Matusik Property Clock – December 2014

From the property guru Michael Matusik.

Our graphic this Missive, as one might expect, outlines where we think the major Australian markets are currently positioned on the property clock. If houses differ in terms of their position on the clock from other dwellings (apartments or townhouses), we have marked them accordingly.


Some observations:

* Many of Australia’s residential markets are well positioned between, say, five and nine on the property clock. Better times are ahead for most, if not all, of these markets. Having stated such, the overall residential market is losing some of its puff.

* In essence, the market is already correcting itself (this is what happens with the property cycle – it’s “the invisible hand,” to borrow an Adam Smith metaphor), with more supply coming onto the market, as evidenced by new listings and softer demand for homes in response to the higher prices. Under these circumstances, a housing bubble is unlikely. True, demand has run ahead of supply in some markets like Sydney, but overall, each market is rebalancing.

* How strong calendar 2015 will be – real estate-wise – will depend on several factors – job creation; what interest rates do; investor appetite; overseas buying; supply/demand balance and our overall level of confidence.

* We think – as has been made quite clear in recent Missives – that our economy isn’t that crash hot. Sadly, we are relying on a sustained housing construction upturn to fill the gap left by the resources slow down. I say sadly, because building homes is the only thing we really have available over the short to medium term, that could generate more work. Australia has great prospects, don’t get me wrong – we have the potential to be the “Switzerland of Asia” – but it will take a lot of effort and change to achieve this. It will take a decade, at least, of hard work and a big shift away from our current culture of “entitlement”. But until then, building something – houses, roads or casinos, take your pick – is our next (and really only) economic big thing.

* On that note, lower interest rates do impact positively on our housing market. In order to rebuild housing market momentum, interest rates could fall during 2015. This, in turn, could see those markets in the recovery & upswing phases of the property cycle potentially overshoot. Some markets, therefore, might face a harder downturn in the future than otherwise might have been the case. This might be the price we will have to pay to keep construction moving ahead. Dropping interest rates does increase the chance of a housing bubble.

* Overall investment activity has been strong this year, but it looks like it is close to peaking. There has been some “double counting” when it comes to investment home loans, so the overall level of activity – often reported in the 40 plus percent range – is overstating things. I don’t think we will see any so-called macro-prudential controls on property investors.

* In contrast, there is much more first home buying activity going on than the “official” ABS finance figures suggest.

* Owner residents have been very active of late, many of whom are using the recovery/upturn phase of their respective property cycles to buy and sell whilst the going is good (i.e. low interest rates; rising market; okay economic growth), and whilst confidence remains somewhat buoyant.

* For those markets in recovery, this upgrading/downsizing activity is likely to accelerate during 2015. More so, if rates drop further. For those markets already in an upturn or downturn phase, the more traditional owner-resident real estate activity – the “bread and butter” stuff – will most likely slow down.

* Finally, bad times do pass – the cycle turns – “The dude abides,” to quote from one of my favourite movies, The Big Lebowski. So, Emerald, Mackay & Gladstone for example, whilst still in a downturn phase, are approaching the bottom of their troughs. This doesn’t mean that it is all cookies and cream for Gladstone, Emerald or Mackay next year, but it does mean that property owners there can start thinking about ordering some dessert. It just might take some time to arrive.

So, you have asked us for the time. Our graphic tells you what time we think it is.

But really, does anyone truly know what time it is or how long we have got? We don’t really know. This is our best estimation. You might disagree with some of our assessments. Let us know if you do. Email away.

Our next property clock update will be in March 2015. We will be posting four property clock Missive updates each year.

Dealing with the ups and downs of property development

If you’re planning to get involved in property development, it’s important to understand that you’re entering a very challenging adventure.

There’s no sugar coating it – you’ll face many ups and downs.

However, most successful developers have one feature that stands out above all else to get through these challenges ­– they’re tenacious.

I’ve found that tenacious people succeed because they’re driven by, and stay focused on, their goals.

After all, success doesn’t come instantly. It requires focus and determination.

Imagine the pride you have when you’ve found a way to get past obstacles like these.

  • You look at 50 potential development sites. They’re all too expensive or unsuitable and the only good one has been snapped up before you look at it.
  • You employ an architect who constantly wants to design his own thing and you have to take control of the situation.
  • You have difficulty obtaining finance because you’re an inexperienced property developer but you find the cash anyway.
  • When you start to pour the foundations for your property it rains continuously in the trenches and the foundations keep collapsing.

Stay positive and remain focused on your goals, even when everything seems to be going wrong. Your hard work and tenacity will have paid off when you finish and make a handsome profit.

Managing risk

Okay, so now you think you’ve got this property business rumbled, let’s just take a look at how the mighty tumble.

Nearly all developers start with one small property, they have a stake, they invest in the property and they make a profit – looking for a margin in the order of 15 to 20 per cent.

Once this first project is finished, they take their original stake and their profits and buy a bigger property. They then take the profit from this property and the stake and buy two other projects and on and on it goes.

Ten years later they’re worth, say, $10 million and it’s all invested in property.

However, when they started they demanded a 15 to 20 per cent return but now they have to accept 10 per cent because the market is frantic and they can’t find projects that return 15 per cent.

The double-edged sword is that if they stop buying property they will realise their total profit but be out of business.

So in desperation they break their golden rule and get into projects that will yield smaller margins and if (and when) the market drops they lose everything.

To protect yourself, adopt this key principle of a successful property development:

Aim for a margin on development cost in the order of 15 to 20 per cent (depending on the size, risk and time frame of your project).

Your development must still work financially for both a sell-on and long-term hold and rental scenario if you can’t seal your project on completion because the market has turned against you.

What I’m suggesting is that if you’re primarily planning to buy, develop and sell on, then ask, “if the market crashed tomorrow, what rental income could I expect to achieve with this property, and will that cover my financial costs – even if interest rates worsen?”

What are the other risks related to developing real estate?

While we all like to look at the bright side of things, developers must also understand the potential risks associated with the process. These include:

  • Rising interest rates, which would result in increased holding expenses.
  • Increases in the cost of construction due to the rising cost of building materials or labour.
  • A downturn in the property market occurring (for reasons such as rising interest rates, cyclical movement in the real estate market and depressed or unstable general economic conditions) resulting in lower property values or increased holding costs until properties are sold or leased.
  • Variations occurring in the local real estate market between supply and demand causing adverse fluctuations in property prices.
  • Disputes with builders or other trade contractors.
  • Changes to the laws relating to property development, including laws relating to zoning and town planning, restrictions on land use, environmental controls, landlord and tenancy controls, user restrictions, stamp duty, land tax, income taxation and capital gains tax.
  • When town planning approval is required for a development, unexpected delays and increased holding costs may be encountered while the application is proceeding through the council maze. It’s even possible that approval won’t be granted or will be granted on unfavourable terms.
  • Unexpected structural defects or building deficiencies that may be encountered resulting in unexpected expenses being incurred for repairs or refurbishment.
  • Some inexperienced developers find that some of the improvements they’ve made to their properties don’t result in an increase in value. They learn the hard way that increases in value don’t necessarily occur in line with expenditure on improvements.

As you can see, many of these risks are outside the control of the developer.

I know this all too well having been involved in property development now for close to 30 years. In fact currently the team at Metropole are project-managing 45 medium-density development projects in Melbourne for clients.

Our experience makes us acutely aware of the risks involved in development projects and this helps us minimise them so that our clients don’t get any unpleasant surprises.

While our projects tend to be very successful, I have to admit that we also run into some of these issues.

The trick is to learn to be ‘risk conscious not risk adverse’. If you never take a risk, you’ll never make a gain.

The fact is one of the big differences between successful and unsuccessful people is the successful people take risks while constantly looking to minimise their risks.

Starting at the appropriate level

While property development can provide great long-term returns, if you’re new to development, you should start small and build up. As you grow in experience, and benefit from the profits of your early projects, you’ll be able to take on more ambitious challenges.

You’ll learn 80 per cent of what you need to know about property development in your first four or five projects and by aiming for a 15-plus per cent return on your development cost, you give yourself leeway to make a few mistakes and still make a reasonable return.

With proper planning and preparation, you can make great profits in the long-term and eventually move on to bigger projects.

By Michael Yardney

The Rumblings Of Discontent Continue

Here’s a great article from Steve KcKnight.

The Aussie property market seems to be running out of steam at an increasing rate, evidenced by key property statistics, consumer confidence, and interesting commentary appearing in unusual places (see the recommended reading link below).

Property Statistics

RP Data (now known as Core Data) have just released their November Data Home Value Index and it declined by 0.3%, evidencing a slowing in the growth rate across the country as a whole.

Over November dwelling values appreciated in Sydney (+1.0%), Brisbane (+0.4%), Perth (+0.9%) & Hobart (0.2%), and declined in Melbourne (-2.6%), Adelaide (-0.3%), Darwin (-0.8%) and Canberra (-0.5%).

As can be seen in the image below, there appears to be a declining ‘top’ in regards to percentage growth for the last three market peaks.


Furthermore, judging by the shape of the graph below, we seem to have reached a market peak with a classic ‘head’ shape emerging.


If the past is any indicator of the future, the previous two ‘head’ formations have preceded stagnate and negative growth periods of between 1 to 3 years.

Rental yields are remain precariously low, with the 8 Capital City yield being 3.7% pa for houses and 4.5% pa for units. Given interest rates are circa 5% pa, this means that every median house in every Aussie capital city would be negatively geared.

The Economy As A Whole

GDP numbers released yesterday failed to impress, missing expectations and leaving economists wondering where future growth in the Aussie economy is going to come from given the mining boom has ended and commodity prices are in decline. Journalists are calling it an income recession, as real net national disposable income was negative for two consecutive quarters.

The Aussie Dollar hasn’t got too many friends right now, dropping to fresh four year lows against the USD. Bad news for anyone planning a visit to Disneyland this Christmas!

Consumer confidence remains in the red, and I suspect we shall remain in pessimistic territory for a while yet.

The only bright spot has been the collapse in the oil price putting a smile on the face of anyone driving a V8 (or any petrol car, for that matter). Did you read my recent blog about oil prices? If not then you can read it here.

But just be careful about the joy you feel watching the petrol price fall. There are some good articles pointing to recessions for significant world economies; in particular Russia (and beware a World Superpower in financial trouble!)

Steve’s Summary

Low interest rates have certainly fuelled a property price revival. But it’s been patchy. Sydney and Melbourne have done really well, Brissie less so, and pretty much the rest of Australia has been stagnant.

Yet even the kick along from low home loan interest rates is fading.

September mortgage statistics revealed that for the first time ever, investors made up more than half of all new loans. This is a significant warning sign, as a market dominated by speculators will often exhibit significant volatility.

Overall, while home loan interest rates remain low (and might even go lower in 2015!), it’s getting harder and harder to mount an argument for strong house price growth in the first half of next year.

The message for the moment is: remain alert, not alarmed but fasten your fiscal seatbelts, just in case of unexpected economic turbulence.

All the best,

– Steve