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MASTERING THE AUSTRALIAN HOUSING MARKET

Table of Contents

Introduction

Chapter 1: Why the Australian housing market outperforms other housing markets

A strong and growing economy

A high population growth rate

An underlying shortage of housing

The opportunity for overseas investors

Chapter 2: How does housing compare with other investments?

Investing in savings and term deposits

Investing in gold

Investing in shares

Investing in housing

Everyone needs a place to live

You can improve the value of your investment

High demand for rental properties

Chapter 3: Who to listen to and who to ignore

The sky is falling! Don’t believe everything you hear

The US subprime mortgage crisis

The boom

The crash

Could the Australian housing market collapse?

How to test claims of a market downturn

How to test claims of fantastic returns

Build it and they will come

Watch out for scams

Chapter 4

The great Australian dream

The greatest generation

The silent generation

Baby boomers and generation X

Generation Y

Overseas migrants

People create demand

Places create supply

Purchasing power links people to places

Limited supply means security for investors

What is housing affordability?

The value of Australian housing is mostly equity

First-home buyer markets

What does this mean for investors?

Subsequent or upgrading homebuyer markets

Final homebuyer markets

Chapter 5: How to get the results you want

High capital growth in a short period of time

Mining towns can have high capital growth rates

Investments that pay for themselves

Large houses and units

Former housing commission houses and older units

Modern inner-city units

Consistently high capital growth with low risk

City versus country investments

Large regional towns and cities

Climate change: the bad, the ugly and the good

The bad

The ugly

The good

Chapter 6: Your investment options

Land, houses or units

Investing in land

Investing in units

Investing in houses

Flipping, trading and predatory buying

Renovating

Do your homework

Buying off the plan

What sort of income and lifestyle do you want in retirement?

Chapter 7: How to find the best investment areas

Measuring the housing market

Capital growth and rental return

The copycat effect

Factors that drive house price growth

High capital growth is short but sweet

Buyer mindsets determine medium-term growth

Seller mindsets determine short-term growth

Comparing listings with the median sale price

Comparing vendor discounting with the median sale price

Time on market trends

Watching the sales and listing trends

The importance of due diligence

Chapter 8: Establishing the value of a property

Why is it so hard to value residential property?

Estate agent appraisals

Comparative market analysis reports from estate agents

Comparative market analysis reports from brokers

Physical valuations

Electronic valuations

Free property price estimates and reports

Property price estimates and reports you pay for

Other features to consider

Chapter 9: Your property investment plan

Planning your investment journey

Investment goals

Expected results

Housing investment options

Optimum areas and property types

Market analysis of selected areas

Selected properties

Your progress

Case study 1: first-time investor, Graham

Investment goals

Expected results and investment options

Optimum areas and property types

Market analysis of selected areas

Property selection process

Monitoring process

Case study 2: badly advised investor, Shukla

Investment goals

Current portfolio and investment options

Due diligence

Market analysis of selected areas

Case study 3: Harry and Jen at the turning point

Current portfolio and investment options

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First published 2011 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

Typeset in ITC Giovanni 11/15pt

© John Lindeman 2011

The moral rights of the author have been asserted

National Library of Australia Cataloguing-in-Publication data:

Author: Lindeman, John.

Title: Mastering the Australian housing market / John Lindeman.

ISBN: 9781742468525 (pbk.), ISBN: 9781742468549 (epub), ISBN: 9781742468556 (mobi)

Subjects:

Real estate investment — Australia.

Real estate business — Australia.

Dewey Number: 332.6324994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above.

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All Microsoft Excel screenshots reprinted by permission from Microsoft Corporation.

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Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

To Carolyn

About the author

No-one knows the needs of housing investors better or understands the housing market more thoroughly than John Lindeman. John has more than 10 years’ experience researching the nature and dynamics of the Australian housing market at the Australian Bureau of Statistics. He has also spent five years as head of research at Residex, Australia’s oldest and leading property information provider, where he has managed the development and dissemination of residential housing information and research services to government at all levels, major banks and non-bank lenders, developers, finance and investment advisers, institutional investors, private housing investors and the media.

His knowledge of and expertise in the housing market is enriched by more than 30 years’ experience as a successful property investor. John is a recognised authority on the housing market, and his presentations and commentaries are highly sought after.

Introduction

Buying property is not something most people do without a great deal of thought and research. The housing market can appear to be such a complex and unwieldy beast that investors are naturally keen to get advice about where and what to buy and when. The problem is that the market is awash with spruikers, sellers’ agents and mentors offering their services to investors. An easy way to measure the health of the housing market is by the number of seminars being promoted around the nation. In 2008 and 2009, when it appeared as if the Australian housing market would follow other property markets around the world and plunge in value, the spruikers disappeared. At the time of writing, they are back in force, promoting workshops and boot camps where, for a significant fee, they will reveal their secrets of success.

However, these people are primarily motivators and promoters, not qualified property market researchers, so how do they know what is going to happen in the housing market? The answer is that they rely on information and forecasts put together by data providers whose proven track records tell the promoters when it is the right time to start spruiking.

Promoters rely on the real experts because the information needed to make accurate measurements and forecasts about the housing market is extremely complex and costly to obtain and interpret. Consequently, this Holy Grail of information can seem difficult for private investors to access. Further, many investors make their investment decisions without even knowing that such information exists.

When I purchased my first house in 1973 I was one of these investors. Since then, I have bought and sold more properties, and been employed by two of Australia’s major data providers, the Australian Bureau of Statistics (ABS) and Residex. My 30 years of investing in and researching residential property have shown me invaluable truths about the housing market, and in this book I pass them on to you, so that you can avoid the mistakes many investors make and get the best possible results from your property investments.

The motivation to buy my first house was purely to get my parents off my back. They were constantly telling my wife and I that we were wasting our money on rent. We had just married, though, and I had only recently finished my studies, so there were only two affordable purchase options. The first option was buying a new house in one of the developing outer suburbs of Melbourne, as all our friends were doing. The second option was purchasing an old terrace in the inner suburbs and renovating it.

Despite warnings from our friends and parents, we decided on option two and bought a dilapidated single-front cottage in Hawthorn in 1973 for $20 000, using $4000 we had saved as a deposit. During the next three years we spent another $6000 restoring the house to its former Victorian glory, and then sold it for $46 000 — more than double what we had paid. Most of our friends’ houses in the outer suburbs had hardly risen in value at all during that time, while our total investment of $10 000 had grown to $30 000, a tax-free capital gain of 300 per cent. This demonstrated to me the first truth of property investment — you can improve the value of your investment yourself.

Reinvesting the profit, we bought and renovated a much more expensive house in a sought-after Melbourne bayside suburb. Despite three years’ work and a considerable amount of money spent on renovations, the house had only marginally increased in value when we sold it. I couldn’t understand why one house had more than doubled in value, while the other had hardly moved at all, and no-one I asked could shed any light on it. Over the years I have learned that renovating does not in itself guarantee a return that is higher than the cost. It is crucial to correctly estimate the value that your renovations will add to a house.

That first house I purchased is now valued at $1 100 000 and it has provided its subsequent owners with an average annual capital growth of 12.5 per cent per annum, while the second house has increased in value at an annual rate of about 10 per cent. In fact, without undertaking renovations and by simply buying and holding, investors in Australian housing have received an average annual capital growth rate of more than 10 per cent since World War II.

I worked for the ABS in the 1990s on its first statistical publication about Australian housing. Published in 1992 and 1996, Housing, Australia: A Statistical Overview linked housing price growth to population change and differing tenure needs. This landmark publication provided a comprehensive history of the housing market from colonial times, and compared the various state and territory housing markets. It enabled me to understand why growth in housing appears to behave randomly, with many years of little to no growth followed by sudden surges that may last only one or two years. Further, I could see why this growth did not occur at the same time in each city, locality or street.

Once I knew why my second house had not increased in value over the three years after we bought it, I never made the same mistake again. Understanding the links between housing market performance, demographics and economics is the foundation of successful housing investment.

Some property investors buy in affordable suburbs with good rental returns and take advantage of the inevitable capital growth over time, while others seek quick results by renovating and trading. However, the housing market has much more to offer investors because it is predictable. During my time at the ABS I ran seminars that demonstrated the value of analysing trends to measure and predict market movements. In applying the rules of economics to the housing market I could see that it behaves like any other commodity, in accordance with the rule of supply and demand. Contrary to common belief there are no mysterious house price cycles endlessly turning to their own immutable laws; rather, there is a relationship between the number of people needing accommodation, the type and location of properties available, and the choice of renting or buying.

From these analyses I concluded that there is no secret to the housing market. It never behaves randomly or independently, it always performs in accordance with these principles. This applies to the housing market in a street, suburb, city or country. If it is possible to identify the factors causing market growth or decline, then it is equally possible to predict which areas will grow in value and which areas will stagnate or fall in value.

I was appointed head of research at Residex in 2005, where it was my aim to explain these essential dynamics of the housing market to investors to help them make the best possible investment decisions. Every movement of housing prices can be accurately predicted, as long as the underlying data is correct. When the housing market appears to behave erratically or under the influence of some hidden rule, it is because the underlying trends are not understood, or the information being used is inappropriate or incorrect.

This book was motivated by the thousands of discussions I have had with investors at seminars, trade shows and other property events during the global financial crisis and in the years following it. Many had made investment decisions that had turned out badly. Some investors had bought in areas that did not experience growth — or that fell in value — after their purchase, while others had bought at prices that turned out to be higher than market value. A few had sold at the wrong time and watched in dismay as properties rose in value shortly after the sale was concluded.

Some of these investors were the unfortunate victims of mentors and advisers who had given them poor advice or who had ulterior motives; most had simply not understood how the market that they were investing in actually operated. Yet, there were also many investors who understood the housing market and who were simply keen to share the secrets of their success with me.

My aim is to provide you with answers to the questions I am frequently asked. Mastering the Australian Housing Market synthesises my experience, observations and understanding of the housing market by taking you on a journey that examines how the market functions, and provides practical and proven methods you can take advantage of.

In chapter 1, I explain why the Australian housing market consistently outperforms other housing markets, providing investors with reliable and highly profitable returns. In contrast to the erratic and even disastrous performance of other assets in 2008 and 2009, you can be assured of the security of investing in housing. Chapter 2 shows you the unique benefits that Australian housing provides, explaining why you, as a housing investor, have a distinct edge. Chapter 3 gives you an insight into the tricks and traps used by those who want you to believe their claims about the housing market.

In chapter 4, you will learn how the Australia housing market works, with a brief look at its history. I explain how the great Australian dream of homeownership has played out over the years and why this works to the advantage of investors. Chapters 5 and 6 then get down to delivering results — how to achieve the outcomes you want, which housing markets will deliver them and where to find them.

Chapter 7 reveals the power of property market analysis and price prediction. You will learn how to use these cutting-edge techniques to make crucial decisions about where and what to buy and when to sell. In chapter 8, you will see how you can easily estimate the real worth of any property and use this information to ensure that you never buy a property for more than its value or sell an investment property for less than its worth. Chapter 9 starts you on your journey with an easy-to-use guide to preparing your personal property investment plan.

This book not only helps you to select areas in which to buy and to buy properties most suited to meeting your goals, it also shows you how to monitor and assess the performance of your investments at any time, so that you can make sure your goals are being met. As you proceed on your housing investment journey, I hope this book will become a frequently consulted friend.

Chapter 1: Why the Australian housing market outperforms other housing markets

The Australian housing market emerged triumphantly from the global housing price crash in 2008 to 2009. Since then it continues to outperform almost all other housing markets around the world. Not only has the long-term growth of the Australian housing market averaged more than 10 per cent per annum, the market has performed with greater stability and resilience, avoiding the sudden surges and falls in value that have characterised so many other markets in recent years.

Growth in most property markets stopped and actually fell in value during the global financial crisis, with the exception of Australia, as shown in figure 1.1 (overleaf). In 2008, house prices in the UK plunged and the US housing market entered its second year of double-digit falls in value. According to the US government–sponsored home loan mortgage corporation Freddie Mac, 44 US states suffered falls in housing prices during that time, precipitated by huge oversupplies and a general lack of demand. Australian housing, however, lost less than 2 per cent of its value in one quarter and quickly regained its growth momentum.

Figure 1.1: Australia’s housing performance compared with other countries

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Source: Residex, ABSA Data (South Africa), Case-Shiller Index (USA), CMHC (Canada), Nationwide Index (United Kingdom), REINZ (New Zealand), URA (Singapore).

All of the major Australian capital city housing markets have continued to grow, with the exception of Perth. (The market in Perth suffered a downturn as a result of a temporary halt to the mineral resources boom, but it had been preceded by five years of double-digit growth, which left investors well ahead.) There are three reasons for the extraordinary performance by the Australian housing market:

a strong and growing economy

a high population growth rate

an underlying shortage of housing.

Let’s take a look at each of these reasons in more detail.

A strong and growing economy

Having avoided recession, Australia’s economy is now performing much better than any other Western nation. The reasons for this are our strongly regulated and robust banking system, which limited our exposure to the fallout from the US subprime mortgage crisis in 2007 and 2008, and the strength of our economy since then, which is rapidly aligning itself to emerging and growing Asian production markets rather than tiring Western consumption markets. China and increasingly India are becoming major producers and creditor nations and their own growing middle classes serve to provide new consumer markets. Australia is a major beneficiary of this growth through its export of primary produce and minerals.

Food for thought

Australia is larger in area than Western Europe and nearly the size of North America. It is a continent of climate contrasts, from tropical rainforests to deserts and snow-covered mountains, where almost anything can be commercially grown or farmed. This makes the country self-sufficient in the necessities of life and provides surplus for export. In addition, the enormous natural resources of minerals, timber, gas, coal and uranium are exported to world markets and provide a sound base for economic growth and stability.

Our biggest export markets for raw materials are as follows:

Japan — our exports include coal $25 000 million, iron ore $8000 million, beef $2000 million and aluminium $1500 million

China — our exports include iron ore $24 000 million, coal $3000 million, wool $1400 million and copper ore $1200 million

South Korea — our exports include coal $5000 million, iron ore $2400 million, petrol $1900 million and aluminium $900 million

European Union — our exports include gold $75 000 million, coal $5500 million, and wine and beer $1200 million

US — our exports include beef $1300 million, wine and beer $800 million, petrol $750 million and manufactures $700 million.

Source: DFAT data compiled from ABS, IMF and various international sources.

Unemployment levels in Australia remain historically low at around 5 per cent and are trending down after a few shaky years following the global financial crisis (GFC) and the subsequent downturn in international trade and business confidence. Not only does the unemployment rate compare favourably with those of the UK and US, the rate is virtually the same in all the major capital cities. Australia does not have any economically depressed pockets or regions where unemployment leads to risks for housing investors.

Most of Australia’s 22 million residents live in modern cities located on magnificent harbours, bays and rivers around the enormous coastline, each of which has its own economic focus. There is always demand for housing initiated by mining, manufacturing or tourism and where demand for housing wanes in one locality it booms somewhere else.

Food for thought

According to the Australian Bureau of Statistics, the major sources of economic growth in each state are different, as set out below:

Australian Capital Territory — public administration

New South Wales — business and property services

Northern Territory — defence and border security

Queensland — infrastructure development and tourism

South Australia — heavy manufacturing

Tasmania — processing of primary products

Victoria — finance and light manufacturing

Western Australia — mining.

A high population growth rate

Australia is very young as nations go, just over 100 years old, and relies on overseas arrivals to provide new residents rather than on natural births. In fact, according to the Australian Bureau of Statistics, most Australians have at least one parent who was born overseas, and in the largest two cities — Sydney and Melbourne — most residents under 30 were born overseas. Not only has Australia accepted overseas arrivals more readily than many other nations, it actually depends on them. The continual intake of migrants is the secret to the nation’s excellent economic record — it is how Australia has grown relatively quickly from a scattering of small colonies dependent on England for survival to one of the most envied countries in the world.

Australians are a resourceful and freedom-loving people who have fashioned an independent democracy peacefully. Migrant arrivals often come from war-torn countries, civil strife or persecution and they are determined to create a better future for their children. As a result, Australia has an unblemished record of resolving major issues at the ballot box and a national history of internal peace.

Australians have a positive and generous outlook, which is demonstrated by their historical acceptance of immigrants who are creating a cultural diversity and ethnic richness found nowhere else in the world.

Food for thought

According to the Australian Bureau of Statistics report Australian Social Trends, more than 50 per cent of Australia’s residents have at least one parent who was born overseas. Following is a breakdown of where most migrants have come from:

In the years prior to World War II, most migrants came from England, Ireland and Scotland.

Between 1945 and 1970, there was an influx of migrants from Greece, Italy, Yugoslavia, Poland, Germany and Holland.

Between 1971 and 1990, most migrants came from Croatia, Serbia, Lebanon, India, Vietnam and Macedonia.

Between 1991 and 2010, the countries of origin were different again, with Sri Lanka, South Africa, China, Philippines and New Zealand providing the most migrants.

Throughout the period following the global financial crisis, the Australian Government maintained its policy of positive economic creativity and kept up a high overseas migration intake, in line with current thinking that immigrants create more jobs than they fill. The population grew by more than 450 000 people in 2009, maintaining its annual growth rate of 2 per cent, as figure 1.2 shows.

Figure 1.2: Australia’s population growth rate compared with other countries

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Source: Australian Social Trends, June 2010, Australian Bureau of Statistics; Australian Demographic Statistics, December 2009, Australian Bureau of Statistics; US Census Bureau; World Population Databank.

Not only is this rate of growth higher than any other Western country, it is almost double the world’s annual growth rate. Overseas migration now contributes two-thirds of Australia’s annual population growth; natural increase alone would leave us with a lower population growth rate than New Zealand, Canada or the United States. Even if housing construction was cut back, without overseas migration Australia would have a housing surplus and the housing market would be in similar difficulty to that of other Western nations.

An underlying shortage of housing

Our high population growth rate has led commentators to agree that Australia is faced with a severe and worsening housing shortage. The Australian Housing Industry Association estimates that the current shortfall or unmet demand is more than 100 000 dwellings (houses and units, or apartments). Even the most optimistic calculations still reveal that a shortage exists. According to the Australian Bureau of Statistics (ABS), more than 160 000 new households are created each year. Housing statistics from the ABS also show an annual completion rate trending to 150 000 dwellings, with many years where household growth has been higher than dwelling completions, leaving an accumulated shortfall. This has led to an increase in the average size of an Australian household from 2.4 people in 2004 to about 2.7 in 2009 — indicating that young people are living with their parents longer and that there is a greater number of share houses.

The shortages are greatest where homes are in the greatest demand — that is, our capital cities — and these shortages result in constantly rising house prices and rents. This is good news for investors as it guarantees healthy returns.

The opportunity for overseas investors

Most Australians consider the purchase of a house or unit an end in itself — just over one-third of all housing is owned outright by the occupiers while another third is being paid off by mortgagors. Of the 10 million dwellings, investors own less than one-third and most of this stock is held in the big capital cities such as Sydney, Melbourne, Brisbane and Perth. Yet these investors do very well, with rental returns averaging 4 per cent to 5 per cent per annum and capital growth averaging more than 10 per cent per year for the last 50 years.

In an effort to reduce the housing shortage the Australian Government has periodically introduced incentives for investors, such as negative gearing, which allows them to claim the cost of borrowed capital as an expense. The tax on capital gains is also set at half the rate for personal income tax. The government views investment in private housing favourably, as this helps to create demand for new housing.

More recently the government has gone much further, cutting the red tape for overseas investors and making it easier for them to invest in new Australian housing through the Foreign Investment Review Board. The government knows that encouraging investment in housing is not the whole solution — it must actively promote the construction of more housing or the housing shortage will get worse. Not only is the process now quicker and easier for overseas investors, but they are able to:

buy vacant land for residential development

redevelop existing dwellings if the development leads to an increase in the total number of dwellings

purchase dwellings not previously sold

purchase dwellings under construction or dwellings off the plan

buy all the new dwellings in any development

rent the dwellings privately or sell them without any restriction.

To many overseas investors, Australia may have only previously been considered a holiday destination — to visit the outback or Great Barrier Reef. All this has changed and Australia now offers overseas investors the best investment options currently available, with its housing market supported by government incentives, sound economic growth and low unemployment.

For Australian investors, competition for investment properties that is generated by overseas investors is good news, because overseas investors can only buy new stock. Rather than resulting in greater competition for existing homes, which is where Australian housing investors traditionally have conducted most of their investments, overseas investors help to increase the supply of new houses and units in the most sought-after areas.

Food for thought

The rejuvenation of worn-out inner-city areas littered with derelict wharves, empty warehouses and factory complexes generates a surge of investment and demand, which creates whole new suburbs. The vibrant new urban centres of Waterloo, Zetland, Broadway, Bowen Hills, Southbank and Docklands would not have been possible without overseas housing investment.

Now is the right time to invest in Australian housing because your investment is based on security and profit. Not only does our residential property market outperform those of other countries, but you’ll also receive far more important benefits to investing in residential property that give it an edge over other investments, as chapter 2 explains.