker 1: But I don't think it's avoidable, really. I think you
26:51
Speaker 1: just have to take that on the chin. The question is,
26:55
Speaker 1: which bank, I suppose, is screwing you worst? It's much
27:00
Speaker 1: more transparent than it used to be. You can go
27:02
Speaker 1: on any of these compare sites. We often talk to
27:06
Speaker 1: people in that area where you can simply just take
27:10
Speaker 1: a look at the different rates that are out there
27:14
Speaker 1: in either cash or mortgages. And Once you digest what
27:20
Speaker 1: bells and whistles are attached to particular deals on both sides,
27:25
Speaker 1: whether you have the cash on deposit or whether you're borrowing,
27:28
Speaker 1: it's much more transparent than it used to be, isn't it, Bruce?
27:31
Speaker 1: I mean, we used to have no idea whatsoever. People
27:33
Speaker 1: used to phone one bank after another. Now you can
27:36
Speaker 1: just go on a site and compare.
27:38
Speaker 2: Yeah. Well, you can. And the other side of it
27:41
Speaker 2: is the amount of business that is written or the
27:43
Speaker 2: proportion of business that is written by mortgage brokers has
27:46
Speaker 2: increased tremendously. steadily and is now sitting a bit under 75%.
27:50
Speaker 2: So mortgage brokers.
27:52
Speaker 1: 75%. They write three quarters. Yeah. Three quarters of all
27:54
Speaker 1: bank loans are going through mortgage brokers.
27:56
Speaker 2: Wow. Yeah. My colleague Vicky here called out the number
27:58
Speaker 2: the other day. It's sort of 74.5% or something of
28:01
Speaker 2: all loans. Yeah. To deal with sort of Andrew's question
28:06
Speaker 2: in a little bit or just on top of what
28:08
Speaker 2: you've said, James, is that banks sort of tend to
28:11
Speaker 2: make a reasonably constant, they're competing and always trying to
28:14
Speaker 2: lift it, but they're but the margin that they make
28:17
Speaker 2: is fairly similar through economic cycles, goes up a bit
28:20
Speaker 2: and down a bit, but they're trying to make, let's
28:22
Speaker 2: call it 180, 200 basis points, is what they need
28:26
Speaker 2: to make, known as a net interest margin.
28:28
Speaker 1: Yes, it doesn't really change an awful lot, does it?
28:30
Speaker 2: Yes. If interest rates are three and they've got to
28:34
Speaker 2: make 2% on it or 200 basis points on it,
28:37
Speaker 2: then the depositors and bondholders, they're not treasury bonds, but
28:41
Speaker 2: they're other fixed interest bonds. investments where people have got
28:47
Speaker 2: money to buy fixed interest securities and essentially lend the
28:52
Speaker 2: money to corporates and governments and banks and insurers, whatever,
28:56
Speaker 2: are chasing sort of a return there. But if they're
28:58
Speaker 2: charging 3% for a mortgage, then they're probably paying out
29:01
Speaker 2: about 1, 1.5% to fixed interest investors. If interest rates
29:05
Speaker 2: go from 3 to 7, then generally those fixed interest
29:12
Speaker 2: investors are going to be demanding an extra 4% for
29:16
Speaker 2: their money. So no, it's not a tax on people
29:22
Speaker 2: with mortgages. The return doesn't go to the banks. It
29:25
Speaker 2: doesn't go to the government. It tends to go to
29:27
Speaker 2: either depositors or fixed interest investors who are putting up
29:31
Speaker 2: the money, which are fixed interest essentially loans to governments
29:34
Speaker 2: and corporates and insurance companies and infrastructure projects and all
29:39
Speaker 2: that sort of stuff. So they're the ones who tend
29:42
Speaker 2: to be picking up. There tends to be somebody on
29:44
Speaker 2: the other side. People need to borrow and people have
29:47
Speaker 2: got cash. They need to invest. And that's the very
29:49
Speaker 2: good answer. Yeah.
29:50
Speaker 1: All comes back around as frank dividends, doesn't it really?
29:54
Speaker 1: On the banks, there was periods where their payout ratio
29:56
Speaker 1: was unbelievably high. There was periods where they were paying
30:01
Speaker 1: out 70, 80% on that. So if you wonder what
30:04
Speaker 1: keeps the self-funded investors ticking along in Australia, it's their
30:11
Speaker 1: frank dividends, which invariably, I might say, and most reliably
30:15
Speaker 1: does actually come from Okay, I hope that was useful
30:19
Speaker 1: to you, Andrew. Similarly, another colorful question from Dave. This
30:27
Speaker 1: question is funny. I'm a loyal listener since inception. Thank you, Dave.
30:32
Speaker 1: Often on my tracker. I presume he's got iPods on
30:36
Speaker 1: his tractor. And I don't think I've missed one. Good.
30:39
Speaker 1: Seems to me interest rates are a dumb ass way
30:41
Speaker 1: to rein in inflation. That's his first point. We'll take
30:44
Speaker 1: that on board and then we'll take his second point,
30:47
Speaker 1: which is somewhat idiosyncratic. But yes, it's generally seen that
30:53
Speaker 1: interest rates are a very crude, rough way to rein
30:57
Speaker 1: in inflation, but it's how they do it. And I
31:00
Speaker 1: would say to you, Dave, once upon a time, if
31:02
Speaker 1: you were old enough to remember, they used to do
31:04
Speaker 1: in a much more brutal way, and famously, the US
31:07
Speaker 1: Fed Reserve under Paul Volcker, the Volcker regime, I think
31:12
Speaker 1: was the 70s, inflation was really out of control. He
31:14
Speaker 1: managed to get inflation under control by a brutally unsignaled
31:22
Speaker 1: interest rate rises where basically America woke up one day
31:24
Speaker 1: and interest rates were much higher. and it forced the
31:27
Speaker 1: country into recession, and yes, it worked. But these days,
31:30
Speaker 1: banks don't do that. They signal. Do you notice they
31:32
Speaker 1: call it, what they call it, jawboning, and they signal continually.
31:37
Speaker 1: And you notice the increases in rates, though we had
31:41
Speaker 1: many of them, each one was only a quarter of
31:44
Speaker 1: a percent. So they don't do that anymore. So it's
31:47
Speaker 1: not as bad as it used to be, but it's
31:50
Speaker 1: one of the least worst options, I think, available to
31:52
Speaker 1: the bankers, to the central bankers. Now, the question, he says,
31:56
Speaker 1: is why not leverage super system to whack another 10%
32:00
Speaker 1: on high earners and keep it aside and available when
32:03
Speaker 1: the next downturn comes. This would take the heavy lifting
32:06
Speaker 1: from wage earners. I stopped people like me spending with
32:10
Speaker 1: gay abandon when I should be putting my head in.
32:13
Speaker 1: I'm an olive producer, though olives are not my main game.
32:16
Speaker 1: That's why he's on a tractor, obviously. Right.
32:19
Speaker 2: Well, yes, yes.
32:20
Speaker 1: So so Dave's suggestion, not unusual now in the future
32:25
Speaker 1: or in the past is tax the rich somehow get
32:28
Speaker 1: at them again. That never stops. So the three million
32:32
Speaker 1: super plan is is very much the latest example of that, Dave.
32:37
Speaker 1: I don't know about your particular, your particular idea, Dave,
32:39
Speaker 1: is like really on the far end of the spectrum,
32:42
Speaker 1: I think, for this sort of thing. But while we're
32:44
Speaker 1: on it and while we have Bruce on the show, Bruce,
32:45
Speaker 1: you might just, could you explain why there's such a
32:48
Speaker 1: rumpus over this new super tax that kicks in at
32:51
Speaker 1: 3 million? You would have thought there's not a lot
32:52
Speaker 1: of people that have 3 million in super, but have
32:55
Speaker 1: you a sense of why the tax is so controversial
32:58
Speaker 1: and what your clients think about it?
33:00
Speaker 2: It's... I think the legislation came out in recent weeks
33:06
Speaker 2: and I haven't read it and I haven't read enough
33:08
Speaker 2: about it to do it. But the reason that there
33:12
Speaker 2: was a lot of consternation about it was, well, how
33:15
Speaker 2: exactly is this going to work? Is it going to
33:17
Speaker 2: be taxed only on income of capital above $ 3 million
33:24
Speaker 2: or that you're going to be paying the 30% on?
33:27
Speaker 2: Exactly how is this going to be done? And You know,
33:30
Speaker 2: the usual way of writing new laws and bills is
33:33
Speaker 2: to put something out there, go back to industry to
33:36
Speaker 2: find out what they think about it, poke holes in it,
33:38
Speaker 2: et cetera. And, you know, I think that's sort of,
33:40
Speaker 2: you know, that will continue to happen on this occasion.
33:47
Speaker 2: I'm not sure exactly where it's gone. But the reason, yeah,
33:49
Speaker 2: there was so much consternation is that it was sort
33:51
Speaker 2: of an announcement of this new extra 15% tax going
33:55
Speaker 2: from 15 to 30% above $ 3 million. But the rules
33:57
Speaker 2: were sort of, yeah, we'll figure out the rules later.
33:59
Speaker 1: And what I spoke of enraged people was the notion
34:05
Speaker 1: that unlike other taxes all across the system, even inside super,
34:09
Speaker 1: this one would be on what they call paper profits
34:12
Speaker 1: on unrealized gains. And if you have unrealized losses, you
34:17
Speaker 1: don't get them back. It carries forward like CGT. And
34:20
Speaker 1: I think that's, but it looks like it's coming down
34:23
Speaker 1: the line. It looks to me like nothing's going to
34:25
Speaker 1: stop it.
34:27
Speaker 2: I don't think so, no. They'll find a way of
34:29
Speaker 2: making it work. They generally do. So, yeah, it's not
34:35
Speaker 2: something that is likely to be stopped. The history of
34:41
Speaker 2: superannuation and rule changes and law changes over the years
34:44
Speaker 2: is something that I've covered ad nauseum in various ways
34:49
Speaker 2: over a long period of time. But they're constantly juggling
34:56
Speaker 2: around a little bit in order to try to make
34:57
Speaker 2: it fairer. And when this particular rule came out, it
35:03
Speaker 2: was announced that they're going to be moving towards it.
35:07
Speaker 2: it's probably only impacting 1% or 2% of the population was,
35:09
Speaker 2: I think, roughly the number. And even the people who
35:13
Speaker 2: were in that situation were understanding, okay, well, I probably–
35:19
Speaker 2: nobody's going to cry for me about this.
35:21
Speaker 1: No one's going to march to the streets for you.
35:23
Speaker 2: Yeah, nobody's going to march to the streets. You've sort
35:26
Speaker 2: of got to move it and deal with it. I
35:28
Speaker 2: do remember, and this is James, back in another time
35:33
Speaker 2: in Blakes when you and I were doing some things together,
35:36
Speaker 2: There was a, when they announced the transfer balance cap
35:39
Speaker 2: of $ 1. 6 billion, the time who had and his wife
35:43
Speaker 2: about $ 30 million in a self-managed super fund in a pension.
35:49
Speaker 2: So they were earning, you know, they had $ 30 million,
35:52
Speaker 2: probably more than that a little bit later on that
35:54
Speaker 2: was earning, let's say seven to 10% a year. There's
35:57
Speaker 2: sort of, you know, a very large amount of money
36:01
Speaker 2: that they were earning off this, you know, $ 2 million
36:03
Speaker 2: to $ 3 million a year on which absolutely zero tax
36:06
Speaker 2: was being paid and reduced the transfer balance cap. They
36:09
Speaker 2: had to roll back all but $ 1. 6 million each, so
36:13
Speaker 2: $ 3. 2 million. So about $ 27 million had to go back
36:16
Speaker 2: and it was then taxed at 10% or 15%. So
36:17
Speaker 2: that $ 2 million to $ 3 million roughly that they were earning,
36:20
Speaker 2: they were going to start paying 10% or 15%. I
36:26
Speaker 2: had chats with him about it at the time and
36:28
Speaker 2: it was just sort of, you know, look, we had
36:30
Speaker 2: a pretty good run there for a long time and
36:32
Speaker 2: we're paid no tax on a very financial asset. And
36:35
Speaker 2: I think ultimately most of the people who are in
36:40
Speaker 2: that band of having more than $ 3 million, which can
36:43
Speaker 2: be $ 6 million for a couple, it's $ 3 million each
36:45
Speaker 2: for a couple of people, it's super fun, sort of
36:49
Speaker 2: understand that, yeah, okay, well, there's we're probably at a
36:54
Speaker 2: pretty good run for a pretty good period of time.
36:56
Speaker 2: And I don't see many people sort of moaning heavily
37:01
Speaker 2: about us. Yes, they are.
37:03
Speaker 1: It's interesting you say, and it's actually what I spoke
37:05
Speaker 1: to lots of top advisors about this, and they generally
37:07
Speaker 1: say what you're saying, Bruce, that people who are lucky
37:10
Speaker 1: enough to have that level of money, and remember, for
37:13
Speaker 1: a couple, it effectively means once you're over 6 million
37:16
Speaker 1: in super, that's when the new tax comes in. But
37:18
Speaker 1: what they say is, we knew... there was every chance
37:23
Speaker 1: that taxes would rise on super. We just didn't know
37:25
Speaker 1: they were going to do it on unrealized gains, on
37:27
Speaker 1: paper gains, which does, you know, you could really be
37:30
Speaker 1: caught very, very badly if you were, especially if you
37:32
Speaker 1: were an earnest investor in startups and all that sort
37:35
Speaker 1: of thing. And you certainly, you know, you don't have
37:37
Speaker 1: the money until you have it in your pocket, but
37:39
Speaker 1: you're paying tax on it before you get it. You
37:42
Speaker 1: can see how that would actually inflame people. And that,
37:45
Speaker 1: I think, is the residual argument and is not over yet.
37:48
Speaker 2: Okay, terrific, Bruce.
37:49
Speaker 1: Thank you very much. Great to have you on.
37:52
Speaker 2: Thanks, James.
37:53
Speaker 1: And that was Bruce Bramall, of course, of Bruce Bramall Financial.
37:57
Speaker 1: And he is an advisor, a regular on the show
38:01
Speaker 1: and contributor as well to the finance pages.
38:04
Speaker 2: All right, folks.
38:05
Speaker 1: Thank you. And let's have some more questions. You know,
38:07
Speaker 1: the email and money puzzle at the Australian dot com
38:11
Speaker 1: dot au. Talk to you very soon.
38:22
Speaker 2: Thank you.