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Perth Still Has 20% Capital Growth Left Before Hitting Price Ceiling | Property Expert · The Follio Property Podcast

• 0:00
  Nationally, we had a clearance rate of just 43%. Both Sydney and Melbourne have experienced price drops over the past quarter of more than 2%. This is worrying, of course, to anyone concerned about the value of their home.
• 0:13
  The houses per still has 20% left in it in terms of capital growth before it hits its affordability ceiling for houses and almost 50% for units. The big one in the news at the moment here in Western Australia, Lachlan, there was some R code change to the WA property market. It's going to allow an extra 50,000 more residential properties to be subdivided, which in theory is true. In reality, it's not so simple, but after the say interest rates go up to about 30%.
• 0:36
  7.2%, so another sort of four rate rises, to put it into simple terms, before it hit that affordability ceiling. If you buy a property in some of the speculating regionals in Australia, I think they'll be worth potentially the same or less in 10 years' time. Do you think that the slowdown is sentiment-driven, or is it the increased stock at the moment? No, it's definitely sentiment-driven. We're in a period of time of mass uncertainty, so I think the quickest way to get debt-free is by taking on more debt, which sounds counterintuitive.
• 1:08
  You're listening to the Folio Property Podcast. I'm Rhys Beddle and I'm here each week with my co-host, Lachlan De La Hunty. Lachlan, last one for your trip in Sweden, mate. I thought we'd make things, you know, we've got a big build-up of Q&A that our loyal listeners have been sending in over the last couple of months. We haven't addressed some of these in some time. There's a lot going on in each market as well. So, I thought what we'd do today is let's do a Q&A.
• 1:32
  Some of the most common questions we get through the podcast, through our emails, also focus on some particular areas as well because we do get a lot that are focused on each state. So let's kick it off with Perth because that's actually been one where we've been getting a lot of feedback. People want a Perth episode.
• 1:52
  Just so those that are aware, we will be doing a Perth breakdown in the next couple of weeks with yourself and Trent Fleskin. So there is a Perth-only focused episode coming up. But let's kick off with a couple of quickfire ones that we can answer before that episode. The big one in the news at the moment here in Western Australia, Lachlan, and it probably happened just as you went on leave.
• 2:11
  there was some R code change to the WA property market. For those, it would be good to get a bit of an understanding just briefly from your perspective, what the R code changes mean, what are an R code and how does that impact infill development in Western Australia, which we definitely need.
• 2:28
  Yes, it's massive. I think the headline median that John Kerry was going for, it's going to allow an extra 50,000 more residential properties to be subdivided. Which in theory is true. In reality, it's not so simple. But essentially what the R codes are, Rhys, is the minimum square meterage required for an allotment to be subdivided. And currently for an R20, which is a very common R code in residential suburban areas, it's a very
• 2:54
  probably the most common coding within Perth and Western Australia. It requires allotment to be a minimum of 900 square metres before it can be subdivided. And we know in Perth there's a lot of properties between that sort of 700 and 900 square metre, probably the most common in the more established suburbs when you think of areas like,
• 3:15
  Wembley or Duncrague or Blue Chip infill areas typically are difficult to subdivide. Now that's been reduced down to 700 square meters. So it's going to open up a lot of opportunity. And I think for those that are looking at a post-budget solution for a more mum and dad
• 3:37
  to sophisticated invest. I think this strategy is going to work really well where you can still stick to quality, blue chip assets in areas, but you can also participate in developers. So I think it's going to be a great strategy for those looking to get a tax benefit as well. And we spoke about this pre and post budget race, what to look for and what to
• 3:56
  We know if you go and buy a property hypothetically say in Wembley for 750 square meters, you can now subdivide that into two, build two new dwellings and you're going to get the capital gains and the negative gearing benefit on those two assets. So it opens up a whole range of opportunity of quality stock, stuff that I truly believe in is a good investment, both short, medium and long-term assets. There has been an argument against the Greens. They don't like it. They think it's chopping up more leafy suburbs.
• 4:26
  I disagree. I think there's really good infrastructure in these suburbs. People want to live there. There's good amenity. And if it's done right and tastefully, these assets are good value and hold their value longer term. So I do think this is probably the best policy that I've seen to bring on the right type of supply. And I think we'll have a lot of investors take this opportunity out because of the tax benefit you get with this as well.
• 4:52
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• 5:11
  Lachlan, advice on Perth. How will it hold up once it hits the $1.1 million price mark? So we're edging closer towards it. We're not there yet. The question asks, how will we sustain the price with no salary increase, inflation's up, people are stressed out, uncertainty in the world, such as the war, et cetera. There's probably a lot more uncertainties as well post the war. But yeah, from your perspective, Lachlan, how does Perth prices hold and go into that $1.1 million mark?
• 5:41
  So to unpack that, we're going to go back to the fundamentals. It's all supply and demand. And I've said this before in the podcast, if you take out recency bias in terms of what's happened in Perth over the last five years and just looked at the raw data, it's still the best market fundamentally from a data point of view in the country. So all recency bias in terms of how it's performed over the last six years aside, an international would come to Australia, look at the data and invest in Perth because there's more people.
• 6:07
  moving into the state than ever before. It's got the second highest population growth in the country and where it's significantly undersupplied and building less than all the other states. So from a pure supply and demand, there's more people coming in than we're building homes. That is a good market, short, medium and long term. To answer your affordability play, if we hit and when we hit 1.1 million, what happens to the market? To give you context, the ceiling
• 6:33
  In Perth, there is still a lot of runway in the Perth market currently from an affordability point of view. So to give you context, where we sit today, Rhys, and hypothetically, an interest rate is 6.1%. The runway in terms of...
• 6:48
  the price ceiling that Perth would have to hit before it runs out of its affordability. For houses, Perth still has 20% left in it in terms of capital growth before it hits its affordability ceiling for houses and almost 50% for units. So that's not including any potential wage growth and that's not including the long-term futures of interest rates improving. So for us to hit that ceiling, we'd have to see interest rates go up to about
• 7:17
  7.2%, so another sort of four rate rises, to put it into simple terms, before we hit that affordability ceiling for houses. And there would still be a level of runway for units. And then if we looked at units, we'd have to hit well into sort of 9%, 10% interest rates before we'd see affordability ceilings on units. So to give you comfort,
• 7:41
  Do I think we're going to see the level of growth that we've seen for the last two or three years? No, I don't. But double-digit growth in any market isn't sustainable. What is sustainable is typically about 0.5% growth per month. You net that out of the long term and you're looking at about 6% growth
• 7:58
  each year, that is sustainable growth. And that's the level of growth that I think we'll see perth over the short to medium term because the fundamentals are very strong. It's very different to what we saw back in 2008 to 2014, that sort of boom-bust economy. And the reason for that is we had a mass exodus in population. We're not seeing that at this point. We had a massively oversupplied market in 2014. We oversupplied the market by about 110% when we look at the surplus level between
• 8:27
  how many people are moving in and how many houses we're building, we're still under-building and because of construction constraints, particularly in higher density apartments, it's very hard to foresee an oversupply coming in the short to medium term. That's why my view on Perth is more bullish than other markets is because, you know,
• 8:47
  fundamentally we're undersupplied in the short to medium to term. And we don't have an affordability issue yet, which will surprise a lot of people, but our wages are higher than that of anywhere else in the country.
• 8:58
  The next question is a similar question to this one, so I won't ask the question, but there is a comment in there that I want to get your feedback on because I think it will address their answer as well. Essentially, it's the same sort of concept, are we at the peak in Perth? The big one is you guys mentioned the supply stats, which are spot on, but on the ground feel in Perth feels like we've peaked with listings now up to 6,000. We were talking historic lows under 3,000 listings there for a long period of time.
• 9:25
  Do you think that the slowdown is sentiment-driven at the moment or is it the increased stock at the moment?
• 9:32
  No, it's definitely sentiment driven. We're in a period of time of mass uncertainty, Reece. So the reason Perth is still getting growth during such time of uncertainty, when every other market in Australia is essentially having negative declining house prices, Perth still is in the positive. And the reason is because we are still significantly undersupplied. If we weren't undersupplied, I think Perth, like every other market in Australia, would be seeing negative house declines week by week, month by month. But we're not seeing that.
• 10:01
  So we're in a period of time nationally where sentiment is at record lows. And this period of time has been from budget and it could be for the remainder of the year. I expect things to improve in the spring once there's some positive news. So yes, listings are increasing in Perth. There's more supply in the market than there was three to six months ago. Balance market in Perth is somewhere between 12,000 and 14,000 properties. We're now in the 6,000, so historically we're undersupplied.
• 10:27
  But we will see demand return to the market when there is more positive sentiment nationally. And that's going to be driven predominantly, I think, by interest rates. And at the moment, there's still a little uncertainty whether they're going to go up, down or sideways. We certainly don't think there will be a reduction in interest rates this year, albeit we've had a guest on recently saying there's going to be seven interest rate cuts before the end of next year. So, yeah.
• 10:52
  I think once the sentiment nationally starts to change to more positive dialogue, you'll see Perth continue to perform at levels that are sustainable, which isn't double-digit growth year on year. It's typically between 6% and 7.5% yearly, annually.
• 11:06
  The last question I'm going to round it out, it's not necessarily Perth, but it's WA-focused. And the reason I brought this one up is we get this question quite a lot. Hi, Lachlan and Reece. Curious to hear your thoughts about the property market, particularly the investment market in Busselton, Western Australia. So for those that aren't familiar, regional town, a couple hours south of Perth.
• 11:27
  Whilst regional, it has an airport to support FIFO employment, huge population growth, Perth spoil over, holiday rental potential and a gateway to the greater southwest. Lachlan, what's your thoughts now on this particular region and has your thoughts changed post-budget with no negative gearing benefits from an investment standpoint?
• 11:48
  The fundamentals are strong. It's a very undersupplied market. And as you said, it's the gateway to the southwest. I have probably more concerns over the more lifestyle assets further south of Busselton. I do think the holiday type home properties will suffer. Busselton is slightly different. It's got a very strong population base without the absolute reliance on tourism in terms of that short-stay accommodation. So I think fundamentals are strong.
• 12:18
  the longevity, but more importantly, the government have come out and essentially announced its future funding spending on the major regionals, and that's included of Geraldton, Kalgoorlie, Busselton has been included in that. So we know the government are going to support that market as a key hub in the south. So what does that mean? It means a lot of money is going to get pumped in for infrastructure. That means, you know,
• 12:43
  public transport, schools, medical, all those sorts of things. So if we know the government and we know the Western Australia government has a lot of money to spend and they're going to back that as the regional hub of Western Australia and the Southwest, then fundamentally from a medium to long-term view, I still hold that market in strong regard. Don't expect the same level of growth that you've seen over the last three to five years because that was built on a lot of sentiment around
• 13:13
  holiday homes and tourism of the like, but I think it will hold its value and see modest growth over the coming five years. Next one, Sydney-based question, but it goes probably generically for anyone in Australia, potentially. Hi, team. My wife and I follow your podcast and can't rate the information you provide high enough. Had to get that one in there. We are based on the lower north shore of Sydney. Within the last week, we've noticed a new trend with advertising properties. They have been listed with a price.
• 13:40
  Have agencies changed their strategy and realized people won't bother going to a listing when most are listed with lower prices to find out that the price sells for much higher, resulting in disappointing buyers? So I'm assuming this is a changing tactic in the Sydney market. Does this have anything to do with a falling property price and negative sentiment?
• 13:59
  Really good question. So what you'll find is this is where Victoria is very different. They have to legally disclose the price. And if it's not within sort of the scope of what they expect, they can get fined. But I think the reason you're starting to see this is taking place not only in New South Wales, but Queensland and Western Australia. I've seen a massive uptick of advertised price. And the reason is there's more stock available and there's less buyers. So...
• 14:24
  We need, you know, the agent is trying to capture attention and trying to get as many genuine interested buyers through a property as they possibly can. And when you're in an undersupplied market, you can put up any property. And the idea of that, the agent just wants to fetch as many calls as they possibly can because they want to see if you've got something to sell. But there's a lot of time wasting. And in this market, people aren't just shopping around for the sake of it.
• 14:48
  People are only interested in properties if it's going to suit their needs. And if they have to make the effort to make a call to an agent, we'll likely won't call them back to try to get a price guide. There's an opportunity that that potential agent will lose that potential buyer for that property. So it's really cutting through the noise. And I think it's a good thing for the industry.
• 15:05
  when it's very transparent between sellers and buyers, here's our price expectation. What you'll find though and what we're starting to see a little bit of is under quoting. So they'll put up properties with a price guide, hypothetically of 1.1 million, but they have no expectation to sell that property for anything less than 1.2.
• 15:23
  And that's when it gets a little bit deceptive. They're trying to get you through the door as a buyer because at 1.1, you go, geez, that's very cheap. That property would have been 1.3 12 months ago. Let's go through, that sounds like a really good deal. And then the agent's trying to engage you into the home open so he can do what his job is to sell to you, to get you to fall in love with that property and get you to pay 1.2 for that property. So yes, it's a good thing. Be a little bit skeptical because you'll start to see a lot of underquoting take place to get more buyers through.
• 15:52
  Next one is in Melbourne. The viewer asks, are you saying out of Melbourne house plus land packages are a bad investment even for long term, say 10 years? So I guess this particular listener is looking at a medium hold, I guess, for a house and land package share. What's your opinion on that, Lachlan? I know you've mentioned multiple times through the podcast over the last...
• 16:16
  12 months, our thoughts on those outer fringe areas but if there is a medium to long term hold, does that make sense for certain clients? No, it doesn't and I'm pretty blunt on this and the reason is it's because you're talking about an opportunity cost. So yes, real estate and property in general, if you hold a property long enough, you are going to do okay.
• 16:39
  So, if I buy a property now pretty much anywhere in Australia and I hold it for 10 years, I'd like to think it's going to be in better shape in 10 years' time with the exception of regionals. I think if you buy a property in some of the speculative regionals in Australia, I think they'll be worth potentially the same or less in 10 years' time but that's another conversation.
• 16:57
  The reason, and I speak about this a bit on the podcast, you buy in an outer fringe area and Melbourne is the example you used, there is supply in that market for the next 100 years because there's so much land that can be developed. You are not building or buying a property that has any significant level of scarcity. Yes, if you buy something, if you look back and you had a bought in Packingham, which is the outer east area.
• 17:24
  15 years ago, yes, your property is worth more now because they're built out through you and it's probably considered almost infill now, right? But the opportunity cost for that money, if it had been put into another asset class or another market that has more scarcity, be that it's landlocked, it's in a market with more occupiers than investors, it has significantly outperformed that asset in Pachydam. So you might have bought something in Pachydam
• 17:48
  for $450,000 and it's now worth $750,000. But at the same time, you could have bought something in a ring or say a home in Geelong for $450,000 in an area like Geelong West or Newtown, probably not Newtown, in a house like Geelong West. And that property is now worth $850,000 to $900,000. Which when you look on your cash return in terms of how much money you put into the deposit,
• 18:13
  Plus, you're gearing and then your exit and you net that over 15 years, you're talking about probably 2% to 4% difference year on year compounding growth compared to. So, it sounds like a detailed way to answer a pretty simple question but it's not a bad thing. I think the worst thing you can do in property is do nothing. So by buying an asset and holding it long term, you'll likely do pretty well but it's the opportunity cost of that money.
• 18:39
  You have X amount of chips you can play with in terms of your borrowing capacity and X amount of chips in terms of deposit. You want to put that into the best performing asset you possibly can for the budget you can afford on the data that we're looking at today. And the data I'm looking at today does not suggest a house and land package area on the outer fringes of Melbourne is the best use or the best allocation of your capital.
• 19:03
  This segues nicely into the next question as well because you did reference it there when you were comparing assets on a house and land package perspective. The viewer asked, would Bendigo Ballarat be considered in a similar market like Geelong in terms of proximity to Melbourne, metro, regional? So, you know, we talk about this a lot on the podcast, the difference between regional…
• 19:24
  regional areas and we may have made it up, but metropolitan regionals where it has the clear access into a major city hub, particularly around an hour, an hour and a half until the access. What's your thoughts on Bendigo and Ballarat? Do you put them in the same market as Geelong?
• 19:41
  And if so, why? Yeah, that's the one. So yeah, these commutable regionals that we talk about or metropolitan regionals, yeah, they are absolutely within that realm of Geelong. I consider them very commutable and that's the whole point. You can – and the reason it needs to be commutable race is because of the – it's to do with the income. So why we look at Geelong as an example is because it's –
• 20:04
  its affordability index or its price to debt ratio, it's going to be higher than a market like Mildura. You're like, okay, what does that mean? Well, it means people living in Geelong can buy a home for $800,000 and if they are on Geelong wages, that's going to be an expensive property to hold. But if they're on Melbourne wages, which is often the case for these commutable regionals,
• 20:28
  they're on city wages, so they're on Melbourne wages, but they live in a regional. And you can't generate that in a place like Mildura or a place like Ararat or these other areas in Victoria where they're going to be on regional wages, which is typically a lot lower than major metro wages.
• 20:43
  So it's all about that income source. And somewhere like Geelong, you'll see a large portion of that population commute every day to Melbourne to work. They get that increase in wage, which means their affordability is much higher in Geelong so they can afford to pay more for property. Therefore, you see prices increase in value. Ballarat and Bendigo are certainly that commutable. They are slightly further away and their population center isn't as strong. So Geelong's almost 300,000 people. So what does that mean?
• 21:10
  There's typically going to be more jobs locally in Geelong that pay more because it's a larger economic hub. If you look at Ballarat and Bendigo, Bendigo is about 100,000. Ballarat is slightly more, 125,000. They are smaller economic hubs. Therefore, the affordability ceiling will be likely lower than that of Geelong because it's a larger district, has higher incomes. But absolutely, there will be people and there is a large portion of that population that do commute to Melbourne and therefore can afford to pay more when they look at property.
• 21:39
  So, to summarise that, yes, they are metropolitan regionals, so to speak, or commutable regionals. Do I think they have the same level of upside as Geelong? No, I think the ceiling in Geelong will always be higher than that of Bendigo and Ballarat, but we will see prices increase, I believe, in the medium to long term in those markets.
• 22:01
  Next one is on Darwin and those of us in the podcast would probably know our thoughts on Darwin. However, we haven't really spoken about Darwin post-budget and with changes and feedback we're hearing from a lot of investment groups out there is they're still in that market. So, it'd be good to get an understanding from your perspective, Lachlan.
• 22:18
  The question is, would it be possible to have some commentary on Darwin? Is it a good market to invest in? Is your answer the same? So for those that haven't listened, we're pretty against Darwin. Has that changed, Lachlan, post-budget? We're unbiased, Reece. When you say we're against, we are unbiased to markets, but we're biased towards data.
• 22:38
  The market, Darwin itself, I've got no problem. In fact, it's quite a nice place to visit. So we're going to be careful about how we frame this conversation. It's not the place that we have against, it's just the data. And a lot of these other buyers groups are pushing, they push projects.
• 22:57
  Big projects are going to result in increased population. So a gas project is going to attract 10,000 jobs, therefore, we're going to see incomes rise and population growth is a demand indicator, then prices increase. So they're pushing this story around population growth. When you dive into the data, it's not a positive population story in Darwin. And so that is my concern, much like Tasmania.
• 23:20
  I think you picked up a stat the other day, 76% of the activity in lending in Tasmania is investment lending. That's concerning. The same is true in Darwin. All the activity that's happening that's driving value is purely driven by investors
• 23:36
  And if you're buying into a market that's heavily investor-driven, when the fundamentals of population growth aren't strong, and we know it's a transient location. So what I mean by that, people go to Darwin for a short period of time and may take on a short-term contract, and then they leave. So there's typically no permanent nature to a lot of people that go to Darwin. So when I look at the demand indicators, medium to long-term, I fundamentally can't support that market.
• 24:06
  Will it go up in value in the short term? Yes. When we see a lot of investor activity that's generated by a lot of buying groups, we typically see a short-term uptick. So, if you can get into that market and get out in a short period of time and understand your entry and exit costs, I would say that market is a big gamble.
• 24:23
  And we don't like to gamble with people's money and we don't like to gamble with property. It is a large investment, so you want to be careful with that. And I think there's better opportunities in the country, medium to long term, that have stronger data fundamentals in terms of that supply and demand that underpin that market. So you can go in and get the same amount of upside with less downside risk.
• 24:44
  Lachlan, I've got a few more questions to close it off but let's do some quick fire and just see where we land with those ones. So, quick fire questions. Are new builds actually worth buying just for the tax benefit? No, we don't invest in property to save tax. We invest in property for capital gain typically over the medium to long term. So, my position on this hasn't changed.
• 25:09
  How do I know if a suburb is going to grow? Track the data. And when demand exceeds supply in that suburb, typically you'll see an uptick. Also, when I say data, look at the local incomes. Incomes are increasing, there's less supply, vacancies, all those. Every decision we make around property or tracking to give us an outlook or a prediction on a market purely comes down to the data. Infrastructure spending.
• 25:33
  on average, how many dollars have been spent per person on that particular suburb in comparison to the state or the country. These are the things you need to be tracking. How long do property downturns usually last in Australia? Really good question. History tells us, Rhys, that property prices double every 10 years. That's not factually correct. In the modern era, it's more like 14 years and can be up to 17 years for regionals. But if you look at a broad, brushed rule of thumb, you know,
• 26:01
  we typically see prices go through a growth phase anywhere from five to seven years, followed by a three to five-year stagnation period. So stagnation periods are typically more short-lived than the growth period itself. But that's an exception to that. Perth is a perfect example that went through a 10-year stagnation, followed by a very short and sharp, as we're seeing now, a five to six-year growth period. So it is market-dependent.
• 26:25
  This may be different depending on their circumstances. So let's just keep it generic because I know you'll say, you know, this depends on what your situation is. But just with your experience and the thousands of clients you've helped over the years, how many properties do I actually need to retire on? A golden figure for a lot of investors, probably 70% plus that they want $150K at retirement on passive income.
• 26:45
  With three really blue chip properties that are debt free, you can achieve that goal. So, then you're like, okay, well debt free, what does that mean? Means you'd likely need to accumulate probably four to five, noting that you're gonna sell down one or two to pay off the debt on the remaining portfolio. So if you can own your home debt free and three investment properties debt free, you will achieve that 150,000 goal.
• 27:07
  If you're looking at a residential strategy or it might own your home and one commercial property at retirement, it's going to pay you that $150,000. That for me is a common strategy for people when they're sort of closing in on retirement. Last one and be interested in to get your thoughts and if this has changed post-budget with the new laws, should I pay off my mortgage or buy an investment property first?
• 27:33
  This refers to a debt reduction strategy and a lot of people think the best way to pay off my debt is just as soon as money comes in the bank, go straight off the mortgage. I couldn't disagree with that anymore. The quickest way to pay off your debt, and we do it with a lot of clients where we try to pay off their home in four to six years, is through a debt reduction strategy where it looks at buying and selling investment properties to pay off that debt quicker. You look at a standard mortgage, you're paying that off over 25 to 30 years.
• 28:03
  and you're using after-tax income to pay that off. That is going to take you a long time. It's not the best use of capital. The way I've done it and the way we do it with our clients is I have a mortgage on my home. Hopefully, it doesn't make up any more than sort of three, three and a half times my income, so that gives me some chips to play with in terms of investment properties. But then by buying one, two or three investments and riding the markets and then selling them, I can pay off large portions of debt at any given time.
• 28:30
  in forms of hundreds of thousands of dollars, a $400,000 gain, I can wipe that off my mortgage very, very quickly. Another $300,000 gain, I pay that off. So I think the quickest way to get debt-free is by taking on more debt, which sounds counterintuitive, but that's the reality of a debt reduction strategy.
• 28:48
  And for those that want to delve more into that, we did cover that on a podcast with a mortgage broker, Michael Killner, where he spoke about the changes from how lenders look at offset accounts as well if you were wanting to put it all in an offset rather than pay it off. Especially if you're looking to grow a portfolio, it's definitely worth a listen on that one because there is some different strategies out there.
• 29:08
  That's it. Good wrap up there, Lachlan. For those, I'll mention it again, we have been getting bombarded with Perth updates. I think the market, obviously, for the first time in, probably since we've been doing the podcast has started to slow down. So, there's a lot of questions out there. We've left a lot of those. We'll wait for when you're back next week and we'll do a deep dive with Trent Fleskins as well into the Perth property market. You've been listening to the Folio Property Podcast.