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Sydney's Worst Homeownership Collapse in 70 Years Has Begun | Property Experts · The Follio Property Podcast

• 0:00
  Ownership rates dropping to their lowest level in about 70 years. Research shows the city has not seen home ownership rates this low since the 1950s.
• 0:11
  The whole ethos of what Albanese government has been trying to communicate is that the Australian dream is home ownership. Australians deserve to have a bricks and mortar home. Yet post-budget, it's the lowest it's been since 1950 in terms of owner-occupied. 12% drop-off, 76% increase in inquiries on house and land package areas.
• 0:30
  based on everything that's happened with the policy, you would expect if the whole intention of that was to increase first-home buyers, then naturally that what would happen? There's more first-home buyers in the market than there was post-budget, which is factually a complete lie.
• 0:42
  This is exactly the situation that the government didn't want. What they didn't want is more investor activity and certainly didn't want less first home buyer activity. Policy will track a more unsophisticated type of investor, people buying on the back of a tax benefit, not necessarily for the benefits of a genuine property strategy or a portfolio strategy. Strategy is more important than ever and you don't want to get stuck in a situation where you're just buying assets for the sake of growing a portfolio when you've got to look at the core fundamentals. Who would have thought the government would get something so dramatically wrong?
• 1:15
  You're listening to the Folio Property Podcast. I'm Rhys Bettle and I'm here each week with my co-host Lachlan Delahunty. Tune in again from Sweden, Lachlan, probably the most underdressed we've seen you in this podcast ever, but you've still got your finger on your pulse. You're still messaging me every day about the property market. Big one we've been going back and forth with over the last week was some articles we've been reading across the AFR actually. And what I said to you is like, let's actually break some of these down in the podcast because I think these are common questions every investor is asking right now.
• 1:44
  not just investors, but the general Australian public. So a bit of a different episode. Love to get everyone's feedback. Post this episode, put your feedback in the comments. Would you like to see us do more of these breakdowns? Because yeah, some of these articles are pretty fascinating. Let's kick off the first one, Lockie. Investor activity in new builds is increasing as first home buyers drop off.
• 2:03
  Pretty powerful headline in terms of what their government proposed changes was going to do to the investor market. What's your thoughts on, from what you're hearing on the ground in terms of new build activity for investors? What's interesting, Rhys, what we do, we track data and Albanese come out, I think it was last week, stating that the activity of first-home buyers has increased post-budget. So there's more, essentially what he was trying to say, without any data to back it up, that there's more first-home buyers in the market than there was post-budget.
• 2:32
  which is factually a complete lie. Like you've gone into the data, what's the drop of first home buyer activity post budget? It's gone from 66.7 to 54.9. So, what's that? It's about 12% drop off. Yeah. And this is where it gets a little cheeky. Overall, in terms of participation versus own occupiers versus investors versus first home buyers as a percentage has slightly increased. That's predominantly because a lot of own occupiers are now out of the market. So,
• 2:59
  Again, him trying to obviously support his decision post-budget with information that's just not correct. So, that is concerning, right? This is exactly the situation that the government didn't want. What they didn't want is more investor activity and certainly didn't want less first home bar activity. And now, we know that headline media will attract and policy will attract a probably more unsophisticated type of investor race. And that's, I suppose, the data that you're telling me there.
• 3:27
  is a complete reflection of policy chasing. So, people buying on the back of a tax benefit, not necessarily for the benefits of a genuine property strategy or portfolio strategy. They're only buying to try to get some level of tax benefit post-budget.
• 3:43
  Looking, you know, one of the builders that's referenced in this article, Simmons, for those playing at home, they're reporting a 76% increase in investor inquiries on house and land package areas. Does that figure surprise you? I know you kind of referenced that it's going to bring a lot of unsophisticated investors across to the…
• 4:00
  the new build, but a 76% increase is big numbers. Does that surprise you? If you're serious about property, you need better inputs. PropStack is where our chief economist and research team puts everything together. Our leading investment reports, our suburb level data, and a weekly market update on what's actually moving. It's the same research our advisors work from, and you can get access now. Scan the QR code and click the link in the description.
• 4:23
  That is a huge number, to be honest. I didn't expect it to be that high. It raises another concern. The last time that the government got involved to try to stimulate construction and bring on new supply, we know what happened. That caused the greatest building boom then bust probably that we've seen in the last 20 or 30 years. So that was during COVID. When you can recall, Reece, they gave out the initial $25,000 handout for anyone that participated in a new building. There was another opportunity to get another $20,000 after that. What that meant
• 4:49
  was as a flight to these builders, a lot of activity in a short period of time. The builders took on more work than they could. You saw a massive cost inflation across building materials. And then we saw the largest amount of builders go out of business in a 12-month period of all time. There's so many concerns here. Like you've got a lot of supply going into areas that don't have a lot of infrastructure.
• 5:10
  We've told people on the podcast previously, investors buying these products won't have a secondary seller so when they choose to sell, another purchaser, unless it's an owner occupier, won't get the same benefit that they're getting it for so you're going to have a really small buyer pool. But the concerning thing is it's just going to put pressure on builders and owner occupiers that choose to or need to build a home to live because of affordability reasons or because of their needs for their family.
• 5:36
  are now going to get priced out of the building market because you're going to see costs run up because of this investor activity. What do you see as the biggest knock-on factor with this, Lachlan? And we should stipulate as well. I think a lot of the concern when we are mentioning new builders probably more in that regional or the growth corridors play. I think infill or there's blue chip owner-occupied suburbs where there's new stock coming on board, we do like that from a fundamental standpoint. But yeah, talk to me through, what do you see was the knock-on effect of...
• 6:05
  investors entering this market. Let's just say, Simmons, this 76% increase in inquiries turns out to actual applications and approvals. What's the knock-on effect we're going to see in the next couple of years? Well, you know, 76% of that activity, if it's investor activity,
• 6:20
  at least 80 to 90 if not more right we could be even 95 percent of that activity is going to go to the outer fringes that's going out to the greenfield estates on city borders typically right so you know we've spoken about those areas in other podcasts what they look like so you're going to see an oversupply of housing in areas that lack infrastructure
• 6:42
  So you go to, and that's where I get really concerned that you're going to see price deflation. So price is coming down, building costs going up. Therefore, it probably supports fundamentals of established product because the cost of building goes up naturally because of supply and demand. But essentially you get an oversupply
• 6:59
  of almost like ghetto areas, Rhys, where there's 90% tenanted, their building quality reduces dramatically because there's so many builds. So builders are trying to take on more builds with the same amount of labor capital that they currently have. So therefore the quality reduces. So what you end up is what we've seen in different periods of times through the 2000s where you get these really shoddy estates that become ghettos because the quality builds are poor, they're highly tenanted areas, typically 80, 90% are investors, so they're mostly tenanted.
• 7:29
  And that causes issues because we know, you know, typically those areas, an own occupier will typically look after their home more, take more care. Tenants don't normally take the same level of care as an own occupier would. So you get high supplied, low socioeconomic areas really sort of are the landscape of this type of model that the government's introduced.
• 7:49
  Excellent. Anyone got any follow-up questions or want us to unpack any more on that new BuildSafe, please leave comments on Spotify and YouTube. Definitely, as this sort of evolves and the landscape changes, we can unpack more of these case studies moving forward. Next article, Lockwood. Just to address one point that we didn't cover off.
• 8:07
  People may be surprised as to why her first home buyer activities actually come off. You'll be like, okay, well, that will surprise a lot of listeners, I think. Based on everything that's happened with the policy, you would expect if the whole intention of that was to increase first home buyers, then naturally that's what would happen. Who would have thought the government would get something so dramatically wrong?
• 8:28
  But there is a reason for that and it's sentiment. So we're going to talk about this probably in another article. But first-time buyers don't want to go into a market that's falling, right? Because naturally, they're going to be more prone to headline media and what's happening in the broader market conditions. They're reading TikTok, Instagram, Facebook, listening to people saying the market's going backwards. They're nervous buyers, right? So more sophisticated investors will weather most storms. First-time buyers are the most vulnerable.
• 8:53
  So, they will try to buy when there's the sort of herd mentality when the markets are positive. Now that there's a lot of negative sentiment, they're standing back and saying, well, now, I don't want to go into the market with my 5% deposit and potentially lose that and the property that I buy for $900,000 be worth $800,000 in 12 months' time. So, they're standing back more than ever and it's just left the door open for all this investor activity.
• 9:15
  to continue to drive up prices in the areas where first-time buyers really can afford. And they are the outer fringe areas. We talk about stepping stone assets. Sometimes you do have to buy compromised locations to get your foot in the door and then you can climb the property ladder. But the areas that first-time buyers typically purchase are these investment belt areas. So, the government have created an even greater problem than there was pre-budget, I believe.
• 9:41
  Lachlan, you're too quick for me or you've done the ultimate segue because it leads very nicely into article number two from Lucy Slade, which is Sydney home ownership falls to its lowest level in 1950s. So kind of backing up your point in terms of first-time buyers, not wanting to get into the market due to prices falling and sentiment being low. Sydney's not just first-time buyers but owner-occupiers in general has fallen to 59.9%, which is the lowest level since 1954.
• 10:09
  Is that sort of echoing what you've mentioned there from a first-time buyer as well, from an owner-occupier? Is there something more deep in terms of the Sydney market that's forcing these changes? Yeah, and this is the problem, Rhys, with the unattended consequences of a budget that wasn't thought out. Like the whole, I guess, ethos of what Albanese government has been trying to communicate is the Australian dream is a home ownership, right? Australians deserve to have a bricks-and-mortar home. Post-budget, it's the lowest it's been, what, since 1950, right?
• 10:39
  in terms of own occupiers. These are people, these are not investors. These are people that live and enjoy the fruits of having a home and with their family. So that is a massive statistic. Well, since 1950s, that's going back in a long period of time. But I think it's, again, on the back of just pure sentiment. And this is what I think people really undervalue. I listen to a lot of the commentators. I listen to a lot of podcasts recent and read a lot of articles.
• 11:03
  No one's talking enough about the impacts of sentiment. I don't believe anything drives a market harder than sentiment, hence why we track our sentiment index now on a daily basis because that is a direct correlation in terms of what's going to happen to the market tomorrow of how people are generally feeling about the property market today.
• 11:22
  And it's the lowest it's been arguably since the 1950s. So it does echo that thought that no one wants to catch a falling knife. And at the moment, there's too much negative news. There's not enough positive news. And there's no green shoots at this point, Rhys, externally, right, when you talk about headline medias. Internally, we track the data. There is a lot of green shoots. But externally, in terms of the noise out in the marketplace and the media, it is all negative because that's what sells papers, negative news. I think that has a lot to do with what's taking place in Sydney at the moment.
• 11:48
  Well, I mean, just looking from a pure affordability factor as well, medium house price now is 1.26 mil. We do around the ground updates every week on each market. And you're looking at Melbourne, for an example, which is in a similar negative territory to Sydney and a medium house price under 800K, which is significantly off where Sydney house prices are. Do you think we've just got to that point from an affordability ceiling now where you've got a mixture of government policy sentiment and affordability that's putting the brakes on this market?
• 12:18
  Yeah, we were calling the Sydney market needed some level of correction or stagnation, right? It was becoming extremely unaffordable. When your affordability index is up over 60%, so for listeners, that's the average wage consumed by the average mortgage in Sydney peaked at 65%. So that means as a potential home buyer in Sydney, for me to go out and buy a home,
• 12:40
  65% of my wage was going to my mortgage. And that's not sustainable figures, Rhys. You know, people are like, what is a balanced market? You know, the old school theory was a third, right? So 30 to 35% of your wage typically should go to your mortgage. We know in the last decade that has changed substantially. People are putting more money into their mortgage than they ever have before. So a balanced market for Sydney probably sits around 50%, which sounds like a lot, but if you go back over the last 10 years, it's sort of high 40s to 50s where it sits
• 13:08
  where a market can continue to increase in value, certainly at a rate that's faster than wage growth. So at 65%, it needed some level of a correction, and that is happening now. It's happening at a greater level than anyone anticipated because you've got other headwinds, and those other headwinds has been a rising interest rate environment, global uncertainty in terms of what's happening overseas, and probably the most controversial budget that we've seen in the modern time. So all those things happening at one time,
• 13:36
  creates an environment that we're seeing at the moment, Rhys. We're seeing declining house prices, recent levels that we haven't seen really since 2018. Almost a percent decline per month happening in Sydney and likely will get worse before it gets better until we get some positive news. Look, that news sounded like it was going to come from some inflation data. Now the war's kicked off again. That's probably going to prove unlikely. You spoke a lot about the construction industry getting a lot of investor activity. That is an inflationary impact, right? So we couldn't see higher inflation come off the back
• 14:06
  that. A Sydney market is in desperate need of some positive news, which at this point in time, in the middle of July, I can't see where that's going to come from. Lachlan, Perth and Brisbane are heading towards that $1.1 million mark from a medium house price perspective. A little bit under where Sydney's at and it's starting to sort of come off, but do you see markets like Perth and Brisbane heading down the same route we're seeing Sydney or are their core fundamentals different there that's going to impact the property prices moving forward?
• 14:34
  Different markets, different supply and demand fundamentals for sure. And more importantly, it comes down to wages, Ray. So that's why I'm probably a little bit more bullish on where Perth can go in comparison to Queensland or Brisbane is because the wages in Western Australia are the highest in the country. So that's what people probably fail to understand.
• 14:54
  will only run into an affordability issue when people can't afford to make their repayments on their home or they hit that ceiling. For Perth, they haven't hit that. Brisbane definitely has. That's why I think there is a cooling event currently taking place in Brisbane and not in Perth. It comes down to people's wages and what they can actually afford. So when I look at...
• 15:14
  The other fundamentals, supply and demand, coming into this budget, both Brisbane and Perth were significantly undersupplied. Significantly. And yes, there has been an increase in supply, predominantly for two reasons. A, the supply that's getting taken to the market isn't getting as absorbed as quickly. So the number of sales are less than what they were per week than they were, say, three or four months ago.
• 15:35
  And generally speaking, there's more properties coming onto the market. But the fundamentals are both these markets are significantly under supplied where a market like Sydney and Melbourne aren't in that same level of supply. And we spoke last episode about the supply equation in terms of Perth City, are we over or under building? It was very clear that both Perth and Brisbane have been under building for the last three years, specifically over the last 12 months, where a market like Melbourne, Melbourne,
• 15:59
  Melbourne and Sydney have been overbuilding. So that's why the fundamental of those markets are very, very different.
• 16:05
  Let's go to the next article, which is by James Ayres. Now this one, the article headline is 13 million empty bedrooms, Australia's hidden housing supply problem. Those that are hearing this for the first time, essentially what this is getting at is almost targeting the baby boomer generation where there's not that supply there to downsize or actually from a baby boomer perspective, holding onto these properties where there's so many empty bedrooms.
• 16:34
  What is your thoughts in terms of this particular article in terms of from a housing perspective? Is there anything we can do from a downsizing option for that particular generation or any sort of benefits for them to exit as well? So I'm looking at maybe more a tax advantage potentially or increase of supply.
• 16:55
  When you look at that demographic, the baby boomers that are sitting on large land allotments, typically with bigger homes, empty bedrooms, they have a desire to downsize if the product's right or available. At the moment in the key markets across Australia, that supply, A, it doesn't exist or if it does exist, it's as expensive or more expensive than their current home. So typically when you downsize, you want to downsize in size but you also want to downsize in cost.
• 17:19
  let's call it a $3 million home currently, and I want to downsize into an apartment for a million dollars, and then I can enjoy the fruits of that equity in my retirement. Problem is at the moment, the cost to downsize isn't too dissimilar than what the current home is, and that's because there's a lack of supply. This comes down to building costs. So I don't think there's a quick solution. I don't think we're going to see building costs come down. If anything, I don't even think we're going to see them stabilised. I think they're only going to increase. It comes down to some level of tax policy where there's...
• 17:49
  a subsidy for those that are wishing to or looking to downsize, whether it's looking at some stamp duty concessions or things like that to encourage people to downsize. So I think it needs to be hit on two angles. A, some planning and approval of policy. We know that on a national level that the governments are trying to push to
• 18:07
  encourage more planning activity. And we're seeing that both in Victoria as well as Queensland and more recently New South Wales. Perth is catching up where we're getting more density into the suburbs, particularly in a city where there's more infrastructure. So that's one way to tackle it. But I do agree there has to be some level of policy to open up those larger allotments and those family homes that are sitting mostly vacant. But there needs to be incentive for these people to sell
• 18:31
  Arguably what the government have done through the budget has completely removed people's incentive to sell. And this is another problem. You've got a lot of properties out there that now may have choose to take some of those gains, capital gains and or negative gearing benefits.
• 18:46
  Previously, they would have sold, but now those benefits are going to be taken away from July next year. They will do the opposite. They will continue to hold those properties, therefore increasing the amount of vacant bedrooms we've had. So I think it's this major shakeup and reform that's taken place.
• 19:01
  has made this problem worse, Rhys. In this particular case study, Lachlan, do you think it's more of a supply issue than financially benefit for the clients? You mentioned that obviously with the cost to build these new builds, you want to have some sort of financial gain to do the downsides. Do you think it is more from the financial side or we're not building enough housing mobility across Australia?
• 19:23
  It's supply, right? Because if there's enough supply, then it will be priced accordingly. When supply is lacking, then it can be charged at a premium. So the fact that there isn't enough supply means there's limited options, but also those options are very expensive. So until we bring on more supply of that type of stock and we're
• 19:40
  need incentives from the government for the private sector to actually build out that stock. And at the moment, there isn't at all. There isn't enough. So the cost of building has almost doubled in the last six years to build particularly higher density accommodation. And that's the market that these downsizes. We're going to get more efficiencies in terms of being able to bring on supply quickly. At the moment, financially, it's not stacking up for developers. So there needs to be incentive from a developer level to want to actually produce this stock to make it more affordable, to encourage downsizes to take up that particular stock.
• 20:08
  For me as well, this isn't just an Australian issue, right? Like this is very, you know, I've obviously mentioned on the podcast before I spent some 10 years in the UK and I actually went on a lenders banking retreat with other leaders within other banking organisations. One of the topics was how do we create more housing supply with particularly similar wealth generation to what we have in Australia. And we were lobbying to the government about reducing
• 20:33
  stamp duty to help people exit and nothing was kind of hurt on that front either. So, what I'm getting at is I think this is a generational problem. It's not necessarily an Australian. It feels like we need to sort the supply out and encourage people to downsize because what's going to happen in 15, 20 years' time when all these houses then get passed down a generation?
• 20:50
  Yeah, and we look, Rhys, at any big problem in the country, if you leave it to the government to the self, nothing will get done. As soon as you create a private incentive, be that good or bad, things get done and they're done really, really quickly. Just look at the NDIS, for example, albeit it's problematic. But if you put it in the hands of private institutes, be that private developers, and create a genuine incentive for them to want to be on this type of supply, it will happen and it will happen very aggressively and very quickly.
• 21:17
  But the government, very anti that, particularly our current government, are very anti. Rhys, if you want to solve any big issue, particularly when it comes to housing, if you leave it in the government hands, nothing will get done. It will get done very, very slowly. The moment there's private incentives for developers or mum and dad investors that can get a benefit, be that a tax benefit, stamp duty concession, a financial gain by incentivising them to bring on
• 21:43
  more quality stock aimed at own occupiers. At the moment, all they've done is incentivized investors to build more stock. We don't want that. We want to own occupiers. Give the right carrot and you'll get the action. And that's what we need from our government. The last article we got here is from Rebecca Pike. It's negative gearing changes are forcing investors to rethink strategy. Something we, you know,
• 22:05
  sing from the hymn sheet and talk about definitely post-budget strategies do change. And those that are out there saying nothing's changed post-budget are definitely lying to themselves. Living under a rock. This was an interesting one. So, I want to do something a little bit different with this article because I delve the article of the couple that was interviewed, right? And just understanding their portfolio. And I thought, as soon as I read the assets, I was like, Lachlan would have a really good opinion on this. And I think it wouldn't necessarily be
• 22:29
  Super positive in all sense. So this particular couple that was interviewed for this article spoke about their portfolio pre-budget. Their business owners are looking to diversify their wealth. Now they're talking they need to rethink their strategy. And actually, with the assets they were rethinking their strategy, assets that we do like. So established Melbourne units was what they were looking at. But I want to talk through their portfolio. So their portfolio pre-budget,
• 22:54
  that they purchased pre-budget, was a $1.5 million retail commercial property in Cairns, a four bedroom house in Cranbourne in Melbourne, so the outer fringes for Melbourne for those that are a house and land sort of package area as well for those that aren't familiar, four bedroom house near Bendigo, so regional Victoria for $650. Talk me through, these assets were purchased for capital growth, not yield, talk me through those particular assets and do those assets make sense in the current landscape and
• 23:24
  What do you think about those assets pre-budget too? That is a very concerning portfolio, Rhys, just to put it bluntly. So let's just look at the first asset in Cairns in terms of a triple threat. The triple threat there, Rhys, is that commercial asset. In terms of three issues, they've bought in a very, A, in a regional market, so never buy. It's very selective in terms of buying commercial assets.
• 23:47
  regionally. They're bought in a speculative area which is built purely around tourism. So Cairns is a highly speculative, very much a boom and bust market based on tourism, which at the moment is suffering due to the cost of living. And then third, it's retail. Retail is the most risky commercial asset fundamentally that there is in that space. So that for me, and if they bought that for capital growth, that concerns me even more. That is purely a cash flow pay. Very difficult to see any sort of level of upside in terms of capital growth in that particular asset.
• 24:15
  So that one's a side. That for me has huge concerns, huge vacancy risk as well. They might find themselves without a tenant for not just one year or two years. Sometimes these things can sit vacant for five or six years. So that's a big concern. The second one is obviously out of fringe Melbourne and house lamb package area. They would be negative equity on that.
• 24:35
  currently, depending when they bought it, but I still think that market has gone backwards because deflation in terms of the improvement costs and land values have come off in that area due to the oversupply. And then you said there's a regional asset near Bendigo. Look that one is probably the best of the three, but if it's only near Bendigo, not in the town centre itself, that's another red flag because you've got...
• 24:57
  Two regional assets, one on the outer fringes of a capital city in a house and land area. So this is very much what I would mark as an unsophisticated investor that's chasing affordable areas. And I would expect of taking the advice of a buyer's agent that sold them on the dream of commercial and regional plays as the way to build out their wealth.
• 25:17
  Okay, Lachlan, so looking at that portfolio, you've done a bit of a deep dive in terms of your concerns on each of those assets. If you were in their shoes, what would be your non-generic advice moving forward? I'd be trying to exit that Cairns asset as quickly as I can. If it's got a tenant in there now, while there's still some positive center around a commercial property, I'd be exiting that. And even if that's at a break even ideally or at a small loss, I just think the risk of holding that asset longer term is significant.
• 25:44
  So that for me is the first red flag. The other two assets, albeit are not A-grade assets, they are in what I will believe for the medium to long-term rising markets. And when you look at entry costs and exit costs and they've bought pre-budget, so there's gonna be some tax benefit there, be that negative gearing and capital gains, I would be holding them reluctantly unless there's an opportunity cost that outweighs that opportunity itself. So what I mean by that is they sell the commercial asset up north, that might free up some capacity and some serviceability, which means it gives them another opportunity to reinvest that into a better market.
• 26:14
  meaning they can hold those two other assets in Victoria. And we know that Melbourne is going, and Victoria generally is at the bottom of the cycle and going through rising market conditions over the medium to long term. So I'd be holding them for the medium to long term to get the upside there in Victoria.
• 26:30
  Lachlan, we've covered four different articles here. One touching on new builds increase, which is no surprise to us and kind of what we thought we'd see of post-budget. Some, I guess, surprising news that's come out over the last month is that lack of first-home buyer appetite at the moment and seeing some significant drop. We've seen that across a couple of different articles. Sydney home ownership at its lovers level since the 1950s.
• 26:51
  really looking at that supply issue as well from, you know, particularly these empty bedrooms with the baby boomer generation. And then lastly, they're talking about strategy moving forward as well. So I think that ties nicely into there has been some serious changes over the last six, seven weeks since the budget. But I think strategy is more important than ever. And you don't want to get stuck in a situation where you're just buying assets for the sake of growing a portfolio when you've got to look at the core fundamentals. Well said. You've been listening to the Folio Property Podcast.