Blogs - Lindeman Reports

Posted on July 12, 2020July 12, 2020 by John Lindeman

Canberra set to boom in the gloom

Which city is about to boom? According to property market expert, John Lindeman the answer is Canberra, where massive economic incentive and business recovery programs will be administered as the government works to rebuild our economy.

Recent data shows that Canberra’s housing demand is rising strongly and the city is set to experience a property market boom.

Canberra is experiencing the second highest population growth rate of all our capital cities at 2.2% per annum (behind only Melbourne).
Canberra’s population growth rate will grow further while that of other capital cities declines due to the collapse of overseas migrant, student and tourist arrival numbers.
Canberra has the highest rental yields of capital city markets, attracting investors who seek positive cash flow from day one.
Housing finance figures for May 2020 show that it was the only State or Territory with an increase in the amount of housing finance.

While Canberra has the third highest median house price in Australia, prices are likely to grow further over the next few years, even as other housing markets stagnate or go into decline.

The reason why Canberra’s housing market thrives when others barely survive is because many of the city’s 30,000 businesses benefit directly from federal government procurement decisions and programs, which often increase during economic downturns.

Government administration produces nearly one third of the Australian Capital Territory’s economic output and indirectly accounts for over forty per cent of its workforce, so whenever the number of public servants in Canberra increases, housing demand grows there as well.

The total number of Canberra based public servants is now at a record high, but it is highly likely to grow even more. There will be a massive rise in the number of public servants needed to administer the government’s economy rebuilding programs which will be launched later this year to get the economy moving again.

Because most of the new public servants will be on short term contracts, they may only initially intend to reside in the national capital for a few years.

This means that they will prefer to rent well located, well-appointed low maintenance dwellings rather than buy a property, and they will also prefer to live in units because of Canberra’s bracing climate.

Canberra’s most popular suburbs for unit renters are located in the entertainment precincts of Civic, Braddon and NewActon, offering a popular mix of shopping, cafes, fine dining and exciting nightlife experiences.

Rental demand is also likely to be concentrated along the recently completed Canberra Metro light rail route, from Gungahlin to the city centre as shown on the map.

These suburbs offer positive cash flow investment opportunities from day one, with the highest genuine rental yields available in any of our capital city unit markets.

Such high yields will attract investors seeking cash flow, and with the competition from investors likely to exceed the supply of available units, prices are likely to rise as well.

Many of Canberra’s new residents will decide to stay and make Canberra their permanent home, and as they gradually move out of rental accommodation they become first home owners.

This means that the demand for housing in Canberra continuously shifts from rentals to home buyers, so if the number of renters keeps rising as forecast, then home buyer demand will rise as well. As a result, Canberra could soon become the city with Australia’s highest house and unit prices.

Sources

Australian Public Service Commission Annual Reports
House Price Index – Eight Capital Cities 6416.0 Released quarterly
Housing Finance Australia 5609.0 Released monthly
Australian Demographic Statistics 3101.0 Released quarterly

Image Attributes

Parliament House at night by Social Estate via Unsplash
Canberra light rail by Bidgee via Wikipedia

Posted on July 3, 2020July 3, 2020 by John Lindeman

Which areas will buck the trend?

John Lindeman reveals why some property markets are likely to buck the downward trend and where to find them.

As the recession deepens, price and rent falls are emerging in inner urban unit markets due to the collapse of short term rental demand. In addition, aspiring first home buyers and investors are finding it more difficult to obtain housing finance from the major lenders as they reassess and limit their exposure to applicants and areas they see as being of increased risk.

Banks will favour applicants and areas with lower risk of loss

Although the banks must continue to lend money in order to generate their profits, they will view housing finance as far less risky than unsecured loans and credit card debt.

They will also prefer those applications for housing finance which meet the following “recession proof” criteria.

Existing home owners upgrading to a second or subsequent home who have more equity and higher household incomes than typical first home buyers.
Applicants employed in industries such as Federal and State public service, local government administration, health, education, water, gas electricity provision, waste collection and public safety.
Houses located in the well-established middle suburban areas of our major cities which exhibit high price stability and are less likely to be impacted from economic downturns.

As most of the preferred suburbs have little to no further capacity for housing development, any increase in buyer demand where the supply of houses for sale is currently in balance with the demand from prospective buyers is likely to result in rising prices.

The issues for investors wishing to take advantage of the potential growth in such suburbs are that they tend to be high socio-economic locations with house prices well above the median for the city and rental yields are extremely low, making them negatively geared, even in the current low interest rate environment.

Many retirees will be motivated to downsize

One significant group could be impacted by the recession, even though they have no need for housing finance and are not directly affected by rising unemployment. They do however, have an escape route which could indirectly lead to housing market growth in some locations.

According to the latest Australian Government Retirement Income Review (2019) one quarter of Australians aged sixty-five and over receive only a part Age Pension, while one third receive no Age Pension at all, continuing to work or relying on other forms of income support, such as share trade profits, superannuation returns, dividend payouts and imputation credits.

As this recent announcement from NAB foreshadows, superannuation returns and share prices will fall over the next few months. Many companies in the most exposed industries such as finance, tourism, travel, hospitality, sporting, recreation, accommodation and construction will provide lower dividends or none at all.

As a result, over half of our four million retirees will soon find their financial positions eroded.

Some may be motivated to draw on their assets, such as selling the family home and then downsize to a smaller well located unit or villa in the same city, or to a townhouse or house in a cheaper regional retiree destination.

They will then be able to keep whatever is left from the sale proceeds as an income supplement in their remaining years.

This trend will not be sufficiently large enough to cause a slide in sale prices as retirees sell their existing family homes, because there are so many of these in the leafy established suburbs of our major cities.

It could, however, lead to price rises for low maintenance, easy access and highly secure properties with buying prices well below those of the family homes being sold. These are likely to be located in the seaside, riverside and harbourside suburbs of our major cities as well as in regional retiree destinations within easy and safe access to the nearest capital city.

Posted on July 2, 2020July 2, 2020 by John Lindeman

Why markets boom quickly but slide slowly

As each new set of property data is released, it becomes more obvious that some housing markets will be in for a rough ride. John Lindeman explains why property markets slide backwards slowly.

Many experts fail to grasp the reasons why property prices rise quickly during booms but slide backwards slowly during downturns.

Sales increase quickly when markets are hot, and prices shoot up because properties are snapped up as soon as they come on the market.

There are very few properties listed for sale, being outnumbered by large numbers of bidders who compete with each other to purchase, and as long as buyer demand remains high, a boom results.

When buyer demand falls, however, potential sellers dig in their heels and begin a waiting game, hoping that a buyer will turn up. The first signs of a slowdown in buyer activity are therefore not declines in sale prices, but a growth in the number of properties listed for sale and an increase in the time it takes to sell them.

Potential sellers tend to hang on and hope

When vendors still find it difficult to sell their properties, they may decide to change agents, increase their advertising budget, or even take their properties off the market altogether and wait until things improve.

Because no one wants to take a loss, or accept a lower sale price than they expected, only vendors who want to sell will reduce their asking prices when all else has failed and it is obvious that the market has slowed.

As asking prices slowly fall and the numbers of listings keep rising, sale prices start to decrease. Only vendors who really must sell will keep trying to find a buyer, and so the process repeats until finally a buyer is found. Such downward slides in sale prices can take a year or longer to play out.

But, when the bottom of the market has been reached, it may then take years before buyers want, or are able, to return to the market in sufficient numbers to kickstart the market back into growth once again.

Property prices slide slowly and then take years to recover

Here are some examples from history showing how this slow slide took place during the Great Depression, the sixties Credit Squeeze and the Global Financial Crisis.

The Great Depression started in 1930, marked by rapidly rising unemployment, falling incomes and bank failures. As the graph shows, house prices crashed by eighteen per cent over twelve months.

The property market then stagnated for several years, not fully recovering until after the Second World War, well over a decade later.

The 1960 Credit Squeeze was initiated by the Menzies federal government, concerned with the huge rise in hire purchase and housing finance debt.

It was short and sharp, but sent shock waves through the housing market for years after. Prices fell for one year after the squeeze, but did not recover for the next four years.

The Global Financial Crisis led to a slide in house prices during 2009 amid fears of a total housing market crash.

With its housing stimulus package, the Rudd government trebled the First Home Owner Grant. This lifted house prices by almost exactly the amount of the grant, after which prices fell once again for the next three years.

Demand side incentives only push up prices – temporarily

The Rudd First Home Owner Grant initiative demonstrates the total ineffectiveness of demand side buyer incentives such as buyer or owner grants and stamp duty concessions because all they do is increase the capacity of property buyers to spend more and push up prices in the process.

You might argue, as many politicians do, that if such concessions, grants and initiatives are limited to new properties, they will generate more housing supply. While it is true that more buyers will then be able to purchase new properties,the benefit is quickly eroded by rising prices, while existing buyer demand shifts away from new homes to existing homes, because they become comparatively more affordable.

Even worse, as pre-existing market conditions return, prices for new homes slide again and many first home buyers may find themselves worse off than before.

Posted on May 30, 2020May 30, 2020 by John Lindeman

What’s wrong with predictions

What's wrong with predictions

Whenever the unexpected happens, it seems that everyone is keen to predict possible outcomes for our property markets. John Lindeman reveals which forecasts are useful and which to ignore.

As we strive to unravel ourselves from the COVID-19 crisis and the uncertainty it has caused, property market predictions keep coming, ranging from dire warnings of imminent collapse to assurances that the next boom is on its way.

Such property forecasts may be exciting, interesting, or even scary, but they are seldom of any real value to investors, and that’s not just because they often turn out to be wrong!

Predictions often combine different types of property together

Many predictions make sweeping generalisations by lumping together different types of properties as if they always perform the same way, but the potential performance of different types of housing in the same suburb often varies, because they appeal to the many different types of buyers and renters.

For example, units and apartment markets respond to changes in renter demand, as from sixty to eighty per cent of them are investor owned. On the other hand, eighty per cent of houses and townhouses are purchased as homes, so their markets respond to changes in first buyer, upgrader and downsizer buyer demand.

Units and houses can perform very differently, as these two heat maps show:

These heat maps (produced by our patented Housing Market Prediction Solution) forecast the comparative risk of price falls occurring in Sydney council locations for houses and units over the next twelve months.

They reveal that Sydney’s coastal unit markets are at high risk of price falls, while houses in the same locations tend to be at low risk of decreasing prices. At the same time, the outer western suburbs of Sydney have a high risk of house price falls, while unit markets in the same areas are at low risk.

This tells us that Sydney units are likely to perform very differently from Sydney houses in the same areas over the next year. Yet, much of the media provides “property price” predictions, “housing market” forecasts, “home value” indexes or “real estate market” estimates which lump all the houses, townhouses, villas and units together. They show the average performance of them all combined, which is of little practical use and could even be misleading.

Many predictions are for huge markets such as capital cities

Another issue with many property market predictions is that they combine all the suburbs in one city or State together to make a catch all forecast such as “Perth’s housing market expected to crash” or “Brisbane property prices set to boom”, such as this recent example:

We can’t really use these predictions, even if they turn out to be right, because we only buy one property in a suburb, not an entire city. Suburbs in any city are very likely to perform differently from each other and some may boom even as others bust.

For example, if you look again at the two heat maps above, you will notice that there are roughly the same number of areas at high risk as there are those with no risk at all, so by averaging all the areas, we would end up with a moderate risk or low risk prediction for all of Sydney. This may be still be interesting, but is of no practical use to property buyers at all.

Some property market predictions are not meant to be reliable

For any prediction to be of possible value, you need to be able to trust the person making it.

This is because many so-called experts have a vested interest in the outcome of their predictions which has nothing to do with the accuracy of their forecast.

They will talk up a market purely to encourage you to buy a property from which they will obtain a finder’s fee, commission, kick back, knock on or other financial reward.

We often hear and see such predictions made by project marketers and sellers’ agents who may promote a property market purely because it is in their interests to motivate us to purchase. That’s why property market predictions need to be as accurate as possible, because they could lead us into making decisions involving huge amounts of money and many years of financial commitment.

Make sure that any forecasts you intend to rely on are provided by recognised analysts and experts who have a proven published record of past success. Ensure that they are not based on hidden agendas, gut feel or intuition, but on proven statistical methodologies which have delivered a consistently high rate of accuracy

There’s no “one size fits all” for property market predictions

As you can see from this image, property investment offers us many different strategies to choose from depending on our finances, skills, time and most of all, what results we want to obtain.

We need strong cash flow if we want to obtain income from rent, or seek high imminent growth during our hold period for flipping or cosmetic renovations. We want medium term growth during structural renovations or developments and look for long-term growth with our buy and hold purchases.

In short, there’s no “one size fits all” when it comes to property predictions, especially in these uncertain times.

A high cash flow forecast is of no use in a suburb where we plan to do a buy-reno-sell strategy because we won’t be renting the property out, while a prediction of high market driven growth during our hold period would be very welcome.

In summary, the only predictions that you can benefit from will be produced with accurate methodologies delivered by reputable analysts. They should identify those suburbs that have the best potential to deliver success for your own preferred investment strategies and they should be relevant to our current economic situation.

Posted on May 25, 2020May 25, 2020 by John Lindeman

Timing the turning point

John Lindeman explains which signals will indicate that we have reached the bottom of the property market and recovery is on its way.

In all the current uncertainty, it’s good to know that there are some property market indicators that point the way forward and help us time those critical turning points.

To demonstrate how they work, I have used the analogy of a plane flight (remember them?) where the aeroplane is our property market and the passengers are potential buyers and sellers.

The take off

As the plane prepares to take off, everyone on board is looking forward to their destination, catching up on some work during the flight, enjoying a rest or the in-flight entertainment. A few optimists might even be looking forward to the in-flight food.

For the property market, this is when optimism is high – buyers and sellers are keen, with both sales and listings rising.

Even though prices haven’t increased significantly, investors are confident that they will. It could even herald another boom, as last year seemed to promise before the pandemic hit.

The inflight safety demonstration

We’re in the air. Uh oh! Thanks for reminding us that things can go wrong. Now we have to assume the crash position, see how to use oxygen masks and where the emergency exits are.

We are even shown how to don life vests equipped with a light and whistle. It’s not comforting to know that disaster could strike – not comforting at all.

This where the property market is right now – everyone has pulled back, suddenly aware of what might happen. We are in a state of shock, with both sales and listings falling as we brace for the worst, but will it occur, or will we land safely?

The crash

Unfortunately, a few flights do end in disaster, and this also sometimes occurs in property markets when demand collapses.

Everyone tries to sell and no one is buying. In other words, as sales drop, listings rise dramatically. Property prices fall, and many investors are ruined.

Such events are rare in our history, and have occurred most recently in towns such as Port Hedland and Moranbah at the end of the mining boom, when prices fell by over 90%.

The safe landing

Luckily, virtually all flights end with a safe and happy landing. The passengers are now excitedly looking forward to their holidays, business meetings, catching up with friends and family, or simply arriving back home again.

In the property market, such times herald the start of a real boom. Prices are shooting up and it’s hard to find properties listed for sale because buyers are snapping up properties as soon as they go on the market.

It’s what occurred during the height of the Sydney and Melbourne property market booms of 2001 – 2003 and 2013 – 2018.

Which signals tell us when we have reached the bottom?

The two indicators that show us where any property market is poised are sales and listings. They are both easy to find for any area, with annual sales provided free of charge by major data providers and the number of listings available from either of the two major on-line listings sites.

Because sales indicate the level of demand, while listings reveal the amount of supply, we need to use them together to tell us whether property markets are confident, concerned, crashing or booming and it is their trend over several months which indicates where we are heading.

Where are we now?

We are currently very much at the “concerned” stage, with everyone waiting to see what will happen next. In that regard, it is important to remember that there are around fifteen thousand suburbs and towns in Australia, and they will not all respond in the same way. Some areas are showing real cause for concern, while others will continue to hold up well.

It is a comfort to know that the only property crashes we have ever experienced have been the result of rash investment in markets driven by speculative price growth instead of a genuine demand for accommodation. It is our continuously growing population that has always underpinned housing demand, and that’s also the key to future property market performance.

What will happen next?

While our sales and listings indicators tell us what is likely to happen, they can’t explain why, or when. To do that, we need to look at the dynamics of the current crisis and what changes will create economic recovery and then lead to housing market growth.

Read John Lindeman’s Post-COVID boom towns revealed blog to discover which suburbs and towns will have high price growth and cash flow potential when this crisis is finally behind us.

Posted on May 19, 2020May 19, 2020 by John Lindeman

Post-COVID boom towns revealed

Rising above the uncertainty and rumblings of doom and gloom, John Lindeman reveals suburbs and towns that will have high price growth and cash flow potential when this crisis is finally behind us.

In these unprecedented times, if there is one certainty that we can hold on to, it is that growth will return to our property markets. As the restrictions on movement and travel are eased, some areas will exeprience greater demand for accommodation than others, and they hold the key to finding post COVID boom towns.

Which areas are most at risk right now

Some property markets are at high risk of price falls occurring, and before we can look at the boom potential locations, we should take note of areas that investors need to avoid right now.

They are suburbs where accommodation demand has been largely dependent on short-stay business and holiday rentals, international students, tourists and workers in the hospitality industries. Rental demand has collapsed in these locations as demonstrated by these examples:

The impact of COVID-9 on rental demand in these areas is clear, with advertised rental vacancies nearly doubling in Brisbane CBD, more than doubling in Melbourne CBD, Docklands and Sydney CBD and trebling in Southbank since the crisis started three months ago.

Around half of the investors in these suburbs and others like them in similar high density inner urban precincts are currently hanging on to empty apartments, for which they must continue to pay holding costs without any rental income.

The prospect of price falls in such locations is almost certain, and they could be significant as desperate owners try to offload their properties no matter what, before they become mortgagee in possession nightmares.

However, selling now would be the worst possible outcome for property investors in such areas, as these same areas will bounce back quickly and strongly once travel restrictions are eased and rental demand returns.

Where will the best opportunities lie?

In fact, the areas worst hit by the collapse in short term business and holiday rentals, tourism and overseas migration will be the first to bounce back as the current restrictions are lifted.

Recovery will closely follow the progressive ending of the current restrictions on movement and travel.

When freedom of movement is once again permitted in Australia, we can expect a huge revival in property markets reliant on rental demand from day trippers, holiday makers, business trips and students.

In addition to inner urban precincts such as the Sydney, Melbourne and Brisbane CBDs and their surrounding high-density suburbs, growth will return to popular holiday destinations such as those shown in this table:

In the longer term, our full economic recovery will require an opening of international borders as we experience a huge rise in tourism, international students and migrant arrivals from Europe, Asia and Africa of people seeking the security, safety and opportunities that Australia offers.

After every major international crisis, war or other catastrophe, Australia prospered and our property markets boomed when our borders were opened. There is no reason to believe that the same won’t occur when this crisis is behind us.

Posted on April 27, 2020May 12, 2020 by John Lindeman

The impact of the current crisis on rental markets

The property investment landscape keeps changing almost daily as our governments struggle to keep the economy afloat with new directives and incentives. John Lindeman urges investors to hang in there, because the long-term outlook for rental markets is likely to be totally different to the situation we are facing right now.

There will be a short-term increase in rental supply

As a result of the shut down in the travel, hospitality and recreational industries and a near total movement lockdown, the short-term rental market has collapsed. Owners of holiday homes, short stay rental accommodation and Airbnb type lettings are desperately trying to reposition their empty properties to attract longer-term tenants.

This is leading to a rise in rental vacancies, particularly in areas previously favoured by business travellers, tourists and holiday makers. In addition, many tenants are downsizing, seeking cheaper living options as they try to cope with reducing incomes. The short-term impact for property investors in many locations will be falling asking rents, reduced cash flow and longer vacancy rates.

For some landlords there will be another hit to their cash flow, with some media outlets portraying the “no eviction” directive as a form of tenant relief, or an excuse for tenants not to pay rent.

The Real Estate Institute of Australia is urging tenants to keep paying rent, as not to do so could affect their credit rating and tenancy record.

Even so, there will some who take the opportunity not to pay the rent, while others may be unwillingly forced to go into arrears. This will then have a knock-on effect for investors, as some landlords may decide to sell their properties rather than face the grim prospect of paying the costs of providing accommodation for tenants who are not paying rent in return.

However, abandoning the property market right now could be a huge mistake, as the longer-term scenario for property investment paints a much healthier picture.

There will be a longer-term increase in rental demand

There are two facts that property investors should keep in mind, once we have hopefully safely emerged from the other side of this crisis. The first is that the supply of rental properties will be much lower in future than it is right now.

Some investors will sell their properties because they can’t hold on or because they believe that the situation will only deteriorate further.
The construction of new housing, especially high and medium density off the plan developments is slowing down.
Many potential property investors are adopting a wait and see attitude until they believe the crisis is over and the economy has recovered.

Taken together, these circumstances will lead to a serious shortage of rental accommodation once the crisis has passed.

The second is that the demand for rental accommodation will rise, both from existing households who become renters and from higher numbers of overseas arrivals, most of whom must rent for years before they become sufficiently established here to be able to buy a home of their own.

Australia has always been seen as a land of hope and opportunity after such international tragedies, and this is highly likely to be the case again. The graph shows how our population growth rates peaked in the years following international crises such as the First World War, the Second World War, the Petrodollar crisis and the Global Financial Crisis.

Even more revealing is the fact that our population has always grown, even during the worst years of war or recession – we have never experienced an actual fall in population, unlike many other countries. This has generated a continuously rising demand for housing, especially in our larger cities.

Once the crisis is behind us, rental shortages will emerge and asking rents will rise again, especially in high density precincts and well-established suburbs. housing prices will follow as property once again becomes the investment asset of choice for most investors. The message from this is; don’t panic – hang in there if you can.

Posted on April 22, 2020May 12, 2020 by John Lindeman

The current crisis and the future of property prices

Given the unprecedented situation in which we find ourselves, what is the impact on the value of your homes and investment properties likely to be?

It is a sad fact that apart from the impact of the virus itself, the ever more restrictive controls on our movement and assembly designed to slow down its spread are also having a tragic side effect on employment, business and the economy generally.

The main problem with making any forecasts is that the landscape is changing so quickly that a correct prediction now may turn out to be completely wrong in three months. Even so, here are some facts I can share with you:

The number of potential property buyers is likely to fall

Sales will fall in coming months because people are losing their jobs, businesses are suffering and the capacity of many potential home buyers to obtain housing finance is being eroded. In addition, even those of us who are not directly affected will delay making major decisions, such as moving house or buying an investment property until the crisis has passed.

Some experts believe that this will result in falling prices and soon there may even be talk of a possible property market crash, but while it is certain that fewer people will buy a home or investment property in the coming months, we need to measure both sides of the equation to get a true perspective.

The number of property listings is also likely to fall

The first effect of a fall in buyer numbers is that fewer properties are sold. This leads to longer days on the market for listed properties and a gradual fall in the number of listed properties as potential sellers take their properties off the market or decide not to sell them until things pick up.

In addition to this, the ban on public auctions and open house inspections will encourage some owners to put off listing their home or investment property for sale in the belief that these bans, plus the dangers of viral contamination will deter all but the most enthusiastic buyers.

The balance between supply and demand is not going to change

The most probable outlook is that any reduction in buyer numbers will be accompanied by a drop in the number of properties listed for sale, so that both demand and supply fall together. In fact, the balance between them may not change significantly, as the graph shows.

Source: John Lindeman, Unlocking the Property Market, published by Wileys

At the worst this trend could lead to a small fall in sale prices and at best, it could see prices rising slightly. Either way it will take many months to become apparent because properties are listed for months before they are sold, and it then takes several more months before the sales data is published.

Ignore the scaremongers who predict a housing market crash

Many experts are comparing the current situation to previous economic crises such as the Global Financial Crisis, the early nineties recession and even to the worst one of all, the Great Depression, when wages and salaries fell from 1930 onwards and unemployment rose to twenty per cent, remaining above ten per cent of the workforce for five years.

Australia’s population kept increasing all through those economically depressed years, but new households had to become renters as housing finance was impossible to obtain. This pushed rents up to fifty per cent of household incomes, while house prices slowly fell, as the graph shows.

Source: John Lindeman, Unlocking the Property Market, published by Wileys

The worst year for house values was 1931, when they tumbled by eighteen per cent, but further price falls were minor and in some years prices even rose. There are however, some quite significant differences from those years to the present.

Firstly, the current crisis has not been caused by an economically induced restriction of finance, but a socially created restriction on our movement and assembly. Once these are lifted, economic recovery should be fairly quick. Secondly, our population growth rate is one of the highest in the world, and this will resume when the crisis is over.

The demand for housing will not fall and rents will rise

The main take out from this comparison is that if our population keeps growing in the future (and this is highly likely), then housing demand will rise as well, especially in our major urban centres. Another similarity with the Great Depression is that rental demand will increase and rents may rise if housing finance is difficult to obtain.

The key to survival for both renters and investors is cash flow – rents will go up and so property investors should buy in areas with the highest rental demand and insist on short leases, while renters should look for suburbs with high numbers of rental vacancies and lock in the longest possible lease periods.

Posted on March 16, 2020March 16, 2020 by John Lindeman

When will Darwin’s housing market boom again?

When will Darwin's housing market boom again?

by John Lindeman

The Darwin housing market is relentlessly continuing its decline, even as recoveries occur elsewhere. John Lindeman explains why, and how to pick this market’s turning point.

The Northern Territory is the most sparsely populated state or territory in Australia and seems much too far away for most investors to get excited about, especially with its house market on a seemingly endless downward spiral. Yet back in 2009 Darwin’s median house price was on a par with that of Sydney as the graph shows and its rental yields were the highest on offer in any capital city.

The dramatic rise in Darwin’s housing prices at the start of the current millennium led many experts to assume that this was connected to the coal and iron ore mining boom which was occurring at the time.

In more recent years, the population of Darwin has been falling and there was a net loss of over 1,000 residents to other States in the last year, but what is behind this exodus? Could it really be due to the end of the mining boom or is this a classic false correlation and there’s actually something else that’s causing people to leave, and leading to a decrease in housing demand?

The Northern Territory economy relies on mining for over 16% of its economic output, but there has not been any decline in demand for its minerals in recent years which would explain Darwin’s fall in population. In fact, demand for the Territory’s non-ferrous and high-technology minerals, fertiliser commodities, gold and uranium have grown in recent years.

Demand for oil and gas has also risen, even though Darwin acts only as a support hub for the oﬀshore oil and gas ﬁelds located along our northern coastlines and these operations have little impact on the local housing market.

The secret to Darwin’s housing market performance is that it is the defence capital of Australia, the embarkation point and logistical supply and support centre for virtually all of our overseas military, peacekeeping and border security engagements. Every service person stationed overseas requires the support of ten logistics personnel back in Darwin and so housing demand swells there whenever we have large scale overseas commitments and then it quickly declines again when they end and the personnel leave.

Our successive and significant defence and peacekeeping commitments grew rapidly from 2000 onwards, with 6,000 military and police personnel deployed in East Timor and over 7,000 personnel stationed in the Solomon Islands from 2003.

Thousands of military personnel were also engaged in warfighting operations in Iraq and Afghanistan. These deployments propelled the Darwin housing market upwards as the troops were rotated in and out of Darwin, with support personnel and their families making Darwin a temporary home.

More recently our defence forces have been deployed in the north to combat smuggling and prevent illegal immigration under “Operation Sovereign Borders”. We have participated in international stabilisation efforts in Afghanistan and operations to counter Islamic State, but these commitments have now declined, resulting in the current fall in the city’s population and a decline in Darwin’s housing market.

These high numbers of temporary residents changed the nature of the Darwin housing market for several reasons –

The personnel and their families were nearly all renters.
Their rents were heavily subsidised, resulting in high rental yields.
They left Darwin when their term of duty was over.

Property investors were drawn to Darwin from the early years of the millennium because of the high rents on offer, but with the result that nearly half of all dwellings in Darwin are now investor owned rental properties. When you compare this to the rest of Australia where only one third of dwellings are investor owned, it is easy to see that the high percentage of investor owned properties gives this market its volatility.

While rent demand was rising, rents also increased and investors competed to buy properties. This resulted in high price growth, but when rent demand started falling prices followed, as investors tried to sell their empty properties at the same time.

Only new defence, peace keeping and border security commitments operated in or from Darwin will turn this housing market around, so canny investors will keep an eye on possible changes in our overseas commitments as it is the presence of personnel in Darwin who are associated with our overseas military, peacekeeping and border security activities which underpins demand for housing in the city.

Posted on March 1, 2020March 16, 2020 by John Lindeman

The property investment puzzle solved

by John Lindeman

The housing market is like a huge jigsaw puzzle, with more than ten million properties spread over 15,000 suburbs. Your outcomes as a property investor will largely be determined by where, when and what you buy, so finding properties with the best potential to meet your goals is essential.

While most areas and properties will deliver rental income and some price growth over time, really good results are never guaranteed. Investors must solve the property investment puzzle to find investment properties which will deliver the best cash flow or highest imminent growth.

Although it may seem impossible, with so many properties and suburbs to choose from, it can be achieved by sorting all the suburbs in Australia into groups with similar risks, opportunities and potential. I have done this for you by creating four groups of suburbs called Cash Cows, Shooting Stars, Sleepers and Long Shots. To estimate the likely performance of any suburb, all you need to know is which group it belongs to.

CASH COWS, SHOOTING STARS, SLEEPERS AND LONG SHOTS

Each group contains all those suburbs which have certain characteristics in common, such as their locations, buy price ranges and types of properties, types of renters and potential buyers.

This not only makes them easy to find, but also reveals the likely results you will receive from each of them as an investor.

This knowledge gives you a much better chance of buying in an area with the best potential to meet your goals. So, what are the opportunities and risks of the suburbs in each of the groups?

SLEEPERS OFFER LOW RISK, BUT AVERAGE PERFORMANCE

Most of our 15,000 suburbs are located in established areas of our capital cities and regional towns. They are the sleepers, where property pices and rents move in tune with the overall ebb and flow of the market. Because there are so many sleepers, they actually “make the market” and it is their rent, price and yield performance that generates the city and regional median house and unit data we read about.

This means that if you invest in a typical property in an established city suburb, you can expect to obtain average performance over time – no better, and no worse.

CASH COWS OFFER HIGH RENTAL YIELD WITH SECURITY

Cash cow suburbs are the holy grail of investors who look for positive cash flow because they provide high rental yield driven by genuine rent demand.

You will find them in areas with high renter numbers, such as the older, well established but ungentrified suburbs in our cities and regional areas where overseas arrivals tend to rent. Ex Housing Commission precincts and rural towns also have pools of permanent renters whose local ties are too strong to encourage them to leave.

Cash cows are also located in high density inner urban precincts with excellent facilties and recreational services where young households and professional couples on high disposable incomes seek well appointed low maintenance unit rentals.

LONG SHOTS PROMISE HIGH RETURNS BUT WITH HIGH RISKS

The hope of buying in a town or suburb just before it bursts into spectacular growth is something that appeals to us all. It would be like winning the property lottery and indeed the similarity is striking, because only very few people who invest in long shots ever hit the jackpot.

Most of these investments are based on pure speculation about an imminent housing boom, rather than actual evidence. They start with attention grabbing news headlines or trending social media posts about a huge new mining venture, port expansion, railway line or other intrastructure project that has everyone buzzing with excitement, and the fear of missing out.

Because so many of these big ticket projects are delayed, altered, abandoned or don’t even start, the initial boom often ends along with the enthusiasm of speculators who rushed in to buy properties. Their disappointment turns to panic as property prices crash and no one wants to buy. Long shots are strictly for those who can bear the risk of recurring losses in the hope of an occasional huge payoff.

SHOOTING STARS PROVIDE BOTH HIGH RENT AND PRICE GROWTH

Hidden quietly amonst the sleepers, cash cows and long shots are the shooting stars, those suburbs with the potential for buyer or renter demand to rise dramatically, generating high price and rent growth in the process.

Sleeper suburbs can turn into shooting stars with a sudden rise in first home buyers, pushing up prices in outer suburban areas, or when retirees decide to downsize, creating booms at the top end of the market. Cash cows boom if a dramatic lift in rental demand from overseas arrivals, tourists or construction workers sends rental yields upwards and investors start competing to buy properties.

Long shots transform into shooting stars when work on a new mine or infrastructure project actually begins and rental demand from construction workers sends rents shooting upwards. Prices often also rise as investors rush in to buy properties.

On completion, some projects such as highway duplications and new railways can cause a second and more sustained boom in buyer demand and prices as nearby areas become safer, easier and quicker to access.

The secret to success is to locate areas where a sudden rise in buyer or renter demand is imminent, and then buying the right type of property just before the growth kicks in.