Latest / The Follio Property Podcast / How Far Can Australia's Property Market Actually Fall? | Canada and NZ Already Answered

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How Far Can Australia's Property Market Actually Fall? | Canada and NZ Already Answered · The Follio Property Podcast

• 0:00
  The Australian housing market has entered a downturn.
• 0:03
  Combined capital city house and unit prices falling for the first time in three years.
• 0:08
  Locking a lot of noise at the moment about we're hitting the bottom of the property market.
• 0:12
  So I don't believe it has and I think there's still a lot of hurt to go into that market.
• 0:16
  New Zealand's down 30% and Canada's down 20%.
• 0:18
  The damage that the main budget did, that's equivalent of 75 basis points.
• 0:23
  It's the unexpected change to the environment that shocks the market and that's why we're seeing a bit of a free fall at the moment.
• 0:31
  We are looking for situations where there is severe mortgage stress.
• 0:34
  People have bought at the peak of the market.
• 0:36
  They can't service their debt.
• 0:37
  Why invest now?
• 0:38
  Why not wait for the bottom of the market?
• 0:39
  Because no one knows when the bottom of the market is until it's in hindsight.
• 0:46
  You're listening to the Folio Property Podcast.
• 0:48
  I'm Rhys Beddle and I'm here each week with my co-host Lachlan Delhanty.
• 0:52
  Lachlan, a lot of noise at the moment about we're hitting the bottom of the property market.
• 0:56
  Yeah, there's an article in the AFR today, Rhys, which is a prominent Sydney agent coming out and said Sydney is officially...
• 1:04
  bottomed out and my concern with that is it was just it was zero substance as to why his rationale was around the fact that sydney's hit the bottom because i don't don't believe it has and i think there's still a lot of hurt to go into that market and it was essentially based on the theory that sydney's never fallen by more than eight percent in the last 20 years therefore
• 1:24
  we're coming up to that, therefore it would be likely that it wouldn't push past that, which is what's happened in the past is an indication of what happens in the future, but there's just no substance behind that article.
• 1:33
  If you're going to make a statement, you want some data or some analytics to back that statement up.
• 1:38
  So Lachlan, I'm going to challenge you a little bit on that one.
• 1:41
  So we got a bit of backlash, I guess, of an episode a few weeks back where it was interpreted that you'd called the bottom of the market, Sydney particularly, actually.
• 1:50
  So what have you got to say for the
• 1:52
  the YouTube haters out there that have been commenting on that over the last couple of weeks.
• 1:56
  Everyone's allowed to comment, Rhys, and we appreciate those comments, so keep them coming in.
• 2:00
  But hopefully those viewers or listeners actually listen to the entire podcast.
• 2:04
  And my reference point wasn't that Sydney hit the bottom of the market.
• 2:07
  In fact, it was the worst was over.
• 2:09
  And what I was referencing is that the market shocks that we saw in the market, the market shocks that we saw at that period of time and the three months leading up to that podcast –
• 2:18
  I don't believe we'll go through that again.
• 2:20
  And I stand true by that, that the worst is over in terms of those macro market shocks and referencing two rate rises at that point and a real war essentially broke out and was unprecedented or unpredicted.
• 2:35
  And throw in the most significant budget in terms of its impact to the residential real estate market that we've ever seen in history.
• 2:43
  That was my reference point that I don't believe we'll see that.
• 2:46
  And the worst was over in terms of the falling of house prices that we're seeing, you know, 2% to 2.5% negative growth per month.
• 2:54
  I was referencing, I don't believe we'll see that same level of fall moving forward.
• 2:58
  It would more likely be potentially negative 1% or negative 1.5%.
• 3:03
  So do I think we've hit the bottom of the market in Sydney specifically?
• 3:07
  No, I don't.
• 3:08
  Do I think the worst is over in terms of the severity of that declining house price movement?
• 3:14
  Yes, I do.
• 3:14
  I don't believe we'll see negative 2% growth per month as we close out 2026 into 2027.
• 3:20
  Big thing, it's all through my feed.
• 3:22
  A lot of articles on AFR recently on this as well, but a lot of articles across the news, podcasts.
• 3:28
  Friend of the show, Lee Van Onselen, talks about this particular subject quite a lot as well through his business and through his media channels as well.
• 3:35
  But it's comparing Australia against New Zealand and Canada.
• 3:40
  I guess similar Commonwealth countries that have gone for big property booms themselves and both now going from Australia
• 3:46
  you know, from a stagnation bid to some sharp declines.
• 3:48
  There's some common themes that I want to get your opinion on.
• 3:50
  But firstly, you know, before I dive into a couple of the figures here, for the headline figures here, what's your opinion comparing the Australian market to New Zealand or to Canada?
• 3:59
  Is there merit in that?
• 4:00
  Or do you think, you know, they're much different markets and they shouldn't be in comparison?
• 4:04
  Our job is to try to predict race in terms of what's going to happen with house prices.
• 4:08
  And to do that, we need to understand data, but we've also got to look at a comparative market.
• 4:13
  So I do think we can draw some conclusions and not throw a blanket that it's going to be a copy and paste effect, cause and effect here in Australia based on exactly what happened in New Zealand and exactly what happened in Canada.
• 4:24
  Because those specific situations were very different in their own dealings in terms of migration, in terms of...
• 4:30
  the restrictions on population growth, their tax policy was different to ours.
• 4:34
  But we can certainly draw some similarities and that's our job today is to unpack where is the bottom?
• 4:39
  How do we identify and what sort of yardstick can we use to try to predict how far this market can fall?
• 4:46
  And I think
• 4:47
  As a reference point, Canada and New Zealand are starting points to that conversation.
• 4:51
  Look, just an overview.
• 4:53
  We won't go deep into the data because it could go over a lot of people's heads.
• 4:56
  But look, some of the core things here from a cash rate perspective or the similar, whatever the cash rate's called in Canada and New Zealand, I'm sure it's called something different, Reserve Bank or something along those lines.
• 5:08
  New Zealand and Canada both hiked harder.
• 5:11
  So Australia currently at 4.35%.
• 5:14
  You've threatened to cancel the podcast if we see a rate rise in November, but there is potential for another rate rise in November, which would potentially get us up to 4.7.
• 5:23
  Canada and New Zealand, New Zealand went to 5.5% and Canada went to 5%.
• 5:27
  Which is massive because that means the serviceability reduces significantly.
• 5:31
  So there's an argument that suggests that almost a full percent in that initial example, higher on a cash rate.
• 5:39
  similar serviceability buses, that means they're getting debt at that level close to sort of 9%, 10%, which would be, I think what that would do to an Australian market, you would be seeing more than double digit growth per month if we were to see rates up at that level.
• 5:52
  Now, the big, there's a couple of variables here that Australia is probably running in a different course to these other countries.
• 5:59
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• 6:02
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• 6:11
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• 6:18
  For a reference point, Rhys, so the listeners, how far did these markets, New Zealand and Canada, fall?
• 6:24
  Yes, since its peak, New Zealand down 30% and Canada down 20%.
• 6:29
  However, the variable I want to throw out here is they did run a lot harder than Australia in terms of price growth perspective.
• 6:36
  So looking at a period since 2022, New Zealand went up 164% and Canada went up 150% versus Australia's 40%.
• 6:43
  Big variable.
• 6:44
  So when you're looking at something we talk about coming off a high base or coming off a low base, they're coming off a significantly high base and I think that...
• 6:53
  Correlation there, when we look at the Australian version of that, if you look at what's coming off a really high base, Sydney's the example, right?
• 7:00
  When debt to income got up to sort of 12, 13 times, which any other market below that might have been Brisbane, nine or 10 times.
• 7:08
  So we didn't see the same level of growth and we haven't seen the same level of interest rate hiking, albeit our inflation certainly be more stickier than that of New Zealand and Canada.
• 7:21
  So as you mentioned there, obviously, from a cash rate perspective, New Zealand, Canada went punched a lot harder than where Australia is right now.
• 7:27
  There's been some commentary I've seen through the media as well, talking around some of the tax policy that came out off the back of the budget, particularly around the negative gearing and what effects that had on the property market.
• 7:37
  Some economists out there are saying that that's potentially two rate hikes worth of damage on the property market.
• 7:42
  More.
• 7:42
  I honestly believe it's more than two rate hikes.
• 7:44
  The damage that the main budget did, that's equivalent of 75 basis points.
• 7:50
  not just because of what the tax policy does to the investor, it's around the sentiment, the shock.
• 7:57
  And that's what happens with markets.
• 7:59
  We talk about sentiment driving markets, Rhys.
• 8:01
  It's the unexpected change to the environment that shocks the market.
• 8:06
  And that's why we're seeing a bit of a free fall at the moment.
• 8:08
  In terms of the direction moving forward, you mentioned that we're gonna get up some graphs, I guess, to go through where we sort of see a market or what sort of data we use to understand when a market is bottoming out.
• 8:21
  Now, we've potentially got a rate rise coming this year, hopefully not, so the podcast remains alive, but we do potentially have some rate hikes in the future here in Australia.
• 8:33
  How far, you see a lot of commentary saying
• 8:35
  this is gonna be the worst correction Australia's ever seen and most likely probably will.
• 8:40
  Where do you see it going over the course of 2026 and will we be in the recovery phase in 2027?
• 8:45
  Well, let's look at the data, Rhys.
• 8:47
  That's the only way I can give my prediction is how far we've fallen in the past.
• 8:51
  That was the fly comment from the Sydney agent to suggest that we can't fall past that.
• 8:57
  I disagree with that notion, we certainly can.
• 8:59
  But one of the stats that has stood the test of time is
• 9:05
  slightly a complicated model, but when the yield curve on any particular asset class falls to the cost of money, that is typically when prices won't get any cheaper.
• 9:15
  So in a residential sense, if your rental yield on a house or a unit in a market
• 9:22
  is to fall and the reasons it would be falling is because a rising interest rate environment.
• 9:28
  So when you look at the markets and go back in history, and particularly here in Australia, you've got to understand the fundamentals of property and it's the economic law of rent.
• 9:38
  And to simplify it, essentially when rental yields,
• 9:42
  get to the point at or above the cost of money, properties will effectively reverse in terms of their capital growth.
• 9:50
  So if you've got a market that's falling, what impacts yield?
• 9:53
  It's the cost, the input of what you cost to purchase that particular property and what rent you get in return.
• 9:59
  And so at the moment we're seeing yields across Australia anywhere from four and a half up to five and a half percent.
• 10:06
  Interest rates are currently at 6.2%.
• 10:07
  So how far logically can these markets fall?
• 10:10
  In my opinion, they will not
• 10:13
  fall any further than the yield line.
• 10:16
  So in a market where you're seeing yields above 6%, it is very unlikely you're gonna see significant price falls because what does that mean in reality?
• 10:26
  Well, people in those markets are looking at two options.
• 10:28
  They need shelter.
• 10:29
  One is to rent or one is to buy a house.
• 10:32
  And if it costs more to rent a property than it does to buy a house, well, then naturally, there's a shift in sentiment and appetite for those funds.
• 10:40
  So tracking the markets across Australia, you'll see a big divide.
• 10:44
  And the one that stands out is Sydney.
• 10:46
  The yield curve versus the interest rate is still so far apart, which would suggest that that market still has a long way to fall in comparison to a market like Melbourne, where that yield curve is much closer and for units almost cross, right?
• 10:59
  It's almost matching.
• 11:01
  Actually, I think it has.
• 11:02
  Where if you compare to units in Melbourne, for instance, that yield curve is now inverted where yields are higher than the cost of money.
• 11:08
  Therefore, we're seeing that market not fall in value, but quite the opposite, increase in value.
• 11:14
  Same as playing out in a market like Darwin, which is at the moment, headline data is reporting positive growth because that yield curve is higher than the cost of money.
• 11:27
  Does that make sense, Rhys?
• 11:28
  We prepped this before and that's probably the most it's made sense.
• 11:31
  So that was – I think what we'll do is I want to show some graphs.
• 11:37
  So for those that are listening, quick plug on PropStack.
• 11:41
  If you haven't already, click the link in the show notes to download PropStack.
• 11:45
  This data will be on PropStack.
• 11:46
  But what I will do is I want to get you to explain a live example.
• 11:49
  I actually think you did explain that pretty well, really dumbed it down.
• 11:52
  But we'll go some live examples from, say, Perth or Melbourne just as an example so people can actually see that to live.
• 11:57
  Okay.
• 11:57
  Before we get to that, though, I just want to round off the New Zealand and Canada story.
• 12:02
  We're not a political podcast here, Lachlan, so we won't go down the political angle.
• 12:05
  But one of the big things there from a price decline perspective of both countries was migration.
• 12:11
  Now, Canada had some strict migration caps, I guess, in terms of who they were letting in or what amount of skilled people they were letting into the country.
• 12:19
  And New Zealand saw a massive uptick in terms of Kiwis coming across the ditch to Australia as well.
• 12:25
  Do you see, you know, from Australians, an immigration policy at the moment on how it currently stands?
• 12:30
  Is that going to be a protector of any sort of price decline like what we've seen there?
• 12:35
  With the Labor government, the ironic thing is, Rhys, if you correlate when Labor are in a position of power, overlay that with median house prices, you typically see quite inflated house prices during their terms.
• 12:49
  And the reason for that is because they're very pro-migration, which is very much a demand indicator.
• 12:54
  So...
• 12:55
  when forecasting out, we've still got, you know, you would think a minimum of two years of a Labor government, so therefore migration is still going to be very positive.
• 13:03
  It would be a one nation or potentially coalition government which would change that migration.
• 13:07
  So in the short term, no, I don't see a massive reduction in migration, but medium term, that would suggest, and that's what we saw in Canada, that's what we saw in NZ, is, you know, if you reduce migration and
• 13:23
  Canada was an extreme version where it was, they've had negative overseas migration and therefore negative population growth rates for almost a two year period which has had a dramatic impact on house prices.
• 13:36
  So there's an interesting balance and our job is a huge part of what we do is population growth forecasting in terms of where is the national migration.
• 13:46
  gravitating to, and it's typically around jobs, but equally where are the internationals moving to?
• 13:51
  And we do have a two year runway while the Labor government's still in play, where we're still going to see a very strong population.
• 13:57
  Interesting antidote that, as you say, Matt, I thought might be a good reference point and get your opinion on it.
• 14:02
  Just to see if something like this does happen in Australia, will we see the same impact?
• 14:06
  I was having a catch-up call with a good mate of mine who lives in Vancouver.
• 14:09
  He's been there for 15 years.
• 14:11
  Asking him, you know, he's asked me about property.
• 14:14
  He maybe lies and says he dips into the podcast here and there.
• 14:17
  Did you talk about your place in London?
• 14:20
  We did, we had a bit of a London, Vancouver takeover.
• 14:22
  But what he did say was fascinating.
• 14:24
  So I picked his brain, he's an animator, right?
• 14:26
  So he's not a property guy, but I picked his brain as much as I could on the property market.
• 14:31
  What he did say, I asked him, oh, where are you living?
• 14:33
  He's like, I'm still in the same flat that I saw him in five, six years ago.
• 14:37
  I'm like, oh really?
• 14:38
  He was downtown in the hustle and bustle and he's like, they put rent caps in.
• 14:42
  So I'm paying half of the rent for what a new place would get in the local area.
• 14:46
  So he's like, I'd be stupid to leave.
• 14:48
  Because the rent cave has been enforced.
• 14:50
  And what's the government trying to do here?
• 14:52
  Putting rent caps.
• 14:53
  So then your landlord is stuck with someone paying half the market rent and it drives investment out of the market.
• 14:59
  So there's a perfect example of why we don't want to enforce rent caps.
• 15:03
  He wants to buy a house too.
• 15:04
  He wants to buy, but he's just like, look, I'm saving money at the moment.
• 15:07
  I just don't see- I just can't leave this house because then I lose that rental cap.
• 15:12
  Yeah, that's not...
• 15:13
  So I guess we can learn, Rhys, and this is the big thing.
• 15:16
  We can learn a lot from what other countries have done.
• 15:19
  And I don't think you look back, particularly look at the New Zealand example, you cannot say their economy and their quality of life is in better shape now than it was four or five years ago or as little as three years ago.
• 15:33
  Yes, three to four years ago, property was unaffordable.
• 15:38
  But everyone was... Employment was strong.
• 15:40
  The economy was prospering.
• 15:45
  We've seen huge amounts of migration from New Zealand to Australia because everyone said life's really tough in NZ at the moment.
• 15:52
  It's hard to get a job.
• 15:52
  Wages are lower.
• 15:54
  The economy is really struggling.
• 15:56
  So Australians, if we sit here today, do we want to walk the footsteps of what New Zealand have done or even Canada?
• 16:03
  I don't think so.
• 16:04
  And this is the problem.
• 16:05
  We've got a government that's seen firsthand what not to do.
• 16:09
  And we're following the same pathway, Rhys.
• 16:11
  So that's the political rant over.
• 16:14
  But we need to learn from that.
• 16:16
  And then you look at the, sorry, one last thing on the New Zealand thing.
• 16:18
  You look at New Zealand right now and another thing, you know, we're going to do an episode coming up to talk about the New Zealand property market as well because we are.
• 16:24
  It's a great opportunity to buy.
• 16:25
  Like it's, you know, no stamp duty, no capital gains, and it's coming off a 30% fall in house prices.
• 16:33
  Yeah, there is opportunity, but you've got to be selective.
• 16:35
  And there's a lot of Australians who are starting to utilise that, right?
• 16:39
  Yep.
• 16:39
  So, you know, could this same thing happen in Australia?
• 16:41
  We get – we need to pump – we have a serious correction.
• 16:44
  We need to pump up the property market and then we get a load of foreign investors in which we've just had caps on for the last couple of years.
• 16:49
  Let's talk through some opportunities in the current market and if conditions do sort of trend towards all-time, you know, price declines or all-time lows.
• 16:59
  Where, from a market perspective, where are going to be the best opportunities?
• 17:03
  In a dip race, there is almost an abundance of opportunity, or there appears to be.
• 17:10
  But a lot of it is smokes mirrors and a lot of it comes with issues.
• 17:14
  The reason they're selling certain sites or certain assets is because they couldn't make it work and therefore they need to offload them.
• 17:20
  So I had this conversation with a very good friend of mine that was looking
• 17:25
  For a property in Victoria, and on face value, the property was a steal because it was 300 grand below the suburb median.
• 17:33
  But there were so many issues with this asset, and my advice was, and trying to educate that particular friend, that you are buying at a discount for a reason because it's always going to be traded at a discount.
• 17:44
  because of the things that are wrong with that location.
• 17:48
  I won't go into details around the due diligence, but it failed.
• 17:51
  Of our 25 due diligence checks, it failed about 15.
• 17:55
  So if you're ever going to be selling that property at a discount, even if the market picks up as we expect, you're never going to get the premium for it because the next buyer will have to pay it at a discount.
• 18:05
  So the same is true in a market.
• 18:06
  So it's a time to be more selective and it's...
• 18:10
  And as an investor, this is a difference.
• 18:13
  Our job is to do what's best for our clients with the investment hat on.
• 18:16
  And to do that, we're looking for the best deals and often those deals come on the back of stress.
• 18:23
  And I don't want to sound like a capitalist when I say that, but we're looking for opportunities where people need to sell.
• 18:29
  and take the emotion aside, and that's our job is to not look at the emotion, to represent our client, the investor.
• 18:35
  We are looking for situations where there is severe mortgage stress.
• 18:38
  And in these times, and in times, our reference point, you go back to the early moments of COVID or then back to the GFC, people have to sell.
• 18:46
  They have bought at the peak of the market.
• 18:47
  They can't service their debt.
• 18:49
  And we're seeing this take place.
• 18:51
  The Bathur Group is an extreme example of where they've taken on way too much private debt
• 18:57
  They've been funded into the peak of the Sydney cycle, and now there's been a contraction in their end values, and they're defaulting.
• 19:04
  They can't continue to essentially pay their bills, and the flow-on consequences are massive.
• 19:10
  But for someone else, that represents a significant opportunity.
• 19:15
  These private funders are in a lot of stress.
• 19:17
  They've got obligation to their investors that they can't pay out.
• 19:19
  So now everyone's trying to get out.
• 19:21
  And so those that are financially in a good cash position, that's why we talk about cash to debt and those sorts of things, can take advantage.
• 19:29
  And you can buy things at a significant discount.
• 19:32
  Everyone's like, cents in the dollar.
• 19:33
  Not cents in the dollar, but we could be talking 40, 50% discounts on opportunities because of the need to sell and sell very quickly.
• 19:42
  And if you are in a position financially where you can take advantage of them, that's when you get five, six, seven extra returns because you've bought at a really bottom point in the market.
• 19:52
  But not only that, you bought at the bottom of the market where there's been financial stress in that equation, which meant you've been able to buy at a further discount.
• 20:00
  and you've got the ability to hold that through a period of uncertainty, and that's when you get your sort of extra turns on the other end.
• 20:06
  So they are difficult to find, but those opportunities are out there, and they're becoming more frequent as this uncertainty and this downturn lingers, and it's not gonna go away overnight.
• 20:19
  So the longer this hangs around, the more financial stress people are gonna find themselves in, the more opportunities for those that have come into this
• 20:27
  with a really strong cash position, probably haven't leveraged themselves too aggressively.
• 20:32
  There's going to be a lot of landowners that have bought multiple properties in various vehicles over the last couple of years, they're going to find themselves in stress.
• 20:43
  For my clients and our investors, we want to be in a position where we can capitalize on those opportunities because that's our job.
• 20:50
  Big question we're constantly getting within our business over the last couple of months is,
• 20:55
  why invest now?
• 20:56
  Why not wait for the bottom of the market?
• 20:58
  So it'd be good to get your opinion.
• 21:00
  There's probably a lot, like that's a common question that we get from new investors, definitely.
• 21:04
  Maybe the more sophisticated experienced ones have been around a few cycles before, so they get it.
• 21:09
  But definitely from a first-time investor or maybe a mum and dad investor, let's just use a perfect example, who's probably just had equity for the first time in their life over the last five years, they're almost like, well, I'll wait in six months' time.
• 21:20
  What would you say to them?
• 21:21
  Like why would now be the right time or why would now not be the right time for them?
• 21:24
  because they must be the experts, Rhys, because they know exactly when the bottom of the market is.
• 21:28
  And no one knows when the bottom of the market is until it's in hindsight.
• 21:31
  And that's a lesson I've learned over a long period of time.
• 21:34
  We track the data better than anyone else in the industry, I believe.
• 21:38
  And I can't sit here and say, there's a lot of theory, there's a lot of science, and there's a lot of data I track to know when we're getting close to it.
• 21:45
  I'll certainly know at some point when we're past it, but I'm not even brave enough to call.
• 21:51
  I'll know when the bottom of the market is.
• 21:52
  But I'll know when we're at a period in time when there is enough uncertainty that I've bought well enough.
• 22:00
  to offset the risk of further price falls.
• 22:03
  Does that make sense?
• 22:04
  Yeah.
• 22:04
  And if you're buying something at a significant discount, so a macro market has come off 10%, hypothetically, and was to fall another 5%, and I've bought an asset
• 22:16
  at a 20% to 25% discount, well, I've still got 10% swing room there.
• 22:20
  So that's an opportunity that I'd still feel very comfortable with, work within markets.
• 22:25
  So there's markets that we, without a doubt, know bottomed two to three months ago.
• 22:29
  There's other markets that bottomed 12 to 18 months ago, and are continuing to produce month by month increases in median house price rates.
• 22:39
  So the blanket rule is like, why don't I wait for the bottom?
• 22:41
  Well, they either know something or I don't, but there's no market that moves in the same way.
• 22:45
  So
• 22:46
  in your particular area or your very localized neighborhood or the asset type that you specialize in, hopefully you've got enough, some insights where you're comfortable with what you're buying, reduces your downside risk of any further falls from a macro level.
• 23:06
  And we're constantly talking property is a deck game, right?
• 23:09
  And I think, you know, depending on where the markets go, your opportunity to get into those particular assets now versus three months time, which maybe is the bottom of the market, rates could go up 25 bps, hopefully not, won't have a podcast, rates go up 25 bps, you might have harder access to get, you know, equity release on your current place, property prices in that point might move as well.
• 23:28
  So like you said, there's a load of variables there that you're
• 23:31
  you need to really consider.
• 23:32
  And I think the challenge a lot of people do is they try to time the market.
• 23:35
  They try to think they know when the bottom is, but the bottom could have already been or could be in the process right now.
• 23:40
  Exactly.
• 23:41
  And then they'll look back like they have for the last five years.
• 23:44
  And I think the doomsdayers are having a field day now because they've been hoping and praying that the market's correct because they missed 90 to 100% growth over the last five years.
• 23:54
  And that's reality.
• 23:54
  People are going, markets are falling.
• 23:56
  It's all doom and gloom for the investors.
• 23:58
  Again, if you're 10% down in the last six months,
• 24:03
  But 97% up over the last five years, it was still the right time to invest.
• 24:08
  And that's the reality.
• 24:10
  And I think those doomsdayers that are seeing and barricing for this market to fall will be the same ones that don't take advantage of it.
• 24:17
  And will be the same ones in three to four years' time calling for another correction or supporting a government that wants to try to make prices more affordable.
• 24:28
  Let's talk through capital cities versus regionals in a market like this as well.
• 24:34
  Now, we're seeing, and we saw this throughout the boom period as well, and typically in areas like WA and Queensland and New South Wales, but regionals being heavily focused for investment groups and seeing some growth.
• 24:48
  Bear in mind, they have seen some growth.
• 24:50
  Very much from an affordability plan, we're seeing that comparison
• 24:54
  below 8.50 sort of mark across Australia, whether that's capital city or regional, probably been the hottest market in Australia right now from investors and first-time buyers particularly.
• 25:03
  In a market like we're in now, and potentially if it does get any, you know, continues down the trajectory and gets worse, what would be your advice, generic advice, for those looking at a regional play versus a capital city play?
• 25:15
  Also to note, yields not too dissimilar at the moment with particular assets.
• 25:19
  And I think that's the difference where we are today than where we were five years ago.
• 25:23
  The reason there was a push to these regional markets were twofold.
• 25:26
  One, COVID hit.
• 25:27
  So the idea of getting out of the big cities was quite glamorous.
• 25:32
  But the cash flow was so attractive.
• 25:34
  And the reason you go to regional, so in a commercial sense, so when you buy commercial property, you're buying on yield.
• 25:39
  So if it's a conversation around yield...
• 25:41
  You only have to look to the yield you get on a regional center versus a metropolitan center.
• 25:47
  So on a shopping center, for instance, the same fast food tenant, let's call it Guzman and Gomez, they might trade at 4.5% yield or cap rate in a capital city.
• 25:58
  You take that into a regional.
• 26:00
  you might see that go as high as 6.5% to 7%.
• 26:04
  So they're paying a higher yield.
• 26:06
  They require a higher yield to offset the risk of being there.
• 26:10
  And that's so true for regional.
• 26:12
  So the reason you are getting a higher cash flow is
• 26:15
  It's like going to a mining town.
• 26:16
  Are you going to go to a mining town and invest 700,000 Reese on a 3.5% yield?
• 26:21
  So all that risk for a really low cash return?
• 26:24
  Definitely not.
• 26:25
  But you may consider it on a 9% or a 10% yield, right?
• 26:29
  So if you're going to get 10% return on your cash, okay, now I'm weighing up the risk versus reward.
• 26:34
  If you're going to a regional with not a significant proportion of upside in terms of that rental return, in terms of that yield, if it's not 3% to 4% higher than a capital city,
• 26:45
  Why are you investing there?
• 26:46
  You're taking on all that unnecessary risk for no greater return.
• 26:51
  I'm out of that market.
• 26:52
  It's just a straight up gamble.
• 26:55
  So at the moment, we're not seeing a differential between regionals and macro cities that makes sense to invest in regionals at this point.
• 27:03
  Even regionals in Victoria, we like Victoria as a market.
• 27:06
  If I can get a comparable yield in a place like Melbourne,
• 27:10
  a comparable yield to that of Ballarat.
• 27:12
  Why am I risking going to a regional where the population's a couple hundred thousand compared to a population centre of five million where I've got higher incomes, it's a larger job centre and significantly higher population growth?
• 27:25
  I don't need to take on more risk.
• 27:26
  I don't need to take on more risk.
• 27:29
  For no added benefit.
• 27:31
  And getting a job like in Gladstone in their specific field, it's going to limit their pool to get another job if there is an economic downturn because they're not going to be local to where all the employers are.
• 27:40
  So I think you're going to see those areas fill the pinch once we do that.
• 27:44
  Well, you are seeing it.
• 27:45
  You're seeing it play out right now.
• 27:47
  And unfortunately, those that own five, six, seven properties all in these regional markets have huge exposure and typically low cash buffers.
• 27:55
  They're going to be forced to sell.
• 27:57
  So then, as I said earlier on the show, there's going to be an investor potentially on the other end that's going to wait for that discounting to be not at five or six percent, wait for that discounting to be at...
• 28:07
  30, 40, 50% to go, okay, now that makes sense because I can pick that asset up at a 7% or an 8% yield versus what they're trying to trade at now at five or five and a half.
• 28:19
  And that's the play with Darwin, right?
• 28:20
  Darwin's a higher yield, but you're taking more risk.
• 28:22
  You have the volatility up there.
• 28:25
  And if you're open to that risk, then there may be some merit there.
• 28:28
  But certainly for a sophisticated investor in a time of uncertainty, it's a risk versus reward game.
• 28:33
  You mentioned earlier there regarding potentially a distressed sale, whether that's come down to mortgage stress or an impact on overexposure.
• 28:42
  Now, they are going to be rare finds.
• 28:44
  And like you said there, not every rare find is going to make sense from a property perspective because they're going to be so much work that it's probably not worth it.
• 28:54
  Looking at a standard transaction in this market, how important is off markets in this market?
• 28:58
  Bearing in mind in a lot of these markets, there will be more stock available than what there probably has over the last few years.
• 29:04
  Is off market still important in these markets?
• 29:06
  It's really interesting time, Rhys, because we're very pro off markets.
• 29:11
  85% of my portfolio would be off market transactions.
• 29:14
  That pigeon was switched now in some of the markets we're buying in or some markets across Australia.
• 29:21
  you're almost paying an off-market premium because you can let things sit on the market and if it's a mispriced campaign, the consumers sit back and go, well, there must be something wrong with it because it's been on the market now for 40 or 50 days.
• 29:36
  It might have just been overpriced.
• 29:38
  It might have been a poor effort by the agent in terms of how they've positioned that particular asset on realestate.com.
• 29:45
  So you can pick things up at a serious discount by letting them sit on the market.
• 29:51
  And the vendors behind that, off-market, you want a price.
• 29:55
  You haven't tested the market.
• 29:56
  So why would I take it at a significant discount unless there's significant mortgage stress where the point is you've only got a matter of a couple of days before the bank's going to forgo on you.
• 30:06
  That's the off-market transaction where you pick up significant discounts because they've literally got days before it's out of their control and the bank's got it.
• 30:15
  and then the bank's just trying to cover their debt.
• 30:18
  But in the scenarios where they're taking it to the market, they may have an expectation that their property's worth 800 off market, they may sell it for 790.
• 30:26
  On market, campaign starts at 820, little interest in the first two weeks, comes down to 810,
• 30:34
  no bites, down to 800.
• 30:37
  Three weeks later they've dropped it to 780 under what they would have taken originally.
• 30:41
  But because it's been on there for six weeks, the marketplace is going, well there must be something wrong with it.
• 30:45
  So no one's going through the home opens.
• 30:47
  All of a sudden an opportunistic buyer might come along and go, I'll give you 710.
• 30:53
  And the seller, the vendor's now conditioned to go, well, geez, I haven't had any interest.
• 30:57
  I need to sell this.
• 30:58
  It's costing me huge in land tax.
• 31:00
  I'm overexposed.
• 31:02
  They counter at 750.
• 31:03
  You're back down to 700.
• 31:04
  There's no other buyers now.
• 31:06
  And pressure comes on and they sell at a significant discount.
• 31:09
  So there is opportunities and that's where a little hack for those, I've been doing it quite a bit, Rhys, is going onto realestate.com and instead of the search function being from
• 31:20
  Our newest to oldest, which is typically the category newest to oldest listings, so what's recently been taken to market, flip it on its head, what's sat there the longest?
• 31:29
  That's where I'm starting because they're the agents I'm calling.
• 31:31
  I'm like, how desperate are they?
• 31:33
  It's been on the market for six months.
• 31:34
  I'm working on one at the moment.
• 31:35
  It's been on the market for nine and a half months.
• 31:37
  You don't think they're pretty keen to sell?
• 31:39
  And I put an offer in 20% under what they asked when they went to market, and I think we're probably...
• 31:45
  you know, 100K off on a $2.5 million property.
• 31:48
  So it does work.
• 31:49
  You know, it never hurts to ask, does it?
• 31:51
  The big thing I would say, the big caveat of what you just said there,
• 31:54
  You are a qualified valuer, I heard, and that was your profession, right?
• 31:57
  So one of the big things I've noticed, especially with PropStack now, we're getting a lot of our listeners of the podcast that have big portfolios joining.
• 32:07
  I'm trying to jump on a couple of calls here and there just to get their feedback on what they're liking.
• 32:11
  What I'm noticing quite a bit is the asset suburb is a suburb we like.
• 32:17
  But the asset quality is something we wouldn't touch.
• 32:20
  And I think that's what it's come down to.
• 32:22
  People hear about a suburb or a hotspot or somewhere where to invest, but it's actually the core fundamentals of asset selection that lets them down.
• 32:31
  And you say, what is it, rising tide lifts all ships?
• 32:36
  Yep.
• 32:36
  Is that the right one?
• 32:38
  Yeah, rising tide lifts all ships.
• 32:39
  Those are the ones that are a bit of a concern for me where you're seeing a lot of people stacking portfolios with D-grade assets and in a downturn, they're gonna be hard ones to offload as well.
• 32:49
  They are.
• 32:51
  You look at the fundamentals, if you get the right location at the right time, you're 70% of the way there.
• 32:57
  If people have bought in the right locations at the right time, they're going to do okay.
• 33:01
  But that last 30%, that could end up costing him $200,000 or $300,000 if they haven't got the asset selection right.
• 33:06
  And we've seen that take place.
• 33:07
  Look at a Perth market.
• 33:09
  Things that we bought in comparable suburbs in 2019 are now trading for $300,000 to $400,000 difference for other properties that were bought in the exact same suburb.
• 33:18
  but they just got the asset selection wrong.
• 33:21
  Failing due diligence, didn't realize they bought next to or close to some commercial zoning or they didn't realize there was social housing next door.
• 33:28
  And then a family, an occupier doesn't want to pay a premium and that's what I said earlier in the podcast.
• 33:34
  A friend of mine,
• 33:36
  A friend of mine was actually my sister that was just convinced on buying on this, what she thought was a steal.
• 33:42
  It's always going to be a steal.
• 33:44
  And that's where that asset selection is the final point.
• 33:47
  And then if you can line those three things up...
• 33:50
  timing, location, and asset quality, well, then you give yourself every chance to see good long-term consistent growth.
• 33:58
  Everything we do, Rhys, is to reduce your downside risk.
• 34:01
  And it's like, when's the bottom of the market?
• 34:03
  Well, at this point in time, if you buy well enough and reduce your downside risk, well, it doesn't really matter because you've given yourself enough runway.
• 34:11
  We've touched the surface with some opportunities there.
• 34:13
  If anyone listening to this wants us to dive into any more strategies, particularly in maybe bottom of the market conditions or distressed sales, put them in the comments.
• 34:23
  We're going to do a bigger deep dive on a strategy episode in the coming weeks.
• 34:27
  You've been listening to the Foliar Property Podcast.