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The property market stripped bare

The property market stripped bare

John Lindeman strips the market bare to find out why housing prices are shooting up almost everywhere and reveals what will happen next.

There are many explanations for the current housing market boom, such as lower interest rates, relaxed borrowing rules, buyer grants, building incentives, stamp duty waivers and tax cuts. But while these have all contributed in some way to the rise in buyer demand, they don’t explain the dramatic increase in the number of potential buyers, or the huge rise in their buying power.

When we strip the market down to the basics, we are left with just two facts that explain why housing prices are booming and tell us what’s around the corner.  That’s because property purchases consist of two amounts – your deposit, and what the banks will lend you.

The banks require you to make a significant deposit on the purchase price of your property, because this protects them from risk if its value falls.

They also need to protect themselves from risk if interest rates rise, so they apply a floor rate which is two or three percent higher than the standard variable rate to your loan application. This serviceability test shows whether you can keep up repayments if interest rates go up and it controls the amount of housing finance that they will lend you.

These solutions have always made it difficult for first home buyers to obtain housing loans, but now everything has changed, and it’s largely because of the pandemic.

There are more potential home buyers than ever before

The need to have a big deposit has always been the first big stumbling block for potential home buyers. But last year, we had to endure lock downs, social distancing and border closures while many people worked from home. We stopped spending on travel, clothing, recreation, entertainment and holidays and saved the money instead.

As a result, many aspiring home buyers have managed to save enough for a deposit and so the number of potential first home buyers has increased dramatically, with a fifty percent rise in first home buyers entering the market over the last year.

Banks are willing to lend more to each potential home buyer

But it’s not only the number of first home buyers that has increased – the amount that banks are willing to lend has also gone up. This is because the banks have significantly lowered the floor rates against which they test home loan serviceability.

During the pandemic, lenders lifted their floor rates to seven percent and more, because they were worried that a severe economic recession was heading our way.

Now, however they have dramatically cut their floor rates because the economy is back in growth and the RBA has given an assurance that interest rates won’t rise for some years. The result is that potential home buyers have received a massive uplift in their assessed loan serviceability and higher loan amounts are being approved.

For those who like stats, this table shows the greater home buying capacity that the lower floor assessment rates have given potential buyers, when this is based on their household income. On average, the reduction has given home buyers the capacity to lift sale prices by up to twenty-five percent or more above pre-pandemic levels.

The three growth governors will soon kick in

Now you can see why there are not only more potential home buyers in the market almost everywhere, but that they can offer higher prices as they compete with each other. So what happens next? Watch for these three growth governors:

  • The number of home buyers entering the market will start to fall.
  • Loan size limits set by the banks’ lower floor rates will be reached.
  • More current home owners will be motivated to “cash in” and try to sell.

As these growth governors take effect, there will be fewer buyers in first home buyer suburbs with more potential sellers and price growth will slow down.

We are already seeing evidence of this trend in many of the lowest priced suburbs of the Outer Sydney Rim (such as Penrith, the Lower Blue Mountains and Campbelltown), where the number of properties listed for sale has risen in recent months. This gives us a clear indication that the peak of the market is already close to being reached in these first home buyer locations.

While buyer demand is now rippling to higher priced areas as existing home owners decide to upgrade, the same growth governors will eventually limit the size and duration of price rises.

Some areas could be in for a wild ride though, if their house prices grow by more than twenty-five percent over pre-pandemic levels. Remember that the higher the price rises, the more likely it is that these areas will suffer price corrections as the market cools down. 

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The compounding growth myth unmasked

The compounding growth myth unmasked

Ever heard of the power of compounding growth? You’ll often see it promoted as the reason that property investment can provide such great results. But does it really work? John Lindeman investigates.

Many experts assure you that property investment is a long term game because prices always rise over time. Future growth builds on past growth, delivering the snowballing result called compounding growth.  

Because of the power of compounding growth, some strategists even insist that timing the market is futile. By this they don’t mean that its future performance is unpredictable, but that it is simply unnecessary to try and predict the future – all we need do is buy and hold.

They point to the long-term performance of property and show you how its regular and consistent price growth exponentially increases your equity over time, as demonstrated in this commonly used illustration of the power of compounding growth.

Compounding growth seems to offer you a secure pathway to wealth, because as your equity grows, you keep buying more properties until you reach your final goal.

Most investors only ever get to own one or two properties

If only this were true! Yet the facts are that very few property investors own more than two properties. According to the ATO1, ninety per dent of property investors only own one or two investment properties and are seemingly unable to make the power of compounding growth work for them. But that’s because the theory doesn’t work in practice, for two very critical reasons.

Firstly, unless your properties generate positive cash flow, you will quickly hit a borrowing ceiling, because banks won’t lend you any more money. Most properties are negatively geared, which means they cost more to hold than the income they generate, so you are actually losing money, and your borrowing power is quickly exhausted.

Secondly, although property prices do go up over time, price growth can dramatically vary from one location to another, even at the same time. Some areas may not experience price growth for a decade or longer, while others experience short but sharp bursts of growth which are then followed by years of price stagnation. 

Theory and practice are different

Einstein once said, “In theory, theory and practice are the same, but in practice, they are different.”


The chances of hitting a property jackpot are slim indeed if we buy and hold without achieving both consistent positive cash flow and high price growth.

This is why most investors never get past owning one or two investment properties.

Their experience shows us that relying on the power of compounding growth alone is totally flawed.

Those few investors who have managed to increase both their equity and portfolio over time and achieved their wealth creation goals have a secret – they always purchase the right properties in locations with high positive cash flow as well as the potential to generate high price growth.

Source:
1 How many properties do investors own? Michael Yardney, YIP Mag blog 12 Dec 2018.

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How to profit from a growth market

How to profit from a growth market

Warren Buffet has just two rules that investors must follow to ensure success. His first rule is Never lose money and the second is Never forget the first rule. So how can investors use this wisdom to profit in the current market?

It would seem that getting into a growth market is the best way to avoid losing money, and in fact many investors do just that, by holding off buying properties until they are sure that prices are rising.

There’s an issue with buying in growth markets

The issue is that property market performance in a city, region or even a suburb moves in a recurring pattern of growth and decline, as the picture shows.

When we are in a growth phase such as the current one, it’s critical to know just how long prices are likely to keep rising. Are we still at the beginning, with more good growth to come, or are we already near the end? This is because sooner or later, prices will become unaffordable, or current buyer demand will be met and growth will end.

When growth ends, markets go into decline and eventually bottom out, sometimes for years, before demand grows again. It’s those investors who enter a market when prices are about to increase who make the most money.

On the other hand, the last buyers to enter a market before prices peak stand to lose, because they have purchased just before the declines set in.

So how do you know that the market where you intend to purchase an investment property has plenty of growth potential left in the tank? The answer to this is not measured by the length of time that price growth has been occurring, nor is it indicated by the amount of growth that has taken place. The answer is revealed by the types of buyers creating the demand.

Different types of buyers create different types of demand

Property buyers come in different groups, such as first home buyers, upgraders, downsizers and investors. Each of these has different motives and limits when it comes to buying property, so if we know which group is doing most of the buying, we can estimate when the growth is likely to end. And if we correctly forecast which group is likely to be next, we can buy just before the growth really kicks in.

Investors for example, are motivated only by profit. They enter markets when prices are rising and the more that prices rise, the more investors want to buy.

On the other hand, owner-occupiers are motivated by affordability. They enter markets when borrowing conditions are easy and finance costs are low. The more that prices rise, the fewer of them can afford to buy. Then, when the new affordability ceilings have been reached, owner-occupier demand slows and price growth stops.

In the current market, most buyer demand is being generated by owner-occupiers, not investors. Although that means there’s a limit to the growth that can occur, it also means that investors can take advantage by buying property in areas that have not yet experienced growth, but have the potential to.

Where to wait and where to jump in

As new affordability ceilings are reached, growth in first home buyer suburbs will slow down and then ripple to more affluent areas as upgraders take advantage of their increased equity and favourable borrowing conditions. This means that suburbs in well-established, desirable locations are highly likely to be next to rise in price as upgraders move and improve, indicated in these examples for Sydney and Melbourne.  

Not only will many potential upgraders living in outer first home buyer suburbs move to better homes, but they will also relocate to more suitable suburbs. Investors who buy well-appointed, low maintenance properties in locations with excellent transport, recreational and retail services will be following Warren Buffet’s first rule – Never lose money, as they sit back and watch the price surge occur.

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Bubble, boom or bust – what lies ahead?

Bubble, boom or bust - what lies ahead?

Some experts are claiming that our property markets are heading for a boom, while others are warning that we could soon be in a price bubble about to bust. John Lindeman gives us his take on what lies ahead.

There’s a huge difference between property booms and price bubbles. Bubbles invariably bust and when they do, housing prices end up much lower than where they started. Property booms, on the other hand eventually run out of steam with an occasional small price correction followed by a prolonged period of little to no growth.

The issue is that they both look the same at the start, as this graph shows.

So what’s the difference between a boom and bubble? It’s the type of buyers causing the growth. Buying demand from investors grows when prices rise and the more that they increase, the more that investors want to buy properties. Owner-occupier booms take place despite price growth and the more that prices rise, the more that demand slows down and then stops as prices become unaffordable. 

Only investor led booms can become bubbles

Investor led booms can become bubbles because investors don’t buy properties to live in, like owner-occupiers do. Profit is their only consideration, and fear of loss their only concern.

This means that when price growth slows down or stops, investors start to put their properties on the market and try to sell. When the number of properties for sale exceeds buyer demand, prices start to fall. Panic starts to set in as more and more investors try to sell and because no one wants to buy, the bubble busts.

Owner-occupier booms merely slow down and when they end prices don’t crash, because the purchased properties are now people’s homes. When buyer demand comes to an end, there’s no motivation to sell. Only those home owners who really need to move for personal, family or business reasons will do so.

Property booms can occur anytime and anywhere that the demand for housing outpaces the supply, but only investor led booms can turn into bubbles.

So what type of property boom are we in right now?

There’s a simple benchmark that tells us the type of boom taking place right now, and therefore what is likely to occur when the boom has ended.

The benchmark is called tenure, a technical term that refers to the conditions by which homes are held or occupied. 

The pie chart shows the percentage of homes privately rented, those rented from government agencies and those which are owner-occupied.

You can see that just over one quarter of homes in Australia are rented from private investors, so if the percentage of homes being bought by investors is lower than this, then owner-occupiers are driving buyer demand, but if the percentage climbs higher, then we are heading for an investor led boom and a possible bubble that could bust.

This next graph shows the percentage of homes being purchased by investors and reveals that they have been lower than the 26% benchmark since 2019, and also that the percentage of investors buying homes is declining.

Investor interest in residential property has waned in recent years because rental demand is falling and the yield from rent is too low. Investor interest has turned instead to high yielding investments such as shares, commodities and even commercial property. Owner-occupiers are not deterred by low rental yields, because they buy properties to live in, not to rent out.

The current mix of low interest rates, easy finance, reduced repayment buffers plus government incentives and waivers is causing the current surge in owner-occupier demand and when the new affordability ceilings are reached, growth will slow down and then end, but it won’t bust like a bubble.

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The three little pigs

The three little pigs

The story of the three little pigs and their experience with property provides investors with valuable insights into how property booms occur and why they end.

Each of the three little pigs chose a different strategy, one building a house from straw, another from sticks and the third from bricks, but in the end, only the brick house was able to withstand the big bad wolf’s huffing and puffing.  

Their experience closely resembles the three types of housing market booms, which are those created by investors, opportunity led booms, or those driven by genuine demand for more housing.

Investor booms are like houses built of straw

Like houses built from straw, investor created booms grow quickly, because investors don’t live in the properties they buy or sell. Their only motive is profit, so price growth can be speedy and spectacular, but is also often speculative.

The boom continues as long as the number of investors wanting to buy is greater than those trying to sell.

When the number of investors deciding to take their profit and sell begins to outnumber those wanting to buy, the growth quickly ends. As disappointment turns to dismay the remaining owners may all try to sell at the same time and prices can often crash, just like houses made of straw.

Opportunity booms are like houses made from sticks

Opportunity led booms can occur whenever housing finance becomes cheaper or easier to obtain, giving potential buyers more borrowing capacity.

At such times, renters take the opportunity to buy their first home, and existing home owners decide to upgrade, with the rise in buyer demand causing prices to grow.

Such opportunity led booms continue until new affordability limits are reached and buyer demand slows down. But sometimes they can start to fall apart, like houses made from sticks. This occurs if unemployment grows, or interest rates rise because some recent buyers may decide to sell while others are forced to and prices come down again.  

Population led booms are like houses built of bricks

The third type of property market boom occurs when the number of people wanting to live in a suburb or city suddenly rises and housing shortages occur. The cause could be high numbers of overseas or interstate migrants, or a local transport project such as a new or improved road or rail project which makes an area safer, quicker and easier to access and more attractive to live in.

This last type of property market boom takes time to build momentum, as migrants usually need to rent for several years before they can buy a home, while transport infrastructure projects also take years to finish. However, it is the only boom where demand is driven by something as solid as a brick house – more people.

What type of property market boom will occur next?

Population driven booms produce far more reliable results for investors than opportunity led or investor created booms, and there is every reason to believe that when our international borders are opened again, a population driven boom will start.

We will receive a huge influx of migrants seeking an escape from the pandemic ravaged cities of Europe, Asia, Africa and the Americas. To predict what this huge rise in population may do to our housing markets, we have only to look back to previous times after our international borders were reopened after years of closure.

This is not the first time our borders have been closed.

We have experienced international border closures before – during the First and Second World Wars, because overseas travel was dangerous and migration came to a standstill for several years. When our borders were thrown open in 1919 and again in 1946 we experienced our highest population growth ever, as thousands of immigrants and refugees fled war torn countries to make a new start in Australia.

As the graphs show, this huge rise in housing demand caused housing prices to boom in just a few years.

Graph1
Graph2

Housing prices doubled and even trebled in the years after our borders were opened, and the similarities to our current situation are striking. Our international borders are once again closed and huge numbers of potential immigrants are lining up, waiting to start a new life in a land that has weathered the COVID-19 storm much better than most.

How investors can secure the greatest benefits from the next boom

We can benefit from the forthcoming population driven boom by purchasing investment properties just before the borders reopen in areas where overseas arrivals are most likely to settle. These areas will experience high rental demand and as housing shortages develop and intensify, prices will rise as well. 

In short, these areas will provide investors with the same security as the third little pig enjoyed when he built his house with solid and reliable bricks.

Sources:
Housing Australia, a Statistical Overview, ABS 1991, 1996, Australian Bureau of Statistics
Australian Demographic Statistics, 3101.0 Australian Bureau of Statistics.
Stapledon’s Index, Stapledon Nigel, Long Term Housing Prices in Australia

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How to avoid analysis paralysis

How to avoid analysis paralysis

With so much data available to property market investors, it’s no wonder that the more we dive into the numbers, the greater our confusion can become. John Lindeman explains which stats can help you make informed decisions and which you can safely ignore.

We often see blogs, podcasts and free reports claiming to reveal the next hot spots or areas about to boom when all they do is offer a list of last year’s best performers.

Their authors assure you that suburbs with a long history of strong capital growth have the best potential because their consistent performance is likely to continue.

At the same time, others will tell you the exact opposite, insisting that buying in areas with long histories of little or no growth makes better sense, because they’re next in line and even overdue for good growth.  

Past performance does not predict future performance

It’s no wonder that investors get confused, when past performance stats are used by experts to give you two totally different predictions. Not only do they contradict each other, but they also don’t make sense. Just because a suburb has experienced high past price growth, doesn’t mean it will keep going. In fact, it is very likely that prices will soon be, or have already been pushed up to the point where buyers must start looking elsewhere and the growth is about to end.

But, neither does this mean that those suburbs with long histories of below average growth are lining up in the boom queue. They may have massive stock overhangs, depressed local economies or falling populations with further price declines ahead.

The housing market puzzle has two pieces

Past performance doesn’t help us to make accurate predictions because the housing market is a puzzle which has two pieces – supply and demand. Looking at the past only reveals part of the picture, and we need to look forward as well.  

Housing supply is all about properties. We measure supply in any area by the number of houses, units, townhouses, duplexes and apartments that are on the market from new property developments plus those listed for sale or available to rent compared to past sales and rentals.

Housing demand, on the other hand, is all about people. It’s the number of renters, first home buyers, upgraders or downsizers about to move into an area compared to the number of renters, first home buyers, upgraders or downsizers who are planning to move out. From this you can see while supply looks backwards, demand looks forwards.   

By comparing the current supply of properties in any area to the expected demand for them, we can obtain a clear and complete picture of the state of the property market in that area. We can then make accurate forecasts about potential price and rent changes.

Analysts who only rely on past performance data such as sales and prices to predict the future are trying to solve the puzzle with only a small piece of the total picture and that’s why their forecasts so often turn out to be wrong.

Property market predictions you can trust

Leading property market expert, John Lindeman invented Australia’s only patented Housing Market Prediction Solution, which is a database that ensures investors can avoid the perils of analysis paralysis and make the best possible buy, hold or sell decisions.

This massive data storehouse gathers real time housing market performance data for properties in every suburb.

The patented Housing Market Prediction Solution merges this supply data with highly accurate demand algorithms estimating population growth and movement trends plus forecast buying or renting intentions down to suburb level.

The solution then produces highly accurate property market predictions to identify suburbs with the best growth and cash flow potential, which we reveal in our predictive reports and share with the students of our educational programs.

Past performance you can rely on

Since they were developed by John Lindeman the algorithms employed in the patented Housing Market Prediction Solution have produced a consistent past predictive accuracy rate of over ninety per cent in terms of forecasting both the direction and intensity of price and rent changes for houses and units in Australia’s 15,000 suburbs and towns.

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Which is best – to buy or rentvest?

Which is better - to buy or rentvest?

With the cost of housing finance at record lows, banks willing to lend and our  governments providing incentives, it’s no wonder that first time buyers are rushing into the property market. But which is better – buying your own home or starting out with an investment property?

The main issue with buying your first home is that it often becomes a balancing act between where you can afford to buy and where you want to live. You may wish to buy a home in a familiar area close to schools and good transport services, or near a shopping centre and recreation facilities, only to find that homes where you want to live are priced out of your reach.

Your first home purchase is usually a compromise between where you want to live and what you can afford. This is why so many first home buyers sell after a few years and then move to a more suitable home in a better location as soon as their situation improves.

How to have the best of both worlds

You can easily resolve this dilemma by renting where you want to live and buying an investment property where the market offers high rental yields and high price growth potential.

This strategy is called rentvesting, and it’s becoming increasingly popular because it gives you the flexibility to live where you want for lifestyle, while it also puts you in a much better financial position than if you bought a home.

There are several reasons for this:

  • You can claim all the rates, insurance, maintenance, repairs and even interest repayments of an investment property against your other income.
  • You receive tax benefits, depreciation and of course, rental income.
  • The property should be cash flow positive, making you money from day one.
  • The price growth potential should be much higher than if you had bought a home.

Knowing where you want to live is a “heart” decision – it’s based purely on your personal preferences, but knowing where to buy an investment property is a “head” decision. You won’t be living in it, so your preference doesn’t matter.

What does matter is that rental demand for your investment is high now, and that buyer demand will be high when it’s time to sell. This will give you strong, regular cash flow from day one and high price growth over time.

In principle, the choice is clear. It’s much better to rent where you want to live, and buy where you want to invest.

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The wolves have returned

The wolves have returned

Whenever confidence returns to our property markets, the wolves in sheep’s clothing come back as well, ready to trap unsuspecting investors.

With many parts of the property market rebounding from their pandemic induced downturns, the wolves have returned, cleverly disguising themselves with incredibly attractive schemes that promise to make you wealthy from property investment.

They shower you with free guides, booklets and toolkits, promoting their fail proof success schemes.

They run free training, intensives, hybrid and virtual livestream events designed to showcase and share their wealth creation secrets from property investing.

Their wealth creation promises are impressive

Their investment schemes may only require a low initial outlay from you but offer high cash flow and wealth from their innovative strategies. Talking up the prospects of the opportunities they have unearthed, they’ll provide you with assurances of rewards, impressive growth forecasts and even some success stories from clients who really cleaned up.  

Their motives may at first appear honest and even honourable, so why do I call them wolves in sheep’s clothing?

They are not at all what they appear to be

Their aim is not to show you where and how to get the best results from property investing, but to convince you to invest in property related schemes or projects from which they will receive substantial financial rewards. In other words, they have their own best interests in mind rather than yours.

There is nothing wrong with paying for the sound assistance you may receive from buyers agents, mentors, property strategists or other experts, but there is everything wrong with the wolves who pretend to be working in your best interests, but really have only their own financial welfare in mind.

How to unmask these well disguised wolves

They often won’t reveal the actual details of their get rich plans unless you register for and attend their on-line or in-house training sessions, consultations and workshops. This is because their wealth creation strategies usually require high pressure sales tactics to convince you that they work.

Once they have your complete attention, they’ll try to sign you up to courses, workshops or training programs for schemes such as passive development, rent to buy, land banking, options, even co-living investments or sub-letting rooms.

The wolves talk down the very real financial and legal risks of such strategies while talking up the benefits, but remember if it sounds too good to be true it usually is.

You can easily unmask such wolves in sheep’s clothing by Googling them. Some of them don’t have websites, but operate purely out of social media platforms.

You may even discover that they have been investigated by ASIC or the Department of Fair Trade.

Property discussion forums will also reveal whether the experiences of their past clients have been good, bad or even shocking.

Of course, not everyone is perfect, but by testing their claims of accuracy, reliability and credibility you’ll quickly be able to sniff out those wolves in sheep’s clothing.

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Putting your eggs in one basket

Putting your eggs in one basket

Investors usually diversify their properties to minimise exposure to risk. But if we know exactly where and what properties to buy in order to secure the most profitable outcomes, we can safely put all our eggs in one basket.

Many advisers say that putting all our eggs in one basket is a high risk strategy. They often recommend that we should diversify our properties to minimise our risk.  

Their logic is that if the performance of one property falters, good performance in the rest will still give us an acceptable overall result.

While diversifying our properties may seem to make good sense, the question then arises – how should we diversify?  Some strategists recommend that we should spread our properties across several States, so that if the market slows down in one State, it may still perform well in the others.

Other advisors tell us to diversify with a mix of different property types in our portfolio, such as houses, townhouses, duplexes and units so that if demand falls for one type of property it could rise for the others.

A few theorists may even suggest that we should combine these strategies by purchasing different types of properties in different States, believing that the more our properties are mixed by type and location, the lower the risk becomes.

These sorts of diversification strategies rely more on good luck than on sound research and they can still leave all our properties at risk. More to the point, such random diversification is completely unnecessary right now, because we are at one of those rare moments in history when areas with the best potential can be easily identified.

There’s no point in diversifying if we know where to buy

With international borders closed, our governments are being forced to take dramatic and very specific initiatives to kickstart the economy back into growth.

In particular, government stimulus programs are focused on accelerating transport infrastructure projects right around Australia, from the Bruce Highway expansion in Queensland to new Metronet train lines in Perth.

These projects have the capacity to deliver the perfect trifecta for property investors  – low risk, high cash flow from day one and market driven price growth into the future.

They are low risk, because they’re recession proof government funded projects which will go ahead no matter how the economy performs.

They are high cash flow, because these projects require large numbers of construction workers to rent locally while the projects are underway.  

They cause price growth on completion, as they will make areas easier, quicker and safer to access.

We recently saw this with the Pacific Highway duplication from Newcastle to the Queensland border. A massive project with over one thousand kilometres of dual carriageways, tunnels and overpasses, jointly funded by the Federal and State Governments.

As the construction work progressed, a shortage of accommodation for the workers and their families sent rents skyrocketing in towns such as Taree, Port Macquarie, Kempsey, Maclean and Ballina.

This was followed by price booms in the same towns when tourists, holidaymakers, retirees and discretionary buyers discovered that they were now much quicker, easier and safer to access.

PacHwy

We are highly likely to see the same results again with new government funded, shovel ready transport infrastructure projects in locations where the construction workers are likely to rent locally. It only remains for you to do a little research on the potential for rents to rise during the construction phase and for buyer demand to surge when the work is completed.

Right now, putting your property investment eggs in such a government guaranteed basket could offer the lowest risk of all.

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Lindeman looks at the supply side

Lindeman looks at the supply side

With so much media attention centred on housing demand and prices, John Lindeman takes a look at the supply side to see what the post pandemic market holds for property developers.

Developers are often blamed for building unsightly, even unsafe high density apartments and encouraging speculative investment, yet housing development has been the means by which our cities and towns have grown and been rejuvenated.

Many of our towns and cities were initially founded on harbours, rivers and bays which offered easy transport for both people and goods. As our cities grew so did the docks, railways, power stations and abattoirs hugging waterside areas. Much of the potentially most attractive parts of major cities became heavily polluted industrial heartlands and residential no-go zones.

But look around these areas today and you’ll see a fundamental change reaching fulfilment almost everywhere as the last decaying and derelict wharf, warehouse and factory precincts are transformed into exciting, vibrant suburbs with new dwellings located right on the city’s doorstep. This is the supply side of our housing market operating at its best.

Oversupply is usually caused by a fall in demand

Despite this, developers cop a great deal of bad press, with an excess of new housing stock, called ‘oversupply’ or “overdevelopment” being blamed for price falls and high rental vacancy rates.

It is far more common, however, for price crashes to be caused by sudden falls in housing demand than by overdevelopment.

For example, it would be unfair to blame urban developers for the high number of empty units in the CBDs of our biggest cities, or for the rapidly falling rents being experienced by their owners. The cause was clearly the COVID-19 pandemic, which led to border closures and a near total collapse of housing demand from short term renters, international students and overseas arrivals.

When our borders are reopened, the numbers of students, tourists and migrants arriving here are likely to be even higher than in the years before the outbreak of the pandemic. History shows that the only times we have previously experienced such border shutdowns were during World War I and World War II, and as the graph demonstrates, our population rose by record levels after each of these conflicts ended.

The green arrows point to those years when our population rose rapidly as migrants and refugees sought a new life far away from war torn Europe. There is every reason to believe that the same influx will occur when our international borders reopen, enabling thousands of people to escape covid ravaged and disaster ridden countries.

Any current oversupplies will be temporary

Once the borders are open again any current surplus in the supply of housing will quickly disappear, and the demand for more housing will be acute. The reason for this is simple – every overseas arrival needs a place to live. The issue is likely to be that there will not be sufficient properties to meet the demand, especially in areas where overseas arrivals initially settle.

Property development ties up huge amounts of capital, so developers tend to avoid taking risks by selecting areas that have already experienced strong recent buyer demand, rather than locations which may have the potential for future demand, but have not shown any evidence of this recently.

The development time lag can take years

This cautious approach can result in a “development time lag” of several years before rising housing demand is met by developers. To meet growing buyer demand developers will pre sell units off the plan before they actually start building them. This has little impact as long as housing demand in any locality remains constant or is rising. but when buyer demand suddenly slows down or stops it has a huge effect.

In such situations an oversupply can quickly occur. This leads to price falls, and creates immense problems for those who have purchased uncompleted units off the plan, or in some cases, when construction has not even started.

Even though some of these buyers may only have paid a small deposit bond, they are obliged to pay the agreed contract sale price at settlement, by which time the actual market value of the unit may have fallen well below the sale price.    

The graph shows how this played out in the Gold Coast high rise unit market before and after the Global Financial Crisis (GFC). Speculative buyer demand (shown by the red line) escalated rapidly from 2004 onwards, with many of the buyers being overseas investors, encouraged to buy units with low deposit bonds and attractive rental guarantees at free seminars and promotional events.

Motivated by rising buyer demand, developers gained approvals to build large numbers of high rise unit projects which they sold off the plan, well before any construction work had actually started. Buyer demand rose relentlessly until the onset of the Global Financial Crisis (GFC) caused it to almost totally collapse in 2008. But the number of new units (shown by the gold line) continued to rise after the GFC as projects were completed, leaving the Gold Coast unit market with a massive oversupply.   

From 2009 onwards, rents started falling and investor owners were left with vacant apartments and no rental income. Many owners were forced to sell at a loss as unit prices plunged by up to forty per cent over the next few years.

Demand for units rose again after the opening of the G-Link light rail (shown above) from 2014 and in the lead up to the 2018 Commonwealth Games, but a much more cautious developer sector is only just responding to meet buyer demand on the Gold Coast.

This example shows us how it can take many years for markets to recover from oversupplies and even longer before developers are bold enough to re-enter such a market even after another shortage becomes evident.

Another property boom will soon be on its way

The current situation in the inner urban unit markets of our biggest capital cities is very similar to what took place on the Gold Coast, with the pandemic replacing the GFC as the cause of the collapse in demand.

Once the international borders are open our population growth will be boosted by huge numbers of overseas arrivals and demand for housing will escalate, but because of the development time lag, it will take years before sufficient properties are available on the market to meet the demand.

In short, we are likely to experience a repeat of the huge housing shortages that followed the last two world wars, when rents shot up and prices doubled within a few short years. Although this next housing market boom will eventual ripple through all our major city markets, the initial growth areas could be the very same areas that are now suffering from rent and price falls.

Warren Buffett famously said “Be fearful when others are greedy and greedy when others are fearful.” – for developers, that time will here very soon.