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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.

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More spin than win

More spin than win

Some experts are calling the new simplified lending rules a huge economic game changer which will deliver benefits for everyone, but John Lindeman believes they could be more spin than win.

It sounds fantastic in theory – a debt led recovery, with relaxed lending restrictions freeing up huge amounts of credit and supercharging our economy back into growth.

In practice, however, the change from “responsible lending” to “responsible borrowing” won’t encourage banks and other finance providers to throw open their vaults, nor do they give us any incentive to race out and apply for more credit.

People don’t borrow more to get out of trouble, they spend less

Unless there is a bright light at the end of the debt tunnel, people faced with financial hardship tend to tighten their purse strings and spend less, not borrow to spend more. Here’s a graphic example of how this works.

In a recent estimates hearing, the head of the National Bushfire Relief Agency, Andrew Colvin stated that only five (5) applications for concessional loans had been approved to bushfire affected small businesses.

These added up to a loan total of $400,000, just 0.02% of the $2 Billion allocated by the government for bushfire relief.

The government’s notion that people would borrow to get out of trouble was badly misjudged. Many business owners simply decided that increasing their levels of debt would make it harder for them to recover, not easier.

So, the assumption that people will race out and apply for housing finance, personal loans, increase their credit card limits or take out payday loans as a pathway to financial recovery is flawed, as it is the very last thing most people will actually decide to do.

But. even if some of us have such plans, there’s a much bigger obstacle. Even before we apply for a loan, finance providers already know our debt capacity and ability to make repayments.

The finance providers know all about us anyway

Over the past few years, the government has been quietly implementing what they call Comprehensive Credit Reporting (CCR), which requires finance providers to report our credit history and repayment performance back to credit bureaus so that they can share this information with other lenders.

Previously, credit bureaus only listed application busting information such as defaults and bankruptcies on your credit report.

Under CCR your report shows all your past credit applications, amounts applied for, loans declined and approved credit limits.

Plus, CCR exposes your repayment history, which must be provided by lenders to credit bureaus, along with default agreements and any deferrals you have applied for, such as those under current repayment moratoriums.

These new reporting rules mean that finance providers will know much more about you than your credit rating when you apply for your next mortgage, personal loan, credit card or payday loan – your CCR lays bare your current debt position, your repayment history and your capacity to repay any further loans.

So, finance providers don’t have to take your word about how little you spend on Uber Eats, Netflix, or your capacity to repay more debt. No matter what you assure them in your loan applications, they already know everything they need to approve or deny you further finance.

Put simply, finance providers won’t be lending more but they will be lending more carefully. That’s why any suggestions that these new simplified lending rules will lead to a debt driven recovery are more spin than win.

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The elephant in the property market

The elephant in the property market

John Lindeman reveals an elephant that’s about to make its presence felt in the property market and he explains why it’s a huge potential game changer.

It won’t be deterred by rising unemployment, housing finance restrictions, buyer confidence or economic downturns.

It has the power to radically alter housing prices and rents, and it’s about to be unleashed on our property markets. What is this elephant in the property market and where will it reveal itself?

The elephant is the massive movement of people from one State or Territory to another that will result in large changes to our property markets.

The biggest changes to property markets are made when people move

People change housing demand and supply when they move, because we all need a place to live. When enough people move, they can dramatically alter housing prices and rents in the process.

Before our internal borders were closed, around three percent of our population moved from one State or Territory to another each year. Right now, hundreds of thousands of people are waiting for the borders to reopen so that they can do the same. 

As this graph shows, the numbers of people relocating within Australia from one State to another each year has been more than double our total population growth, leading to far more significant changes in housing markets than growth causes.   

This graph clearly demonstrates that before the pandemic there were twice as many people moving as there were new residents arriving or being born here, but there’s much more to it – these relocators pack a double whammy. Not only does every moving household increase demand by needing a new home where they move to, they leave an empty one behind, increasing housing supply where they move from.

That’s hundreds of thousands of properties changing tenants or owners each year as people move from one State to another. It’s like a huge elephant making its presence felt wherever it decides to move around.

With such massive numbers of people moving, why is this phenomenon going unnoticed? It’s partly because the current border closures have stopped interstate movers in their tracks.

The elephant is hidden from our view

Yet, even when our State borders reopen, the potential effect of these relocations is still likely to go unnoticed. This is because many statisticians and economists quote and rely on net interstate migration numbers, not the total number arriving or leaving.

Net interstate migration numbers leave us with a distorted view of what’s actually been going on. For example Canberra’s net interstate migration last year was zero, but what this hides is that 22,000 residents left the ACT, and another 22,000 new residents arrived.

The graph shows that around ten percent of Canberra’s population move in or out of the ACT annually.

The “zero” net interstate migration figure for Canberra completely hides the highly significant fact that so many people do move, and the effect that they have on the city’s housing market.

Net interstate migration hides changes in housing needs and preferences

Why is this important? Because the people arriving very often have different housing needs from those leaving. Most of Canberra’s arrivals are young professionals seeking work in the public service and creating demand for unit rentals, while many of those leaving are older residents retiring at the end of their careers and selling fully owned family houses.

In fact, many of the otherwise unexplainable ways that housing markets perform become crystal clear when total interstate migration figures are taken into account.

What will happen when the State borders re-open?

Interstate migration has come to a temporary halt with the State borders closed, but is sure to start again when they reopen. There will also be a huge backlog of people who have been anxiously waiting to move, and a large number who have simply decided that it’s time to relocate for other reasons.

Looking at net interstate numbers doesn’t reveal the total numbers of people moving, but it does show the net effect on State and Territory populations.

The graph demonstrates that last year’s interstate migration winners were Queensland and Victoria, while the losers were South Australia, the Northern Territory, Western Australia and New South Wales.

The critical fact is that there are many different types of people moving, and their housing needs are varied. Last year, younger people left Perth, Adelaide and Tasmania in search of employment, education and lifestyle opportunities.

Young couples and families left Sydney in search of more affordable housing in Melbourne and Brisbane, while older people moved from Sydney and Melbourne to downsize in retirement havens and coastal resorts in Tasmania and Queensland.

Most of this movement is hidden from view when we use the net interstate migration figures. For example, the following graphs show the total number of people moving in or out of each State and Territory last year.

Arrivals
Departures

You can see that 120,000 people left New South Wales last year for other States, but another 100,000 arrived from those areas, leaving the State with a net loss of 20,000 to other States. The point is that the many of the people who left were older people looking to downsize or young families wanting to buy their first home in a more affordable city, while many of the arrivals were young renters from other cities.

The total effect of these moves is hidden by the relatively small net interstate migration outcome, but what is far more important is what will happen when the State borders reopen.

The big property market winners and losers will be different

Large numbers of people will start to move again when the borders are open, and there are likely to be even more of them than before, because of the backlog that has built up this year. Their destinations will also be different, because some cities have become more attractive while others have been tarnished with a COVID-19 stigma that may take some time to dissipate.

More opportunity seekers leaving the western and central States and Territories will be attracted to South-east Queensland, and Brisbane in particular is about to receive large numbers of young renters when the borders reopen. Watch for a dramatic rise in rental demand in areas they move to, especially inner urban unit markets.  

People

Young couples and families will again leave Sydney in search of more affordable housing, and are likely to head for first home buyer areas in Brisbane and the Sunshine Coast. This means that prices in the newer outer suburban areas of these cities are likely to rise, especially first home buyer locations, which is good news for Brisbane property investors, who have been waiting a long time for growth to return.

Potential retirees will also be on the move again from southern cities and both Tasmania and South-east Queensland will be the beneficiaries, with demand rising in coastal towns and retiree destinations, especially for low maintenance, easy access and secure dwellings which are retiree ready.

Retirees

Get in before the booms start again

This is not to say that all relocators will choose the same destinations, and other housing markets will benefit from increased renter and buyer demand, but by investing in areas that are likely benefit most from interstate migration we will get a strong head start on the price growth and rental demand to follow.

This is because these interstate movements will begin well before our international borders reopen.

The areas that will benefit are likely to be the same as those favoured by overseas arrivals, when they start arriving later next year, pushing them into strong growth.

Migrants

This graph provides a picture of how net interstate migrations could pan out once borders are open again, with Queensland and in particular Brisbane and the Sunshine Coast being the big winners. 

Sources:
CoreLogic publishing housing price data
Australian Demographic Statistics, ABS, 3101.0

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The emerging relocation trend

The emerging relocation trend

Many people are becoming increasingly dismayed and disillusioned with the impact that the pandemic is having on their personal, social and financial circumstances.

While some are looking for any opportunities that the new normal is presenting, others are taking action – they’re moving.

More and more people are making plans to move as soon as they can. While some of them may rethink their plans when things are relatively back to normal, others will definitely relocate.

The latest property data indicates that several relocation trends are already emerging, with professionals upgrading, retirees downsizing, couples and families relocating. This is not something new, as people have always moved in search of better opportunities. 

We have experienced such relocation trends before

Most of us have parents or other forebears who were born overseas. Although some people have come here to escape persecution and discrimination many arrived in the hope of finding better opportunities for themselves and their children. 

In fact, before our borders were closed, over sixty percent of our new residents regularly came from other countries.  

 

But while our relocations are not novel, what is currently driving people to make such moves certainly is, and this is setting in train a new wave of moves which are likely to grow in number as the economic downturn worsens next year.

Perhaps the closest parallel we can find to this situation is what took place during the Great Depression, when our population trends underwent two massive changes.

  1. In response to the economic crisis, our borders were closed to new overseas arrivals. As most of these migrants preferred living in our biggest cities, housing demand in Sydney and Melbourne fell.
  2. Many existing residents moved or were driven from our major cities to regional and rural areas, seeking work, affordable housing and an escape from depressed urban environments. This caused a rise in housing demand in those areas.

The drift to regional and rural areas was driven by massive changes in the economy and social order which the Great Depression created. Unemployment numbers rapidly rose during the early 1930’s but even those with jobs had their wages cut. Many lost their homes and found it impossible to make ends meet. It was also a time of social unrest, especially in the big cities where right and left extremists held protest rallies and urged people to reject a system which had failed them.

Australia’s rural areas offered people an opportunity to escape from the turmoil. Single men took to the road, becoming swaggies who tramped from town to town seeking whatever work was available.

Needy families found cheap food and accommodation in country towns, growing their own food and making do with whatever nature could provide.

The graph shows how the average price of a country house compared to a similar city house has changed over time. During years of large scale immigration and economic prosperity, city house prices have risen more than those in country areas. At one of these periods (during the early fifties), the value of a country house was only half that of a comparable city dwelling.

The graph shows that this trend was dramatically reversed during the Great Depression, when city house prices fell more in value than country ones, some of which actually rose.

By 1940, (green arrow) the price of an average country house was fifteen per cent more than that of a similar city house, something which has never occurred before or since.

Could this happen again? All it would need is the same two coinciding population trends, which are a massive reduction in overseas arrivals and a significant shift away from city living to regional and rural areas. We are now witnessing the emergence of both of these trends. 

This is the emergence of a new relocation trend

Not only have the numbers of overseas tourist, student and migrant arrivals collapsed, leaving our inner urban rental markets in a state of disarray, but many existing residents are deserting them because they were never designed to cope with the new social distancing requirements and the attractions of urban living have dissipated.

Some inner urban locations could even be in danger of becoming virtual tomb towns. Not only has their attractiveness for future tourists, students and recent arrivals diminished, but the numbers of such new arrivals are likely to be far lower in the foreseeable future.   

This trend will continue and strengthen as the economic impact of the pandemic develops over coming months.

Such a dramatic shift in housing demand could even lead to housing booms in locations less unaffected by the pandemic and its social and economic fallout, where people will hope to discover opportunities for exercise, entertainment, employment and a better lifestyle, free from the threat of restrictions on movement, assembly and travel.

While the causes of our current situation are very different from those that led to the Great Depression, the social effects could turn out to be very similar. In coming months and years, we may witness a complete reversal of the trend to live in densely populated urban areas.

As increasing numbers of people discover the benefits and attractions of living in clean, green regional areas and in States that have been less impacted by the pandemic we are likely to see housing prices in the most sought after regional and rural areas rising strongly in comparison to those of the big cities, at least for the next few years.

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The property investment puzzle solved

The property investment puzzle solved

In the current air of uncertainty, we know that some localities should be avoided, while most others will still deliver rental income and price growth over time. The best results, however, will only be secured by investors who know which suburbs will deliver the strongest cash flow or highest imminent growth.

The issue for investors is that the housing market is like a huge jigsaw puzzle, with more than ten million properties spread over 15,000 suburbs. Although it may seem impossible, with so many properties and suburbs to choose from, success 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. Due to recent pandemic induced lockdowns and border closures, however, some of these locations can be highly risky, especially if they rely on rent demand from migrant arrivals, overseas tourists or international students.

You will still find them in areas with large numbers of permanent renters, such as the older, well established but ungentrified ex Housing Commission precincts and also rural towns which have pools of permanent renters whose local ties are too strong to encourage them to leave.

Holiday destinations can provide high rental yields, but the demand is often seasonal, peaking during the summer holiday season, or during the winter months in tropical locations and alpine resort towns. .

Some cash flow locations experience a temporary rise in rental demand when mines are constructed or further developed and during transport infrastructure projects including the building or expansion of railway lines, ports or highways. These rental booms are most common in remote and regional areas where the workers must rent in nearby towns until the project is complete, when the renters leave and the high cash flow often ends.

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

Waiting quietly amongst 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, upgraders, relocators or downsizing retirees. Cash cows boom if a dramatic lift in rental demand sends 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.

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Canberra set to boom in the gloom

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

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Which areas will buck the trend?

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.

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Why markets boom quickly but slide slowly

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.