Latest / The Follio Property Podcast / Australia's Property Market Just FLIPPED | Should You Buy Now or Wait?

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Australia's Property Market Just FLIPPED | Should You Buy Now or Wait? · The Follio Property Podcast

• 0:00
  Home values have dropped across the country with one in three houses bought just a year ago, now worth less than when they were purchased.
• 0:06
  Brisbane house prices have fallen for the second month in a row.
• 0:09
  Almost 0.5% market falling in Brisbane is significant.
• 0:14
  And when people get their cash buffers lower than 5%, you're playing on a knife's edge the entire time.
• 0:19
  In financial stress, the bank is coming for you and you don't get a situation where the bank is going to reclaim your property.
• 0:27
  And is this common when you see a bit of a downturn?
• 0:29
  Some of these markets, if you wait another 12, 18 months, there may not be a buyer.
• 0:33
  You're not talking about a 5% to 10% haircut, you're talking about a 30% to 40% haircut.
• 0:37
  If you're thinking about holding or continuing to grow your portfolio, don't do so from a non-informed base level.
• 0:43
  what's the advantage of having that surplus cash there?
• 0:44
  So I'm going to be able to pick up an asset, potentially $500,000 or $600,000 under what market value would suggest because they just want to clear their debt.
• 0:54
  You're listening to the Folio Property Podcast.
• 0:56
  I'm Rhys Bettle and I'm here each week with my co-host, Lachlan Delahunty.
• 1:01
  Lachlan, today I want to talk around the grounds, market update.
• 1:04
  Big changes for the week, some surprising changes for the week as well.
• 1:08
  Yeah, it's interesting when we went through the data before jumping on air, I think there's a bit in today's episode that will probably surprise some listeners, particularly those that the doomsdayers that enjoyed my comment that the worst is over.
• 1:21
  I think they'll be a little bit surprised.
• 1:23
  Not all markets, but certainly some sub-markets for East that have contradicted the trend.
• 1:28
  I want to talk to you first about a property portfolio, Lachlan.
• 1:32
  So, you know, we've been talking on the podcast, quick plug for PropStack, for those that are investors and want to track their portfolio, click the link below, click the link in the show notes to gain access to that.
• 1:43
  I've actually been doing a lot of portfolio, not reviews, but just onboarding sessions with people onto PropStack, and it's been super helpful over the last week, just getting feedback, understanding people's portfolios, and there's a lot of common trends.
• 1:54
  And I thought what I wanted to do today is,
• 1:57
  This is a portfolio I've made up, but it's a combination of like five, six people that I've met with over the last week.
• 2:03
  It would be similar sort of advice, and I'm noticing a similar pattern with investors with more than two or three properties.
• 2:11
  They do look very similar to this, so I think this episode today would appeal to the masses.
• 2:15
  Yeah, and what's interesting in reviewing some of those calls raised with you is how many people actually don't know their numbers.
• 2:21
  And we know it's a bit of a tagline for PropStack is know your numbers.
• 2:25
  But the shock, and I'm shocked to see how many people have no idea about their debt to income levels, their cash buffers.
• 2:34
  Their true equity, they're sort of working off realestate.com valves and think that their portfolio is doing okay, but absolutely no visibility actually where they currently sit.
• 2:47
  And it surprised me that a lot of people have got this far without knowing their numbers.
• 2:50
  So that's been interesting to understand.
• 2:53
  And for anyone that is listening-
• 2:55
  If you are going to make any decisions before you're selling or if you're thinking about holding or continuing to grow your portfolio, don't do so from a non-informed base level.
• 3:06
  Make sure you're across your data.
• 3:07
  And that's why we built PropStack so you do know your numbers.
• 3:10
  So this particular portfolio I want to go through today, it's built of a couple of regional assets, some slightly speculative assets in capital cities.
• 3:18
  And the reason I've put this in, like I said, a lot of these portfolios I'm seeing with multiple properties that have used other buyers agents in Australia, some may be no longer with us.
• 3:32
  They are filled with a lot of these regional plays and definitely speculative assets that are trying to push for growth and in a lot of instances have done well.
• 3:39
  They have, and I think you can't undersell that.
• 3:43
  These properties have done well.
• 3:47
  The question out there whether it's fluke, timing, et cetera, is a different conversation.
• 3:52
  But all assets have produced a capital growth outcome.
• 3:57
  So tick for that.
• 3:59
  Do I think they will continue to do that over the next three to five years?
• 4:03
  Unlikely.
• 4:04
  All right, let's look at this portfolio.
• 4:06
  So I won't go into the nitty-gritty because we'll be here all day, but I'll just give you a high overview of how the portfolio is looking.
• 4:12
  There's an investment property in Gladstone, which is definitely an area I'm seeing a lot when I'm doing these prop stack onboarding calls.
• 4:19
  Current value about $730,000.
• 4:20
  Equity position about $330,000 in that asset.
• 4:23
  There's another one in Townsville, which again has been a very popular location for a lot of these investment groups.
• 4:30
  Current valuation is about $650,000, $260,000 equity in that particular asset.
• 4:35
  Now then it's got two Perth assets as well, which was purchased coming up three years ago.
• 4:40
  One in Clarkson, which is probably a slightly lower socio-demographic area here in Perth, so wouldn't classify it as blue chip.
• 4:47
  However, in a lot of instances, it's becoming a better suburb.
• 4:52
  That's now at $850,000 with about $350,000 of equity.
• 4:56
  And they've got an Armadale asset, which was flooded with a lot of investment groups, especially over east in the beginning of the Perth run.
• 5:03
  That one's at $745,000 value with about $150,000 equity.
• 5:06
  So it looks like they've restructured some finance, why there's not so much equity in that one.
• 5:10
  Now, let me talk through the high-level figures before I get a deep dive.
• 5:13
  Portfolio value just under 3 mil.
• 5:15
  So for those that are listening, this is all visual.
• 5:17
  I've got what the portfolio looks like.
• 5:18
  So 2.98, so done well.
• 5:20
  Pushed hard, it looks like, over the last three or four years.
• 5:23
  Equity positions just over 1 mil.
• 5:25
  So there is a fair bit of debt there.
• 5:26
  So we're looking at 1.89 mil worth of debt.
• 5:28
  Debt, cash flow at the moment's costing about 33K a year.
• 5:31
  Obviously, these assets were purchased before the budget, so they've got the utilisation of the negative gearing benefit at tax time.
• 5:37
  Debt to income is pushing five times at the moment, and cash to debt is only at 2%.
• 5:46
  So overall, LVR about 63%.
• 5:47
  So conscious I've thrown a lot of figures at you here, but overall they've pushed pretty hard in the last couple of years and have seen a lot of growth in these assets.
• 5:54
  What would be your first thought looking at this portfolio?
• 5:57
  Yeah, we went through this obviously during the week, Rhys, and one of the key concerns with this client, which is important for listeners to understand, is the context.
• 6:05
  They have ran into some cash flow issues recently because of interest rate environment.
• 6:10
  So at the start of the year or late last year, the holding costs were okay for them.
• 6:16
  They got to the point now where something's got to give.
• 6:20
  And like I said, we don't advise to sell just for the sake of selling.
• 6:23
  It's either to do with...
• 6:26
  lifestyle or cash flow issues and or opportunity cost.
• 6:29
  And this is a scenario of both opportunity costs because they're at their limit in terms of their serviceability and there's no foreseeable increase in income and they've got cash flow constraints.
• 6:39
  So looking at that portfolio, the two assets that I'd be considering selling first out of that portfolio.
• 6:45
  And for those listeners, all these four assets are in investment grade locations whereby we'll all at some point
• 6:54
  None of those four assets, I believe, remain in the portfolio long term.
• 6:58
  None of them are considered AAA assets.
• 7:00
  So do we go out and sell four overnight?
• 7:02
  Absolutely not.
• 7:03
  Do I think there's still some upside in those Perth assets?
• 7:06
  Yes, I do.
• 7:07
  I think when interest rates start to come off, they'll go on another slight run.
• 7:11
  But certainly Gladstone and Townsville would appear to be somewhere close to the cycle.
• 7:17
  The top of the cycle is probably pre-budget this year.
• 7:20
  So obviously they've left some money on the table, but not selling them more premature.
• 7:25
  But I think looking at that holistically, I'd be looking to offload or divest Gladstone and Townsville, restructuring the finance to make sure that a lot of the debt is increased on Armidale and Clarkson because I get negative gearing benefits on that.
• 7:41
  So if I had some money in the offset of those accounts, I'm pulling it out because I want to get a negative gearing benefit on that.
• 7:47
  which means I'm going to buy the next asset at a lower LVR, probably likely at 60 or 70%, which means it's likely to be neutrally or positively geared.
• 7:56
  So then I'm still getting the negative gearing benefit on anything that I own in my portfolio pre-budget, but my next purchase will be targeting cash flow.
• 8:06
  So it's not a burden on their cash flow, which come up in conversation in their meeting that was hampering their ability to hold these assets.
• 8:13
  You talk a lot about that from a cash-to-debt perspective and especially in a rate-increasing environment how vital that is.
• 8:19
  So this particular example, and this is what I've been seeing a lot with the portfolio, is low cash-to-debt but decent equity position, so 2% cash-to-debt at the moment.
• 8:28
  What sort of advantages is there going to be besides the obvious, giving that extra level of support or comfort in case of a rate rise?
• 8:36
  What's the advantage of having that surplus cash there for potentially...
• 8:41
  Cash to debt is so important.
• 8:42
  It means you're never in a forced selling situation.
• 8:45
  When you see people in financial stress, that's when you get into a fire sale situation.
• 8:52
  The bank is coming for you and you've started to not meet your repayments and you don't get a situation where you're in a position where the bank is going to reclaim your property.
• 9:01
  I'm negotiating on one of these at the moment, Reece, in Victoria where I'm buying it off the bank.
• 9:07
  Because the purchaser, the vendor or the owner of that property could make their repayments.
• 9:13
  They were well behind in terms of what they owed the bank would end up getting refinanced to a private lender.
• 9:21
  And the lender is now taking that, essentially pulled on their margin call to take that asset off them.
• 9:27
  So now I'm dealing directly with the lender, the financier, who has X amount of debt on their books and they want to clear that debt.
• 9:33
  So this particular asset's likely worth $3 to $3.2 million, but the debt on what it owes the bank is about $2.4, $2.5.
• 9:39
  So I'm going to be able to pick up an asset, potentially $500,000 or $600,000 under $1,000
• 9:45
  what market value would suggest because they just want to clear their debt.
• 9:47
  They've got no interest in ...
• 9:49
  Ideally, they would like to sell it for more, but at the end of the day, their baseline is what debt they've lent against that particular property.
• 9:57
  I can pick that up at a massive discount.
• 9:59
  You don't want to be in a situation where you're on the other end of that transaction, where you're the seller that is forced to sell it.
• 10:04
  When people get their debt to income or their cash buffers lower than 5%, you're playing on a knife's
• 10:13
  You get injured playing sport on the weekend and you need time off work, which is unpaid or unexpected pregnancy.
• 10:21
  All of a sudden, we've gone from two incomes down to one or there's a health emergency which requires funds or a family member particularly needs money.
• 10:31
  I've run into that at certain times where you think you're financially okay and an event comes into play that you didn't foresee and you need that cash.
• 10:40
  But when you're at 10%, that gives some flexibility in terms of not being in a position where you're actually forced to sell something.
• 10:48
  And that's why the cash buffer is so important in this particular scenario here.
• 10:51
  Not only is their cash buffer below 3%, they've reported that they're running into cash flow concerns with the current interest rate environment.
• 10:59
  So we want to be on the front foot with that.
• 11:01
  So they don't need to sell and they're not going to take an offer that is a fire sale.
• 11:07
  They come from a position of strength where it's on their terms.
• 11:10
  That's why it's important.
• 11:11
  When we're looking at the sale of the asset as well, the big question that I've had come up and a lot of these end up getting referred to our sales advisory team, but a lot of the questions that I'm asking is,
• 11:23
  Do I sell it now?
• 11:24
  Because a lot of these markets, right, have probably starting to come off.
• 11:28
  And people have got that psychological feeling, oh, I'm going to wait until the sentiment changes and the interest rates drop before I sell it.
• 11:34
  So that's the one question that keeps popping up.
• 11:36
  So I'm sure there's a lot of listeners that would have that.
• 11:38
  The other one is selling it with or without a tenant.
• 11:41
  And when is it – it's obviously going to be circumstantial depending on the market conditions and that's why you want to go through that sort of tender process with local agents to understand the market.
• 11:49
  But when is like in a general rule a good time to sell with a tenant in there and when is not or is there no general rule?
• 11:56
  No, there is.
• 11:58
  In blue chip markets, AAA markets that we buy in, we want to make sure that we sell them when they're vacant.
• 12:03
  The reason is because we typically, those AAA locations, those blue chip assets we talk about, appeal to own occupiers.
• 12:10
  And when there's a tenant in there, obviously...
• 12:14
  won't appear to own occupiers because they can't move in yesterday.
• 12:18
  They're going to have to wait.
• 12:19
  If it's three months, there might be some room for grace because if it's their dream home, they can probably wait three months.
• 12:25
  But regardless, we want to get in there, tidy the property up, spend the money.
• 12:29
  If we're going to spend a dollar to make three, we want to do that.
• 12:31
  Painting, gardening, landscaping, all the things that you can touch, see and feel.
• 12:35
  and we want to get it presented, you know, staging furniture.
• 12:38
  So then when that family walks in, that own occupier, you know, they've absolutely fallen in love with that property and pay your premium for that.
• 12:46
  Investors are never going to do that.
• 12:48
  So that's if you've got A-grade stock, but the stock we're talking about here is, you know, C-grade stock, therefore it's investor-grade stock.
• 12:56
  So having a tenant can be a positive because often you're selling back to other investing groups.
• 13:02
  The problem that we have now, these markets, Townfield and Gladstone, the investors are starting to withdraw from the market.
• 13:08
  So you run the risk that there is less buyers in that market than there was six to nine months ago.
• 13:14
  And when you're trading these markets, when you're buying in volatile areas where there is patterns of high investment activity that come into the market for two or three years and then exit.
• 13:25
  Timing is so important.
• 13:26
  If you can get in there early, but you want to exit at the FOMO stage when all the investment groups are paying well above market valuations to buy it, that's passed.
• 13:34
  So you are leaving some money on the table and that's a given.
• 13:37
  But the likelihood that the market's prices are going to continue to fall is high.
• 13:42
  So albeit you're not selling at the peak and you might be leaving 10, 15% on the table, the opportunity cost of the market you're about to enter is high.
• 13:49
  is more significant than what you're going to lose on this asset.
• 13:52
  And further to that, some of these markets, if you wait another 12, 18 months, there may not be a buyer.
• 13:57
  You're not talking about a 5% to 10% haircut.
• 13:59
  You're talking about a 30% to 40% haircut.
• 14:01
  So that becomes really important.
• 14:04
  So it is subjective, but quality A-grade stock, we want to be selling it vacant.
• 14:10
  Investor stock, there's a case either way.
• 14:12
  I think that's pretty valuable insight because there's a lot of clients, like I said, in similar situations where they're just wondering, do we make a move?
• 14:19
  Do we hold?
• 14:20
  Do we wait for the sentiment?
• 14:21
  Sentiment's the big one, right?
• 14:22
  I think a lot of people are – sentiment's a little bit low, although we're going to talk some positivity later in the episode with what we've seen in the last week's worth of data.
• 14:30
  But a lot of people are almost waiting for that.
• 14:32
  I'm waiting for that next move of the interest rate.
• 14:33
  I'm waiting for it to change.
• 14:34
  But by that point, they could have lost 10%, 15%.
• 14:37
  Yeah, that's it.
• 14:38
  You want to take action, but you want to firstly know your numbers.
• 14:41
  And every asset, every sub-market is very, very different.
• 14:44
  So it's important to get advice.
• 14:46
  Not just from us, hypothetically, from your property advisor, but getting localised knowledge because every market is different.
• 14:52
  How you present and how you take a property to market will depend on the performance and who's buying in that area at that particular time.
• 14:58
  So our job with our clients, when we do, we call it sales advisory, when we meet with our clients and give them advice on...
• 15:06
  Setting up a campaign, we do exactly that.
• 15:07
  We'll go out and tender five agents.
• 15:09
  We'll get a feel, a pulse check of what's happening on the ground and what the best campaign is going to be.
• 15:13
  We'll have a look at what agents are carrying the most listings because if they've got 25 listings, we don't want to make it 26, do we?
• 15:19
  We can get a hungry agent saying they've got five that we know is going to work that listing for.
• 15:22
  You can get every dollar they can.
• 15:24
  There's a lot of variables that come into play when you're looking to sell the asset with the overarching goal of getting the maximum price you can.
• 15:31
  So this particular example here, Lachlan, you know, the big concerns you've got with this is around the cash flow, cash to debt perspective, but actually just the cash flow, you know, in a rising rate environment.
• 15:43
  They've made the move.
• 15:44
  They've managed to sell off one or maybe even two of these regional Queensland assets.
• 15:50
  Freying up the cash flow is important, so mitigate some of their risks in for any future events.
• 15:54
  What sort of asset would you be looking at to add into that portfolio?
• 15:58
  Yep.
• 15:58
  So one or two options.
• 15:59
  The first is commercial because cash flow is an issue for them.
• 16:02
  So we need to get an asset that's going to yield north 5.5% because that 70% to 75% LVR, which they'll be able to do, it's going to be neutrally geared.
• 16:11
  So there's no tax benefit post-budget in negative gearing properties and they've illustrated cash flow issues.
• 16:18
  So that's one option.
• 16:19
  And or the second option is high yielding residential assets.
• 16:23
  So that would be in the form of a
• 16:25
  wholesale or resale unit.
• 16:27
  In this current environment, Rhys, a Melbourne wholesale unit or likely two Melbourne wholesale units would be my preference for this specific portfolio because they probably don't have the horsepower to buy commercial, but they can still get exposure to commercial yields through residential units.
• 16:46
  Lachlan, what do you mean by a wholesale versus a retail unit asset?
• 16:51
  So we've discussed this a little bit on the podcast previously, Reece.
• 16:55
  So retail unit is exactly that.
• 16:57
  It's an individual strata unit that's on the market or off the market where you're buying that unit individually in a complex.
• 17:05
  That might be a complex of six.
• 17:07
  An own occupier lives in that, takes it to market, and you transact on that individual asset.
• 17:12
  The wholesale scenario is when you are buying one of a group.
• 17:16
  So situation there, we've purchased one in Elwood, where we bought a complex of seven units in one line.
• 17:25
  And we've got that at a discount because there's not the buy pool shrinks when you're buying the whole complex.
• 17:32
  There isn't many buyers.
• 17:34
  that can participate at $2.5 to $3 million.
• 17:36
  So we're able to buy that at a discount.
• 17:38
  So an asset individually, each particular unit adds up to $3 million.
• 17:43
  We're able to buy that at $2.5 because of that scenario of buying in one line.
• 17:48
  And then as an investor, they get to get access to...
• 17:50
  to that wholesale deal and buy an individual unit from that complex.
• 17:55
  That's how you're able to buy these at a discount because as a group such as us or another group or another investor that can take the risk or has the ability to buy at a larger price point, you get exposure to those discounts.
• 18:10
  And for those that are listening, I'm just getting up a couple – sorry, for those that are listening and don't have the pleasure of viewing this, I'm just getting up a couple of examples of some unit assets that we've acquired off-market on the wholesale arrangement you just mentioned there.
• 18:23
  And they can range, right?
• 18:23
  So your one bet is you're actually looking at up to 7% yield and as you said, they're neutrally cash flowed from day one.
• 18:29
  Then once you're starting to go into a bit of a higher land component –
• 18:33
  and maybe have slight renovations done, you're seeing a little bit more of an expensive price point, but you're actually probably getting a better quality asset at the end of the day as well.
• 18:41
  Yeah, and both scenarios we're seeing yields well above 5.5%, sometimes into the early sixes.
• 18:46
  So in today's cash rate environment, LVR at 70 to 75%, it's neutrally geared.
• 18:51
  So that solves that cash flow story.
• 18:54
  And wholesale in general, you think about that in residential property and or commercial, often we get presented a distressed situation where a landowner has four or five assets in their portfolio.
• 19:05
  individually we'll have to pay close to market value for each of them individually asset.
• 19:10
  But if we take all five off their books to the lender, to the bank, we'll get that at a 10%, 15% discount because of the ease of the transaction.
• 19:18
  The bank then don't have to go and deal with, you know,
• 19:21
  five different campaigns, five different buyers, we say, we'll buy the wholesale, the entire portfolio, but we want a discount for that transaction.
• 19:29
  So that's how the wholesale retail element works.
• 19:31
  And you're going to see more of this as more people get into financial distress where banks and private lenders, we know there's been a huge movement in the private lending space,
• 19:40
  want to recruit their losses, look at the Bathurst Group's a good example.
• 19:44
  They are now selling off parts of their portfolio and there's going to be discounts for those that can move quickly to take the debt off the lender's book.
• 19:53
  Looking at the data, the data is pretty fascinating on Melbourne units and Melbourne in general actually over the last week and even over the last month.
• 20:01
  So Catality recently came out with their monthly report and Melbourne units are the only market in Australia from a capital city perspective that's actually seeing a tick up.
• 20:10
  So it's showing growth.
• 20:11
  It's seeing growth.
• 20:12
  So it – and actually as a market as a whole, if I'm reading these figures out right now in the last week, Sydney was down 0.3%.
• 20:20
  Melbourne was down 0.2%.
• 20:22
  Brisbane was down 0.43%.
• 20:24
  Adelaide 0.39%.
• 20:25
  And Perth 0.31%.
• 20:27
  So Melbourne was actually, although still slightly down, the best performing market in the country last week.
• 20:32
  Yeah, and then the sub-market saying that Melbourne units is in fact going up is contradictory to the trends or the headline media.
• 20:39
  It would be interesting how these markets continue in a lot of a rate-rise environment, but those figures there, Reece, has really put the spotlight on Brisbane.
• 20:49
  We spoke about this.
• 20:51
  Earlier this year, we had Josh Coleman from Brisbane coming on there, talking about the concerns around the Brisbane market.
• 20:56
  That episode copped a lot of criticism in the feedback that people support in the fundamentals of Brisbane.
• 21:03
  I sort of agree with Josh that it was potentially due for a correction, if not a serious stagnation and almost 0.5% negative, almost 0.5% market falling in Brisbane is significant.
• 21:17
  And I think people on the ground there,
• 21:19
  would be concerned in their investments.
• 21:22
  And a rolling four-week average, Melbourne's still the best performing as well.
• 21:25
  So obviously a good week last week for Melbourne, but actually on a four-week rolling average.
• 21:30
  The big one is the auction clearance rates as well.
• 21:32
  So Melbourne's seen a significant uptick in auction clearance rates over the last week, 62% this week as opposed to 56% the week before.
• 21:42
  Comparing that to the only comparable market for Melbourne, Sydney's flatline at 54% this week and last week.
• 21:48
  Again, that's your demand indicator.
• 21:51
  Seeing interest rates, if we can start to see that get closer to 70%, we are very much getting to a balanced market for Melbourne.
• 21:59
  So encouraging signs, albeit, as I said in last week's podcast,
• 22:04
  I still think we're not going to see across the board positive median house price growth in Melbourne.
• 22:13
  I just think that top-tier market still has some room.
• 22:16
  So when we say top-tier, above $2 million is still falling, but certainly the more affordable prices are rising in that unit market.
• 22:23
  And there's a science behind that.
• 22:25
  We did our sixth episode, I think Jonathan went back on the podcast 18 months ago.
• 22:29
  We spoke about units in general.
• 22:32
  And again, cop some criticism around the fact that units don't perform, that people were quite sceptical for my comments to suggest that units were probably going to outperform markets over those 18 months.
• 22:45
  If we look at the data, I'm sure we got it there, Reece.
• 22:48
  units have well and truly outperformed houses in the last 18 months.
• 22:51
  And the reason behind it is because of the replacement cost factor.
• 22:55
  And this is what people fail to understand.
• 22:56
  At the moment, if you look in Melbourne, there's often a three, sometimes $500,000 difference between the cost of what you're buying a unit for and what it would cost to replace that unit.
• 23:08
  So in a complex
• 23:10
  for them to, you know, buy the land and build the units that are in their current form, whether it's eight units that are two by ones with some level of amenity, there's a $300,000 to $500,000 discount on what you can buy it for today for what you'd have to build it for.
• 23:30
  So if you look at, you know,
• 23:32
  mean reversion, like we've seen in most markets across Australia, when there's a significant discount, you see a price inflation up until that replacement cost and often beyond that.
• 23:42
  So in a national shortage of property, where replacement cost exceeds what the established prices are, you typically see prices go on a run.
• 23:53
  Now, we've mentioned this on the pod numerous times, right?
• 23:57
  But I think it's important in case you have any new listeners there to explain the difference between a unit and an apartment complex as well, because there is a big difference.
• 24:04
  The reason I want to get your opinion on that is I am seeing a lot of people that have, and I've been seeing this for the last 12, 18 months, right, in different areas, but definitely in the Melbourne unit market where...
• 24:16
  They're buying in the areas where people are talking about, but the asset quality itself is compromised in some way, whether it's on a main road, there's some other complications with the asset.
• 24:24
  When we're saying units here from a value perspective, what are we talking about?
• 24:28
  And B, what are some like the key fundamentals you should be looking at when you are looking to get into one of these assets?
• 24:33
  Yes, so there's a sharp difference between apartments and units, and we've made that clear on the podcast previously.
• 24:39
  So units are typically in a complex less than 20, ideally less than 10.
• 24:43
  So it might be single, double level, where you're still getting exposure to land value.
• 24:48
  So you might be buying eight units.
• 24:49
  The example I spoke before about, oh, there's eight two-by-ones on 750 square metres of dirt.
• 24:57
  That's what's important.
• 24:58
  So you're still getting good exposure to that land, and that's typically what appreciates.
• 25:02
  What an apartment is, is what not to buy.
• 25:05
  A lot of people go and buy – the story here a lot about Melbourne, all the vacant properties in South Bank.
• 25:14
  There's all these one-betters that there's a lot of international money that some buildings – and there's no – some buildings, the power hasn't even been turned on because they've felt vacant for so long.
• 25:25
  Yeah.
• 25:26
  And they're the ones not to buy.
• 25:27
  So if you're in a complex of 30, 50, 200, 500 apartments, you are getting very little exposure to land value.
• 25:34
  So we want to avoid them.
• 25:35
  They come with higher body corporates.
• 25:38
  So your holding costs on them are typically a lot higher.
• 25:40
  We're these units.
• 25:42
  There's no lifts.
• 25:43
  There's very little common property.
• 25:45
  They're typically built prior to the 1980s often.
• 25:50
  So again, built well, but strong exposure to land value.
• 25:54
  Do not be buying airspace because that will not appreciate in value.
• 25:58
  We mentioned that about some of the auction results and Melbourne up 6% in the last week and in the 60s now.
• 26:04
  Interesting data came out recently from Domain where it actually showed the percentage of auctions that have now gone to a private treaty.
• 26:11
  Obviously, we've touched on Sydney and Melbourne because they're the two most comparable markets with the others not really an auction-driven market like those two.
• 26:18
  Sydney sent 126%.
• 26:20
  uptick from February to July's figures and Melbourne's in 96%.
• 26:24
  So just to give you some context, 24.9% private treaty for Sydney in February, 2026, up to 56% now.
• 26:32
  And Melbourne, 29% in February, up to 58% in July.
• 26:37
  Are we starting to see the death of an auction, auctions in Sydney and Melbourne?
• 26:41
  And is this common when you see a bit of a downturn that people are fleeing away from putting it under the hammer?
• 26:47
  For sure, in a hot market, it's the most transparent environment and typically gets the best outcome for the vendor because you create competition.
• 26:54
  In a softer market, what kills a campaign, no offers at an auction, gives you a very weak position to negotiate from.
• 27:03
  So due to a lot of failed auctions, and we've seen a lot of them in Sydney, we're over there again next week.
• 27:11
  Reece, the last time I was there, I went to three auctions of which all three got passed in.
• 27:16
  You come from a very weak position when trying to get a price.
• 27:18
  So I think this will be a common occurrence where you're seeing more private treaties and auctions in Melbourne and Sydney for the next six to nine months.
• 27:25
  But when you see the market start to pivot and start to see some positive sentiment,
• 27:32
  they'll naturally revert back to an auction environment.
• 27:34
  And the reason Sydney and Melbourne, particularly Melbourne is such a strong auction environment, and that too is Sydney, is because the other markets, you've got a cooling off period of three days if you're not at auction.
• 27:48
  So essentially, what does that mean?
• 27:50
  It means I can go and buy a property, sit on it for three days,
• 27:54
  lock it away, no other competition can bid on it.
• 27:57
  And then if I don't feel confident or I can then afford the time to do my due diligence, I can pull out.
• 28:03
  We can't do that at an auction.
• 28:05
  And in Sydney, there's gazumping.
• 28:06
  So I've bought a property and then three days later, someone else comes in and gazumps.
• 28:11
  and outbids me.
• 28:13
  What environment does that create any level of transparency?
• 28:18
  Hence why Sydney and Melbourne always go to auction because under the hammer, that's it.
• 28:21
  The deal's done.
• 28:22
  No one else can buy it off me.
• 28:24
  As a buyer, I've committed to the property.
• 28:26
  For the seller, they know they've sold it.
• 28:28
  I can't turn around three days and go, actually, I've changed my mind.
• 28:32
  When I heard three, four years ago, Perth's going to become an auction state, so is South Australia, I couldn't have disagreed more because the fundamentals of how
• 28:42
  the contracts are conditional upon the vendor and the buyer committing to that particular purchase or sale are very different to what they are in Melbourne and Sydney.
• 28:53
  So there is no need, there is no gazumping, there is no cooling off periods.
• 28:56
  If I put a cash offer down in Perth,
• 28:59
  With no terms, that's it.
• 29:01
  The deal is done.
• 29:02
  I can't get the zumped and I don't have a cooling off period.
• 29:04
  So why?
• 29:05
  I don't need to go to auction to create that environment.
• 29:07
  So there's no fundamental need to do an auction in Perth and or South Australia, like there is in Melbourne or Sydney, to create those unconditional frameworks.
• 29:15
  So that's why Perth will never be an auction state.
• 29:19
  I'll never say never, but unlikely to become an auction state.
• 29:22
  Gazumping.
• 29:23
  I've learned something new today on gazumping.
• 29:25
  Put in chat, JP, and I've looked at gazumping.
• 29:27
  It blows your mind.
• 29:29
  It would be disheartening to buy a dream home and then get gazumped.
• 29:31
  Just to close out on the market update then for the week.
• 29:34
  So big one as well, right?
• 29:35
  Sydney and Melbourne perform better, although in a negative decline for the week, perform better than Brisbane, Adelaide, and Perth.
• 29:43
  Now, we've spoken about this two-speed economy for the last six, 12 months with Brisbane, Adelaide, Perth running at one speed versus Sydney and Melbourne.
• 29:51
  We don't want to call it a bit of heat for that, but you're now actually starting to see it slow down a little bit in those big capital cities.
• 29:59
  Do you think that trend will continue?
• 30:01
  You've mentioned on the pod controversially saying the worst from a Sydney's negative growth per week is behind us.
• 30:07
  And looking at the data, it is trending down that way.
• 30:11
  What do you see happening for the rest of the year with those particular markets versus a Brisbane, Adelaide and Perth?
• 30:16
  It's all going to sit on, not all, but a majority of this is going to sit on the back of what happens with interest rates.
• 30:22
  And I've made a pretty big call that I don't think we'll see a rise in November.
• 30:26
  The caveat to that is we might see one in September.
• 30:29
  But that would, you'll find up until December, that December period is pretty quiet in the markets, Reece.
• 30:39
  So forecasting that if there is a rate rise,
• 30:42
  which goes against the grain of what I expected.
• 30:44
  And it will still surprise me.
• 30:46
  If they're going to do it in the next six months, doing it before Christmas is going to be better than after.
• 30:50
  And the reason for that is 2026 has been a year of a lot of turmoil in the residential market, a lot of shocks, a lot of changes and a really high cash rate environment.
• 31:02
  If we are going to nip inflation in the butt, doing it before spending season, before Christmas,
• 31:09
  is arguably responsible.
• 31:10
  Again, I don't believe in the fact that our only lever is, unfortunately for the RBA, is interest rates.
• 31:17
  It's a terrible way to try to control inflation, but it's their only way.
• 31:24
  would again stall this positive sentiment into a very negative lot of headline media, which would result in correlating falling house prices right into the back end of this year.
• 31:40
  So I do believe some of the best buying...
• 31:44
  Historically happens in the week prior to Christmas because those that have bought things on the market that can't sell them will take a low offer to get a deal done.
• 31:55
  But that could also correlate with very low sentiment on the back of a rate or potentially two, which would be outrageous.
• 32:02
  So I do think it's going to be a negative end in terms of house price movement in 2026.
• 32:10
  But that could set things up for a better 2027 when you could, you know, if we are to get on top of inflation, you know, we know that they don't want interest rates at these sort of heights.
• 32:20
  At some point in time, in the not too distant future, we'll start seeing rates come down.
• 32:24
  And I think that will be the turning point.
• 32:26
  And we're coming into a Victorian election in November, which is
• 32:29
  Looks like there's definitely going to be a change.
• 32:31
  So there is some green shoots there for Victoria that we know they're already in the works.
• 32:35
  Sydney's definitely going to be very reliant on the cash rate.
• 32:38
  And just to close it out, I've got an example here of what cash rate increases and then once they do start to decrease can do to a market.
• 32:45
  I was having a catch up with our economist last Thursday actually and he was showing us some data looking at the cash rate back in post-GFC in 2009 and the graph for those that are viewing right now, you can see the cash rate in the purple versus the Melbourne units in orange.
• 33:03
  did over 30% growth within a 15-month period off the back of cash rate decreases.
• 33:08
  So it shows, you know, once we do get to the peak of a rate environment, we do start seeing a decline.
• 33:14
  That's when we do start to see a lot of value from a buying perspective as well.
• 33:18
  Yeah, that was a pretty sharp decrease in the cash rate.
• 33:21
  But yeah, absolutely, Reece.
• 33:22
  You correlate Sydney and Melbourne with the cash rate and prices do rise in a falling cash rate environment.
• 33:28
  And they do contract in a rising cash rate environment, which we're seeing now.
• 33:32
  So
• 33:32
  You've been listening to the Follow Our Property Podcast.