11: The Meaning Behind The Numbers with Louis Christopher

Did you know with just two investment properties and one single renovation that you could put over a million dollars in the bank? It's true. And why stop there? Welcome to your Property Success podcast, the show that explores the practical steps to making your property investment dreams a reality. And now here's your host, a lady who once owned a pet rabbit who thought he was a chook. Jane Slacksmith.

Flopsy. Flopsy. Flopsy. Yep, he did have a few issues with his identification. I think growing up with a lot of chooks really led him a bit astray. So not my fault is what I'm gonna go with. To quote my son, not my fault.

What were the symptoms? Could you do them for me and I'll just describe them to the audience?

Okay, you actually want me to act this out? All I'm gonna say is that he did manage, and this is hard for a 15 kilo rabbit, he did manage to climb up on the roost and kind of squish along a little bit, knock the chooks off and jump on them.

Oh, really?

So I don't know if he was trying to cross pollinate in some way, the rabbit chook DNA, but there was a lot of chooks that were squished and he had a lot of fun and he'd run back and he'd get back up on that roost and he'd try to balance until he got to the get knockoff and jump. It was a lot of fun to watch. Our farm was full of fun and that was just one of the animals that had issues. I'm sure you guys are going to bring up more in the future. Good stuff. So a big welcome today to your Property Success podcast, episode 11, and thank you for joining us. We really appreciate you taking the time to be here and I'm really excited about what's coming up today because we are going to tackle the big questions, aren't we, John?

Yep.

And we brought in the big guns. Now we're going to look at questions like what triggers a downturn in the Australian housing market? Are these triggers likely to appear in 2017, something we're all interested in? And how can a novice investor read the market cycles and the key indicators of any movements up or down? So to answer all this and much, much more, we have the founder and CEO of SQM Research, Louis Christop.

Yes, certainly one of the big guns in the Australian property landscape. But, yeah, I'm also keen, Jane, to hear about what he calls deep markets. So he's got this. He's coined this phrase, deep markets and it's markets that have consistent returns over long periods of time and also the boom and bust report that sqm do. Very keen to hear about that for 2017.

Aren't we all? Aren't we all? So lots of information coming up. Grab a coffee and your pen and notebook because you are definitely going to want to refer back to this one. Hello Louis, how are you?

Good, thank you, Jane.

Well, we're very excited to speak to you today. But tell me this, a lot of people don't know about Louis. So if someone sat next to you on a plane and said what do you do? How would you answer them?

Oh my goodness. Okay. I would say that we're one of the more respected property data suppliers and analysts in the Australian housing market. I would say there's actually two businesses in one though. We do property data supply but increasingly we also rate and review investment management funds for on behalf of the country's financial advisers. And that's one of our biggest markets actually is the financial advisor community because increasingly through the growth of self managed super funds, advisors require property data and property information. But of course we have many customers, mums and dads through to government institutions as well. And probably the best way people like to compare us is by knowing our largest competitor, which is CoreLogic. We definitely compete with them. Heads up that we're 100% Australian owned.

And tell me this, you know you mentioned that you provide analysis for financial planners so they can make better recommendations for mums and dads. Is that what it started or did it start with direct to public content and review of information?

Yeah, no, it started in 2006, direct to public. That year I was the general manager with Australian Property Monitors which in that year was bought out by Fairfax. And I decided I actually really wanted to go out there and run my own show. Always had that ambition. So I went off on my own and launched SQN Research at that point. And one of the first indexes we put out there was actually demographics, just presenting demographic information in a completely different manner altogether, which we still do today. And then the next index we put out there was the Vacancy Rates index which was a world first in terms of covering vacancy rates by postcode, which.

Is what you probably most well known for, isn't it? Appearing in the back of all the magazines. Yeah.

That'S what we're best known for is the vacancy rates. You're putting vacancy rates into Google. We come up first. And if you're putting free property data into Google as well, we look like, we come up first as well.

There's a tip for all the listeners.

We move well beyond vacancy rates now.

Absolutely. Sorry, I was just saying. So you've come a long way. But, you know, if we go back to. So how did you first get into property? Or was it statistics or what? Where did you start?

It was actually probably via a bit of a bad experience, if anything. Back in the mid-1980s, my grandparents who raised me bought a property on the Gold coast and they got burnt through it pretty badly through some underhanded practices that were occurring. And I witnessed that firsthand. It was very hard. And we'd actually see my grandparents getting burnt like that.

Was that their home or was that an investment that they did?

It was an investment property. And look, I won't go into the details of what happened, but they got burnt on the sale of it quite badly. And I think it was through a lack of information that enable them to be burnt. And I think from that point onwards, I was always very passionate about, gee, you know, this country really needs to improve the impartiality of information that's out there on the real estate market.

And I mean, it wasn't just your grandparents, was it? During that period of time, that whole triangle selling thing that was going on in Gold coast in particular, there's so many people whose first property investing experience wasn't what they expected it to be, and that's something that we still see today. The practices are still there, aren't they?

The practices are still there. I think people are more aware of the practices, but you're quite right, they're still there. Perhaps some of the more dirtier tactics have been kind of taken care of, but I still see some problems there where people overpay for new properties and then they get burnt on the other end because they overpaid to begin with.

So were your grandparents able to get out of that situation or is that. It took them years to get.

They got out at a substantial loss.

Right.

So. And you know, when you're a retiree, you know, losing basically half your money on a property investment isn't good at all.

No.

So, yeah, so I experienced all that and saw that firsthand determine off property itself, though. So, yeah, I still had hope. I still could see opportunity in it. And my first.

How did you do that, though, that, Louis? How did you change that from, you know, that one bad experience? Because I speak to people all the time who talk about grandparents, parents, neighbors, friends, taxi drivers who've had a bad experience and they're burnt without even going into it, you obviously saw people quite close to you having, having that effect. What, what kind of gave you the confidence that property was still an asset class that could be safe and secure for your investment?

$Oh, good question. I think by strictly doing the numbers and doing the research and investigating it, I just, I guess I had a natural curiosity for it and I was also aware of, of people having good experiences as well, genuine stories of people doing rather well out of it. So. But what really enticed me for my first investment was I was actually still at university and I actually bought an industrial property, funnily enough, on the Gold Coast. You think I'd like, I'm waiting to.

See where this goes.

Actually knit. It was, it was a bit of a roller coaster ride. So yeah, no, I bought this industrial property when I was 22, still at university.

Wow.

And I bought it at that time you could buy property on very high yields. And I bought this property on a net yield, net of 12%. And at the time the money I was borrowing at was at 8%. So it's very, very cash flow positive. The question is always asked of me is how did I get the loan to lend me money while I was still at university? That's an extraordinarily good question. And look, I don't really know how I did it at the time, now looking back, but it was along the lines of bringing about, bringing forward to the bank manager a brilliant investment plan and just proving to the manager that the numbers don't lie and they work. And I think he was pretty impressed. And yeah, so we got the money and it was certainly a massive learning experience. I had the, probably the worst mistake I made with that property was showing the tenants my face at the time I had all my hair and I was still very, very, very young boy. And these were 50 year old gentlemen who'd certainly been around the block. Yep, I had a similar experience.

You don't want your tenants to know they're younger than them. They don't take that too well, do they?

They don't take that too well at all. No, they don't. I also had another property who I had a residential property whose tenant, one of the tenants was a schoolteacher and they didn't take too well. To me, I was once again just effectively out of uni and a lot younger and they didn't like it at all.

So there's a tip. What did you study at uni? Was it statistics?

I studied accounting and economics.

Okay, and so how did you get into Australian property monitors and building that portfolio. Did they happen simultaneously or as you learnt more, you bought more?

Probably coincidentally, it was when I finished my university degree. I was actually living on the Gold coast at the time and I moved to Sydney because this is back in the. In the mid-90s and it was still very hard at that time to actually get a job as a university graduate. The economy in some respects was still coming out of the recession and so it was all about getting a job back in Sydney. So moved back to Sydney while the property portfolio was still happening on the Gold coast and started chasing a career in Sydney. And my first job was actually with MLC in the funds management business and I was just doing a grunt job but that was all about. Eventually that job turned into providing market reports to the call centre staff so whenever the markets would move the call center operators would know what to say to these panicking business. My job was to rattle that out for them. So I did that for a while and then, then I moved to an editorial role with the securities Institute of Australia as it was known then, now known as Finzia. And I did that for about three years and then in 2000 the job at APM came up and I was immediately attracted to. Was at that point APM at that point in time was a very small company and the job initially was about really project management and getting new reports off the ground, etc. But the job quickly morphed into doing proper research and releasing research to the market, which APM really wasn't doing that much at the time. And then we moved on to building indexes and that's probably when we got a lot of notoriety because one index we built, the Reserve bank of Strait republished it and it's still being republished today as APM's Many House Buy series and it just, it just grew from there and I think a natural curiosity and interesting property statistics I've always had and I think there's always been a niche there. Nowadays of course the tables have really turned. There's probably too much information out there.

There is.

People don't know where to look and a lot of conflicting information and you know, so we've gone from one extreme to the other where when I was growing up there was hardly any property information at all, any objective information that is. So now where you know you've got a lot of conflicting information from various startup providers all competing with each other. So it is difficult once again for an investor to work out well which index should I follow? Which one's telling it like it is.

Well, did you find, you know, working obviously through, you know, MLC and Fincher and eight Australian property monitors, you know that looking at that detail, did that because I know I speak to people who, you know, as you've just said, there's so much information, they get confused. Did you see some clarity through the numbers that allowed you to say, you know, I think there's trends or there's something about to happen? Because a lot of people read the information wrong.

They do. And I've been fortunate enough to be very close to the data and information for many years now that I guess I do get some additional insight in terms of working out whether if a certain indicator is going up or down, whether that's just a false positive or it's actually telling the world something's really happening in the market. I guess it takes quite a few years of experience. But there are some things I think the average investor who's not so close to property as I am could still pick up pretty quickly. Some obvious ones, such as auction clearance rates that, for example, during the springtime, auction clearance rates tend to fall each spring. Because there's more on the market. Yeah, I'm sure because there's more on the market. And for people like you and I, we know this, it's rather obvious, but when you have, say, a novice investor just reading the newspaper, they read a story saying, oh, auction clearance rates have fallen like a rock. And the report isn't about the fact that, hey, hang on, it's springtime. This happens each and every year. That's where you can see how investors can easily be misguided and be easily confused in terms of what truly is actually happening.

So if we said all data's not equal, as a property investor, Mum and Dad going out and looking at starting their first property investment purchase and trying to look at the data, what would you say would be maybe 3 to 5 of the key criteria that they would look at?

That's a very good question. I think, firstly to get a handle or get a grip in terms of what's actually happened to each of the various Capital City housing markets and regional housing markets over the long term. So perhaps go onto the ABS's website where they have available for free the Capital City House and Unit Price Index, which they have back now, I think, for the last 20 years, freely available. And that's an easy one. You just have to go onto the site, type into the search housing prices and up will come the index. And I think by doing that, for starters, will Give a grand overview in terms of how the markets have moved over long term, in terms of the peaks and troughs, which cities have actually upper floor others, and then take it from there. So basically I would sort of take it from a top down overview, get a really good handle, a really good understanding of the big picture and then keep on going down, down, down to the local area that they're particularly interested in. But always have the longer term perspective what's happened historically because then it'll help in my opinion. I think that makes it easier than to work out some shorter term leading.

Indicators just picking up before we go to the short term indicators. I'm a big believer in you have to look at the history because we really don't know what's up in the future. But from looking at the historical information, has it changed since you've been looking at it? Have cycles got shorter or longer? Has the quality of information changed that allows us to make these decisions that we need to make when we're making a purchase?

Yeah, good question. I don't think in terms of the cycle we haven't seen any major change, but every cycle is different in its own right. Funnily enough, I don't think, for example, we're seeing a more choppier housing market. We're still seeing longer term trends where markets stay in the cycle for, you know, pretty much the same amount of time. So for example, Sydney now has been in this property boom effectively since the very beginning of 2013. Perth on the other hand has now been in the downturn since 2013. You know, that's a, that's a longer term cycle. Now here we are, 2017, four years, maybe we might see a turnaround in those to respect these cities next year. So, you know, no, I don't think the cycle is getting any more choppier. So I think we're still seeing the same factors influencing the market. I would only say that I think over a period of time interest rates have had increasingly having more of an.

Influence upon the market and I guess that's an important thing, is that people often look at the historical data and can argue away that that happened in the past and we're now facing a whole new set of dynamics. But that argument can be made at the beginning and the end of every cycle, can't it? So if you, if you look from the big picture and you can look at the historical data and still see those trends, then there still has some, I guess, relevance to considering the past when looking to the future. Which leads me to the future. So what are the some of the short term kind of trends that you would look at or tell people to. To investigate?

Yeah, one of my favorite indicators I like to follow is monthly listings data. So it's more on the supply side. It certainly helps me pick the turning points in a number of markets. So this is a measure of the total number of property listings in the marketplace. And generally speaking, what I see is the greater the listings, the slower the housing market and the tighter listings or the lower the number of listings in the market. The tighter the market is, the more likely you're going to see greater price increases. It's really simply down to supply and demand. So the tighter the supply that could be as a result of a number of factors, but usually it's a result of demand absorbing the stock that's there and that creates upward price pressure in the marketplace.

Yeah. And tell me, where would they get that data?

Well, funnily enough, they could come to our site and get it. So now we've had that series on for free on our website and you can just look up stock on market. So the charts are actually available for free.

You've added some other things, haven't you? That asking prices and rental prices, which are really interesting. I find them really interesting indicators in the market.

Yeah, that's right. So they're not perfect because once again, it's looking at from the vendor perspective in terms of how confident vendors are in the marketplace. Usually if they're very confident, they'll start lifting their asking prices or the asking rents. If they're less confident, they'll actually stop. They'll actually start reducing their asking price or start discounting more. And funnily enough, what the information does show is that vendors are actually a little bit more responsive to market conditions of perhaps what we all thought. I've seen a strong relationship between the ABS's House Price Series and APM's House Index versus our asking prices index. So I am a believer that vendors nowadays are a little bit more responsive to market conditions. Not all of them, of course. You can certainly have many a stubborn vendor who doesn't care what the market's doing. They're only going to sell for X amount of dollars and that's that. But funnily enough, it does seem as though many other vendors out there are willing to meet the market.

It's interesting. I've had a conversation with a couple of clients just today and late yesterday afternoon. And without a lot of information to back their conclusions, one's decided to wait Six months before they put the property in the market. Because I think it's got a few more legs to run. And the other told me that they've got. They think the peak will be in August. One is in Sydney and one's in Brisbane.

Wow, that's been very right down to the month.

And I was like, I do a lot of analysis. Tell me where you're getting this data. It's like, well, how's the gut feel? And so, you know, which kind of brings me back to the fact that, you know, it's how you read the data, isn't it? And a lot of people do read it wrong. You know, just things like, well, you can explain to us about yield. You know, does yield, you know, the data on yield in a particular suburb, does that mean that the suburbs are a good place to buy?

No, not necessarily. I mean, yield is often a function of risk. The higher the return, the higher the risk in the property. So, you know, going back to that first property purchase I had where I bought it on a 12% yield, I can tell you now I was taking a lot of risk and there was a bit of a roller coaster ride with that property. So the return certainly represented the risk at that point in time. But often what you can find is that as prices rise or accelerate compared to rents, the yields go lower, so your acquisition yield goes down. And sometimes you can find that the yield is not representative of the actual risk in that local marketplace because potentially property prices have been bidded too hard, all rents are falling in that area. So yield is a very interesting one to watch. I think, obviously it does represent a type of rental return you may well receive in that local market. We have once again, a chart up on our website available for free, where people can see how yields have changed over time for a local area. And I think as an example, how things can get a little bit out of whack. Looking at potentially Perth, a number of Perth suburbs where we've noted that yields are falling, which normally represents the fact that prices have risen. But no, it hasn't. In this situation, rents have fallen a lot faster than prices and that's what's actually sent yields down in Perth.

Because we've also seen, you know, if you just looked rather than the graph, for instance, of yield and what's been happening and getting a feel for how the price of the property has changed. You know, if you look at the short term growth, you know, we're all very focused often on the capital growth because obviously we need growth to retire on we need the property go up in value for us to sell at some stage making it worth more than we bought it for, pay off the loans and put the money in the bank and live on a beach somewhere. But you know, if we look at, you know, I'm just wondering what your thoughts are on looking at growth in isolation. What kind of timeframes that you'd suggest people look at?

Yeah, look, I'm generally anti doing say 12 month hotspot stories and things like that or publishing data just showing the 12 month change because often that 12 month change can just simply be skewed by too many properties selling at say the top end of the market only to be followed by the next period where a whole bunch of properties sell at the bottom end of the market. At the bottom end of the market range. I mean. And so yeah, that 12 month change you see in localities where you'll see in a newspaper story, you know, so and so has gone up by 50% in the last 12 months. I'm normally very skeptical that that's what's actually happened for that locality. Just knowing the data as I do know it, it's more likely that the median price quoted for that locality has been skewed in some way. So you have that issue to begin with and then as you've rightfully said, you can have localities which will actually outperform very quickly for a very brief period of time where there's literally a shift upwards and then that's all you'll see for that locality. There's nothing else driving it. And sometimes you will see that for example in mining towns as an example. So yeah, one needs to be careful about that. And one of my preferences is in terms of investment preferences is to actually stable localities where I call a deep market. So there's actually maybe not a lot of volatility that goes in there. So you may well not see such as the big short term spurts, but the return profile for that locality is more consistent over time and the ability for the property owner to actually sell out of that market when they want to.

Is there, what characteristics do you find? How would you do, how would you describe that deep market? Is it, you know, a house, a unit, is it on a certain level of land? What are the characteristics of a deep market?

It's strong, a deep market. When I mean deep market, I mean there is high sales turnover in that area that usually is characteristic of a deep market. It's a little bit like say if you equated say to some listed companies Such as bhp. I can tell you now that if you own BHP stock, you could sell out at any time you want it. There's no problem in terms of being able to sell out. Whereas if you bought say a 10 cent stock, it's not on the index, it may well be a lot harder to actually sell out of that company. And it's the same for residential property. There are deep markets and blue chip areas where hey, no matter what the market conditions are, if you really want to sell, you can sell out. But unfortunately there are certain markets in this country where hey, it won't matter what price you put that property on, you still won't be able to sell out because there are no buyers at all. And I think for an investor going to those type of markets is very, very risky because the problem is when the downturn comes, often the downturn could be with that locality for many years.

And I guess, I mean if I just kind of summarise that, what I'm hearing is that deep market with that repetitive sale and the sales going on despite the market, you don't want to have a, a specialised property in that kind of market. What it is, is a typical property that the typical person wants. So you're reducing your risk by having that kind of typical property that will sell anytime.

That's true. That is in part true. I would only say what I describe as deep markets. Even a specialized property, a unique property maybe at the top end of the market or say in another scenario, a property that's on a major road will still sell, will still sell in deep markets, but they certainly won't sell in shallow markets in markets where you wake up tomorrow and there's just no buyers at all in the marketplace.

So tell me this, you've kind of morphed from that front facing consumer selling, providing of information based on your experience with APM and previously and I guess that drive around telling it as it is. That's what I've always loved about sqm. You've come out with the big calls when you need to make, you see trends, you follow them rather than hide behind the data when no one else is actually calling it. What have been some of those big turning points or calls that you have made in the past?

That's a good question. You're going to get me talking now. I think one of the first calls we made which were recognized for was probably back in 2003, late 2003, when we made a call which was published in the Sydney Sun Herald that the Sydney housing market would Correct. And certainly slow down in 2004. And I was somewhat berated by that by the analysts of the day. I remember good old Johnny Edwards and Residex having a bit of a go at me about that one and but I think we got that one right. That's pretty much what happened in 2004, you may recall.

What were you seeing there in the data? Yeah, tell me about that data that made you come up with that conclusion.

It was probably the third quarter of that year just noticing that auction clearance rates were coming in a little bit weaker than expected at that point in time. Also recognising too that the market was, was quite overvalued. So I knew it wouldn't take much of a trigger to create a downturn. And also noting that the Reserve bank of Australia had been lifting rates to try and slow the housing market down. So they were hell bent on slowing the market down. And when you've got a central bank basically stating to the well we're going to slow the market down, well they generally have the power to do that.

They did back then. That's definitely right.

So there was that. And then the one that really played out was in early 2004 where look, the market was slowing down by that time. But then you may recall state labor government in New South Wales decided to putting on a vendor stamp duty which was this crazy style and that really put a hole in the Sydney housing market. But funnily enough the other markets did slow down in that first half of 2004 due to the rate rises but then pick up pretty quickly. So Brisbane really took off later in 2004. Melbourne had a slowdown but then kind of shrugged it off later that year. So you know, we didn't entirely get that one right, but I think we did initially get it right in terms of slowdown would come.

Tell me this Louis, that would hit Sydney. Louis, how do you assess if a market is overvalued?

It's a good question. It's a number of factors. One of the key valuation metrics that we follow very closely is nominal gross domestic product to house prices. So we've noted there's been a strong relationship in the past. And when you see prices, house prices rising well ahead of nominal gdp. Remember nominal GDP represents all incomes, everything so all income unadjusted for inflation. So when I've seen that, when I've seen prices move well ahead of nominal gdp, it's usually indicated to me that the market's getting rudder overvalued. And funnily enough, when we look at Sydney and Melbourne right now, I can tell you now, that indicates definitely suggesting that those two capital city markets are overvalued. Pretty much, it's overvalued as where they were in 2003. So we're keeping a close eye on the market. The thing is, we're not getting right now is a trigger to create slowdown. So I've always believed that you can have an overvalued market, but it doesn't necessarily mean it's going to have a downturn, imminent downturn, or there's going to be a crash or anything like that. It may well play out that that market just underperforms for a period of time. But what often is required. Right, sorry.

No, you go on. No, you go ahead.

I was about to say what is often required to create the conditions for a new downturn or even an upturn is a trigger. That trigger may well be a rise in interest rates or a cut. It may well be an oversupply surge or an unemployment spike or negative gearing being wiped out. Or negative gearing potentially being wiped out. A major event is often required to change the momentum in the marketplace.

Do you think?

And I think that's one thing that's helped with our calls in the past, because we recognise that the market can be momentum. It's often momentum and emotionally orientated, and that's helped us make correct calls in the past.

I look at the market now and obviously being involved with mortgages and watching interest rates closely, the RBA seems to have lost a little bit of its power because the banks are doing those out of cycle rate rises and kind of already bringing in those rate increases. So maybe the RBA doesn't have to do that. But are you seeing, you know, when you Talked about that 2003, with that, you know, the overvaluing and the clearance rates and maybe the interest rates moving, you know, and you've just said that Sydney and Melbourne look overvalued. And the triggers that you've got of any of the triggers that we should watch for, that you've mentioned, what do you think would be the most likely that would. That would push that kind of correction?

I think the most plausible scenario that could play out over the next 12 months, and not certainly in the first six months, but say in the second six months potentially, is a combination of APRA jumping into the market again to try and slow investor growth or investor purchases, and the RBA lifting the cash rate. So those two events could play out in similar time frames. So it could happen simultaneously. And if that were to play out, that would be the likely trigger for the next downturn for Sydney and Melbourne. So we're keeping a very close eye out on what the money markets are suggesting interest rates will be in the next 12 months because often the banks will change their interest rates simply based on what the money markets are doing. So we're watching that very closely. We're also watching investor credit growth because that's something we know that apra, the Australian Prudential Regulation Authority, are closely monitoring. And you may recall in 2015 they took action in the market when investor credit growth went over 10% per annum.

Yep.

We're still feeling the fallout of that in the mortgage business that we've got. It's amazing that changing borrowing capacity. You know, some people were approved for $900,000 purchase prices and were out there actively looking and doing all this research in those suburbs with those price points. And then three months later the approval is up and we had to go back and say your new purchase price is $475,000 and completely different type of property and different type of suburbs. So it's extraordinary those two.

Well, there's a chance could jump in again if investor credit growth goes beyond 10% per annum and there is a chance later this year it will, they'll be in the market again trying to restrict lending.

Do you, I mean, you've talked about the potential correction in Sydney and Melbourne and when Sydney's going up in 2013, Perth started coming down. If you're looking at the next three years, what would be the general comments that you'd make about the different markets that we have?

Good question. Very, very hard to forecast out three years. We seem to have a heck of it doing about 12 months out. But there's just a lot of X factors that can play out over a three year period. One of them being, for example, exactly what's going to happen with the US Economy. Will Trump, for example, run a very protectionist economy and could that start global trade war? Well, there's a risk of that and that potentially could be damaging for various economies, including our own, over that time frame. On the other hand, if Trump is a little bit more business savvy and it's just a hard deal maker and he goes off and spends big as he's promised he would in terms of infrastructure spend, that could be very positive for our local economy and positive for the following on through to the respective housing markets. That's just one factor to keep an eye on in terms of a Three year view, the next thing will be, of course, well, how, what will the Reserve bank of Australia do over that time frame? Will they be on an interest rate rising cycle where we see interest rates go up by say a full 1%, maybe 2% over that time? If that happens, that will definitely be negative for the Sydney and Melbourne housing markets. But then by the same time you've got to look at, well, why would they actually do that to begin with? And potentially if it's because we're having a surging economy, maybe brought upon by say a recovery in global commodity prices which seems to have been happening the last six months, that would be good for the Perth housing market and the Darwin housing market and perhaps the Adelaide housing market. And so in all this, I think seeing a situation where the national housing market performs in sync with each other, where all the capital cities perform pretty much in line, I think going to be a very unlikely scenario over the next three years. So it'll be either the case of. Yeah, that's right, that's right. And that's probably one good thing about our housing market is that it's a fairly diversified housing market. There's markets within markets and unless you saw something crazy like the cash rate going to 10% for no good reason, it's likely that these markets will stay separate from each other and basically operate on their own local economies.

It's interesting, I was talking to someone today who was really worried about the difference between a 4.4% interest rate and a 4.04 that their friend was getting. And we did the calculations and it was $10 a week, the difference on their loan. And then they got worried about if interest rates went to 8% and the calculation was a difference of $100 a week. And they were holding a property that had the potential to make $45,000 a year. And it was like when you put it in that context of how much the interest rates go up and the benefit they could possibly get, it really didn't, it was, it wasn't the big question. It was, oh, I just got to make sure I buy in the right area so it goes up in value, isn't it?

Yeah, well, look, I mean in the scenario where you saw the cash rate go to 8%, I mean that would affect a lot of markets.

Yes, definitely.

The question is. Yeah, I know. The question is will it go to that point? And in that sense the Reserve bank of Australia is kind of in a bind. I think it's no secret that there's a lot of private debt in the Australian economy right now, that in itself doesn't mean that we're going to see a housing price crash, but it is certainly at a level where the whole market's probably a little bit more interest rate sensitive than previous times. And the reality is that, okay, reserving of Australia by lifting interest rates are basically saying they want to see a the economy slow down in some capacity. I suspect it will take a lot less than say cash rates going to 8% to create that slowdown effect that they would be seeking. So look, it is very interesting times. And yeah, I think the three year view in summing all this up, the three year view is it's going to be a mixed market with most likely the east coast, Sydney and Melbourne in particular re entering a downturn at some point in time in that three year period we're thinking maybe 2018, but perhaps a recovery finally in the Perth and Darwin housing markets on the back of higher commodity prices.

So tell me this, should people be buying in a downturn then? Is there opportunity?

It's a good question. Just like the stock market, property prices are never too high to go even higher and never too low to go even lower. And just because something has fallen in value, that doesn't necessarily mean now is the time to buy it because it could fall again over the next 12 months. That said though, timing is very difficult in this game. I think it's a combination of perhaps a market which has just bottomed out and a number of the indicators have suggested that that market has just bottomed out and valuations being very fair and reasonable. A combination of those two factors would certainly be a big buying indicator for me at the personal level anyway.

Absolutely. Well, let me finish off with some questions. You mentioned the mixed market out there. What have you seen that makes a suburb outperform other suburbs?

Yeah, good question. It's a combination of income growth in that area outperforming other localities over the long term. So that may be as a result of a demographic change that's occurring in that area. A local market where it's not that easy to resupply with new stock. So you don't regularly see say the boom bust happen where there's a whole bunch of apartments that get built in that area. Mortgage stress is definitely one of the key factors. And funny enough, it can play out in the short term that when you see interest rates get cut, that suburb, because it's more leverage, will actually outperform. But it only bites you in a sense that okay, an area with high Mortgage stress will get hurt when you see interest rates rise. So our overall preference is to see areas which have relatively low mortgage stress. People often talk to me about population growth, how important that is, and there's a convoluted answer with this, unfortunately, in the sense it can be important, but it's not the be all and end all. And just think of for example, an inner city established locality that's been around for say 100 years where okay, every plot of land's been built out. I can tell you now that that locality is not going to have any more population growth. And it's tightly held, but it's tightly held, it's in an area highly sought after. It will outperform versus say an area that may well have a very strong population growth. But funnily enough that's happening at the same time that supply is going crazy. There's just a lot of properties being built and with that rapid increase in supply that doesn't normally translate to an outperforming locality. Of course in all this you can have exceptions to the rule, no doubt about it. But they are just some of the things that I like to look at when getting down to an individual locality. And I also like to look at, as mentioned before, suburb depth that the sales turned over in that area. I don't like seeing a lot of volatility in prices for a particular area at all. I prefer to see, I prefer, far willing to prefer to sort of offset those 12 month localities can shoot the lights out in preference for say locality that may well not should lights out over the next 12 months, but will more than likely outperform over the next 10 years.

Is there an inverse relationship between that income growth and mortgage stress? Can you track that?

Look, yes, it can be tracked. I don't think there's a strong, necessarily a strong relationship between the two. But to your point, I have come across localities where on the numbers the mortgage stress appears higher, but it seems to be offset by very high incomes in that area or rapid income growth. So between the two, would I pick an area that has high income growth but offset by some mortgage stress? Yes, I probably would actually.

And what about pockets of potential or areas within suburbs that outperform the rest of the suburbs? Have you seen some characteristics? They have common.

Tightly held streets, Streets where there's quite a difference between say the best street in that suburb and the worst street and the difference is significant. So you will see that in some localities, particularly perhaps some bayside localities, harborside, beachside localities, you can often get that?

Okay. And for someone who's just starting out, they've got their savings ready or maybe a bit of equity and they're ready to invest. What steps would you say a beginner should start with today?

I have a general view that novice investors should firstly get very familiar with the area they live in. I do believe that the first property should be in a safe area, an area that that investor knows very well as opposed to say a property that's interstate that they cannot actually check up upon. Now that's not to say that they shouldn't go off and buy interstate properties, but I just don't think it's as optimal as buying. Yeah, you basically should perhaps consider starting where you currently live if you can.

So what's safe then Louis?

Well look, you know, there's no perfect property, there's no perfect locality that. Look, going back to those deep markets, we generally do prefer the big capital cities. We see safety there. Be keeping in mind as my comments before about Sydney and Melbourne being overvalued, so there is some risk there right now, that's for sure. But over the long term the capital cities have been a proven out performer. As mentioned, I like them because they are deeper markets. Even in the downturn you can still sell out. So they are relatively safe with safety. Though that doesn't necessarily mean you're going to. It's not guaranteed you're going to shoot the lights out. That's right. There's definitely a matchup between safety or lower risk and lower return.

So final question, the Boom and Bust 2017 report that people can purchase off the website. Have you got some key highlights that you can share with us?

Sure, sure. So look, we are forecasting a positive year overall for the capital cities. So the forecast ranges plus 6 to plus 10% for 2017. There will be areas that will record falls so we think Perth will have another year of falls, same with Darwin as well. But this will probably be the last year of the falls. So there's every chance that as we get towards mid year that both those cities will be reaching their bottom in terms of the cycle.

There'll be a lot of relief people to hear that.

Yeah, I know, yeah. Sydney and Melbourne will rise and rise quite spectacularly this year, particularly in the first half. So the forecast for Sydney is 11 to 16% price rises and Melbourne 10 to 15%. I'll be becoming increasingly cautious of those cities as we get towards the end of the year. As mentioned, we think there could be some storm clouds on the horizon in 2018. One of the cities which we are expecting strong and ongoing outperformance is Hobart. So we're rather positive on that market, have been since probably the end of 2014. And all the indicators are suggesting it's going to be a rather big year for existing property owners.

And what about good old Brisbane?

Yeah, Brisbane's been an interesting one. It's caught out a number of analysts. I remember seeing analysts forecasting new boom from even from as early as 2013, and it's never really materialized. Brisbane at the moment is doing an annualized growth rate of about 4 to 6% depending on where you are. Houses definitely outperforming units and no great surprise given the oversupply of units in the CBC area. For Brisbane, we've become more favorable towards Brisbane, so. And east for freestanding houses. We think that that's where the growth is going to be from the long term. So look, it's likely to pick up. We've been all anticipating a greater movement of first home buyers, investors, upgraders, downgraders, moving from Sydney to Melbourne to Brisbane because the standard living gap between Brisbane and Sydney and Melbourne has widened right up again because of the house price difference. So, you know, for example, at the moment, the median house price we have on Brisbane at the moment is Approximately just over $600,000. Whereas, of course, in Sydney we've got it now well over 1.1 and Melbourne we've got it at over 800,000. I'm talking about freestanding houses. So there is quite a price gap now and I do believe it's enticing more and more residents from Sydney and Melbourne to move to Brisbane.

And what about Hobart then? If this is the big pick of 2017, their prices would be a lot lower than that, wouldn't they? Do they have the economic.

It's a lot lower.

Do they have the economy to sustain it, the employment?

For now, they do. The Hobart and Tasmanian economy has had a bit of a turnaround, which is great. The state government that's been in power has done a good job over the past three years and it's been paying off. So unemployment has been creeping down in Hobart. Remember, of course, Hobart was an area where, hey, people were actually more people were leaving the state than staying in the state for a while, particularly in the 1990s. And that trend has kind of stopped now and I think it may well reverse. But yes, it's going to require continued outperformance for the local economy. But for now, all the indicators are very positive for housing. You can buy A house there close to the city for under $500,000 within basically a 10 minute walk that is possible in Hobart. Is it for everybody? No, it isn't. No question about that. And there would still be some restrictive employment opportunities, certainly for some industries, but in terms of property investment, it's looking pretty good. We've got vacancy rates now in Hobart at under 1%. We've got rents rising at 7% per annum. The yields are quite high. They're basically at 6% gross. And as mentioned, this is definitely an affordability play. What will happen over the next 10 years? I'm unsure it's going to. As mentioned before, it's going to require a strong economy for this momentum to keep going.

Interesting. Well, I'm so glad to hear that we've got some opportunity ahead of us in 2017, even if there is some clouds on the horizon. So I really, I really appreciate you sharing your insight with us and your story too. I know that, you know, sometimes it's hard for people when there's so much information out there to understand where the data comes from and how it's presented. So I think you've really given us some clarity about the kind of triggers, the information people should look at and some of the key stats that should be monitored. So I really appreciate your time. Thank you, Louis.

No, thank you, Jane. And hopefully your listeners will get something out of all that.

I know I did, so I'm sure they will. Thanks a lot.

Thank you.

Tons and tons of information in that. I've got a page of notes here.

I know, me too, me too. You know, it's really interesting. We talk about, talk to people about, you know, how they start and I know a lot of the people we interview, you know, are quite well known in the property space and in Australia and overseas. But the reality is, you know, we just love hearing about how they started and their first property investments. But you know, he didn't start with a bang really did. He really started and I mean, it really has been a lifelong career. He wanted to give quality impartial information to people so that they could use that when researching and buying their own property. So, you know, something, some travesty that happened in his past really turned that in around and for the good of everyone.

Yeah, absolutely.

And I know, I mean, I refer to SQM research website regularly. So really great. And you know, the other thing is that I loved about his start was he started with not the typical type of property.

Yeah, the industrial property.

Yeah. So. And on the Gold Coast. So he Wasn't shy of that location after his grandparents got slammed there. But you know that. And I think when we talk about, and he talked about this, you know, the risk reward of yield in the interview that, you know, he had a. I think it was a net yield of 12%, so probably a gross yield of 15%. And we were talking about residential property, you know, markets in Australia, 2.5 in Sydney, or 3% rental yield.

So just for a sec, Jane, would you mind just explaining that difference between net and gross?

Sure. So a gross yield essentially is if you have a $400,000 property and you have a 5% return, then 400,000 by 5% is $20,000 a year. So that's kind of the rent that you're getting divided by 52 weeks in a year, obviously. So that's the gross. Whereas the net yield is where you say, you know, well, once I have that gross rent of $20,000, I then have to pay $3,000 to the strata management or the rental manager. I then have utilities and rates.

All your expenses.

All the expenses come out now. Interesting thing about the commercial property, one that some people may not know is that all of those regular external expenses other than the rental manager are actually paid for by the tenant. So, you know, there's not a lot of additional expenses. But as Louis says, there's risk and reward around those type of yields. So you may have 6 months, 12 months. I know I've had. Have clients that have bought industrial sheds or shops that have had over 24 months vacant.

Yeah.

So, you know, there is that great good yield.

You said that you posed that question to him. Does a good yield, a high yielding area, necessarily represent a good suburb? And he said, well, not necessarily because yield often represents risk.

Exactly. It's interesting looking at yield and that as a function of what the market's doing. And of course, Louis invented the vacancy rate index. So by posting World first. Yeah.

So the other good thing was that he gave us some free resources to go to like the ABS website. So he said, go to the ABS website, use the search function and put in housing prices and look for a free guide called Capital City House and Unit Price Index.

And I mean that's. We'll probably try to put the link in the show notes.

Yes, absolutely.

However, as you all guys know, links change and websites change. So it will be current early 2017.

Yeah, use that search function.

But yeah, that's. And that's. It was a great piece of advice because we often start with the census data to try to get no and field the demographic or the typical type of buyer person who lives in a suburb. But yeah, this is an extra report that I'm going to definitely download and have a look at.

Yep.

So the other thing he said was you asked him the question is this market cycle different? But he didn't think so, did he?

No, not at all. And you know, he did mention that the interest rates have an influence on the market and have had a lot of influence. And you know, and he subsequently said that, you know, when we at look, looking at risks in the future, the continued changes from APRA might make some big differences, something to watch and to monitor. But really interesting knowing that the cycles aren't that different because we often get into and go, oh, is the cycle longer, is it shorter? How do we predict the next cycle? And it's like not so different.

It was great hearing how the indicators that he uses to look at the market cycle too. So he said that I've got here that month monthly listings data and it was good too that he talked about the supply side and the demand side. So on the listings data, which is on the supply side, that helps him pick those turning points in the market.

And that allowed him to pick some turning points that have happened in the past too. So he's been the first to call like the slowdown in the Sydney Market in 2004 by starting finding those turning points.

Yeah, I've got here third quarter auction prices were coming down lower than expected and he realised that the market was also overvalued at that time too, which he also said now the Sydney market and the Melbourne market was overvalued, but he said it needed to be paired with those triggers for something to happen. And he gave us a couple of predictions too.

He did. Obviously we've been on an upturn for such a long period of time in the east coast and arguably and he predicts with that commodity resurgence, Adelaide, Perth and Darwin might be ready for an upturn. But the downturn triggers that we have to watch for, that a major event trigger is what he said has to occur to make that dramatic momentum change in the market and you know, those major, major kind of event triggers. You know, he talked about APRA jumping in and maybe once again changing some regulations for the banks on how they assess people's borrowing capacity or restricting the amount of investors in the market. So, you know, I was just reading this morning that maybe May to June, APRA might step in again and make some more changes. So that's interesting. And then once Again, interest rates, you know, rbi, all banks putting up the interest rates and then there's something completely out of our control.

Yes. The, our mate over in the U.S. yep. Donald Trump.

Yeah. So we, we're not sure what he's, he's going to do to affect our interest rates or, or our commodities, commodity prices or free trade or who knows.

Who knows what's happening.

Watch this space because we'll be watching it as well.

And he generally had a positive forecast for 2017.

I was so relieved to hear that.

If it all goes wrong, we'll blame him.

Louis didn't call it. We'll come and get you.

Yeah. But forecast range of 6 to 10%.

Yeah.

Which is great. And you know, he was saying Sydney still had 11 to 16% in it, you know, Melbourne 10 to 15%. But one of the big things that he made the call on was Hobart. Yeah, yeah. So that was interesting, you know, and.

Jacob Field will be happy about that.

He's been calling that for at least six months. Mind you, it helps he lives there too. I think he does that own research on his own area. But you know, the interesting thing about Hobart is once again it's that affordability play.

Yeah.

You know, so it is, you know, affordable. We look at, looking at properties, I think he said within 10, a couple of K's less than $500,000 and you know, there is some growth there.

But it was interesting though what he said about the, the good governance in Tasmania that's really helped with the turnaround. So I guess it can easily go the other way. It's amazing what a difference that makes.

Absolutely. So yeah, you can grab that boom and bust report off the SQM research page and. But yeah, we got a few little highlights so I was really grateful for him for sharing those with us. So once again, and one of the other things, if you do go to SQM research the page and you put in your postcode, there's a page that comes up which is the price per square meter coefficient curve. And I know that Louis invented it for a whole different reason, but if you've seen me do any analysis on suburbs, I particularly love that, especially if you're thinking about doing subdividing because what it does is, is it actually shows you all the sales and you can look over the last 12 months or any period you choose, but you can actually see the sales plotted out per square meter. So it tells you, gives you a very quick indication that 600 square meters is where most of the properties are selling. And if you don't see a lot down at 300 then subdividing a 600 into 2, 3 hundreds would, would mean that you might be first in the market to do that and there may not be a demand. So it just gives you an indication of what that standard size blockies in a suburb as well. And I just love that from a quick little. Yeah, it's a great getting to know these suburbs. So fabulous SQM research. If you haven't been there, go have a look around.

Yep.

So another huge, huge episode. What do you think? So many takeaways.

Yeah, absolutely. And another top Australian property expert.

Absolutely.

To go to the long list.

I know, I know. I just love chatting to these people. I'd do it without the podcast, to be honest.

It gives us an excuse, doesn't it?

So with some trepidation, yes, it's that.

Time again, where you get the chance to test your suburb knowledge while the entire nation holds its breath. Ladies and gentlemen, it's time to play Suburbs against the Clock. The rules are simple. To play, all you have to do is answer a question about 10 suburbs in the city of your choice. Within 20 seconds, the lucky winner of Suburbs against the Clock will win one year's free access to your Property Success Club. Your Property Success Club is an in depth monthly masterclass which gives you the practical tools needed to grow your portfolio yourself without having to spend a fortune on expensive seminars or even leaving your own home. So who do we have standing by to play Suburbs against the Clock?

Hello? Can you hear me?

Yeah, loud and clear. How you going?

Yeah, good.

Man stuff.

Yeah, good, good.

Hey, Terry. So you ready for Suburbs against the Clock?

Yeah.

Really?

As any of the others have been, I guess.

Whereabouts are you based, Terry? Where would you be playing for today?

I'm in Melbourne.

There you go.

And tell me where about. So you on your property investing journey?

Yeah, so we got a few investment properties and we're just in the middle of moving into a more active strategy at the moment with the development down in Cranban. So that's hopefully just being advertised at the moment, public consultation phase. So fingers crossed we get through that unscathed and we can move into permits and building.

Fabulous. Well, John's done a few developments and just you've got one sold last month and you've got another one just hitting the market next month.

Yeah, that's right. Finishing getting handover from the builders this week.

Cool.

But, yeah. So are you playing for Melbourne, Terry?

I might as well.

Yeah.

It's got the best chance there I think.

All right, so you're familiar with the rules? 10 suburbs in 20 seconds.

Yeah.

Okay, so my question for you is name 10 Melbourne suburbs above sea level.

Okay, above sea level. Hampton, Brighton, Mount Waverley, Glen Waverley, Ox.

Hill.

Richmond, South Melbourne. Port Melbourne.

Yep, he's in. I've got 10.

I got close.

I mean I got 10. All I can think of is things on top of hills.

That's what I was trying to think of.

I haven't googled it, but I'm pretty sure nearly all of them are above sea level.

I got to say. Otherwise, be underwater. Right.

They'd have to be, wouldn't they?

Yeah.

Port Melbourne, you know, you've probably got about half a meter in it, but you're still above. Yeah, just. Yeah, yeah, good job.

There's a couple high rises there, so.

Good job, Terry. Well, we're definitely going to get you access to your property.

James paid that. Terry, you're in, mate.

Yeah, I told you, I. I can't. I didn't tell you that. I lost a couple of fingers when I was working underground. But other than that I counting on my hands and I got dealing with.

Explosives for 12 years will do to you.

Yeah, that's right. No, well done, Terry. Well, congratulations for you. We're getting 12 months access to the your property success club and access to the private Facebook group. So look forward to seeing you in there and hearing more about your development there too.

Awesome, thanks guys.

Good job. Okay, Terry, good on you.

Thanks, Terry.

See you later.

Okay, bye then.

And if you'd like to test your knowledge in the best suburb quiz in.

Australia and still the only suburb quiz.

In Australia not being copied anytime soon, simply email supportourpropertysuccess.com and use the subject line Suburbs against the clock.

And if you have any suggestions for questions in the future, we are definitely open to hearing them. So, John, great day. A great guest. I really enjoyed speaking to Louis. He was so generous with his time and information. I think a lot of people, experienced investors and first time investors tend to take a lot of information away, so. And if you want to gain instant access to the transcript of this, plus get show notes, free training material, anything that we've actually mentioned in the show, then please head over to YourPropertySuccess.com EP11 and that's YourPropertySuccess.com the letter E for echo, P for papa, and the number 11. Okay guys, well, all the best and thank you for. Thanks for listening to youo Property Success podcast.

Ladies and gentlemen, it's important for you to understand that you need to take care in applying what you've heard on this podcast to your own personal circumstances. Everyone's situation is different, and while we go to great length to ensure that everything we share is accurate, the information in today's podcast was based on personal experiences and opinions and is not intended to be specific to your circumstances. We are not real estate agents, financial planners, lawyers, or accountants and are not liable for any loss, damage or misunderstanding caused by reliance on any information provided or inferred. We highly recommend you seek out the services of a professional or mentor to help chart your own path to property success.

Sa.