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We would all know of Albert Einstein, the German-born physicist who developed the general theory of relativity and is best known for his formula E = mc2. A smaller percentage will know of Ernest Rutherford, the New Zealand-born British chemist who is widely credited with first "splitting the atom" in 1917.
Even fewer people will know the formula of “the long-run average ratio of house prices to disposable income and to rents equals (property) fair value”. And, that by adopting this formula, the Australian property market is 36% above fair value. This is what The Economist is claiming in its August 2012 update of 21 residential-property markets around the world. I must have been truant the day that they taught this theory at property school.
Here’s another formula that those who know me personally will relate best to: “full-time property market student plus outlandish claim from so-called expert equals outburst.” That’s the response which those in earshot of me hear each time some suit in an ivory tower tries to make a name for himself with an attention-seeking headline.
I always find it amusing when people talk about “the Australian property market”, as if every one of the 8.4 million residential properties spread across 15,000 suburbs in this country all move in the same direction.
It is similarly amusing when an economist looks at what occurred to property values in one country, then plays around with a few ratios in a spread sheet, and concludes that she’s unlocked the formula that is going to split the property atom in another country. Economists would have us all think that their reading of the stars in the sky says that the Southern Cross is about to fall apart.
I am sure that fellow property market analysts such as <a href="observers/terry-ryder/">Terry Ryder</a> and <a href="observers/michael-matusik/">Michael Matusik</a> will concur with me that forecasting from one Australian city to the next is a very involved science that even we, as full-time property students, find difficult to keep up with. Add to this the many political, economic, legal and cultural variables across different countries and you have an impossible task.
Australia is nothing like America or Europe. Credit policies adopted by Australia’s (very strong) banks are completely different to the policies during which American banks handed out interest-free loans and a set of keys to unemployed people with no deposit. Australia’s economy (current and forecast) is vastly different to those in the Western world. And, unlike practically every other part of the world, Australians have a deep-seated cultural attachment to bricks and mortar – that Anzac spirit in our DNA means most Aussies, when faced with adversity, will fight hard to retain our family homes.
Economists love two things: data and formulae. The problem is, data is a record of the past, not the future. And, not everything in life can be calculated using some magic formulae. I like data too, however in order to draw any conclusions from data one needs to understand the things that influence it. You can’t just extract some data from a spreadsheet, multiple it by three, divide by the power of five, and end up with the square root of nine. One needs to understand the human behaviours that influence both the supply and demand of that essential commodity called “accommodation”. Most economists are flat-out predicting interest rate fluctuations, let alone reading the dozens of property markets across the country.
In some ways the science of evaluating share markets has similarities to property markets. In other ways, they are completely different. Ratios, for example, are referred to a lot by stock brokers as they dissect company balance sheets. Economists who persist with referring to ratios between median property values and median wages as a formula for our property being overvalued are delusional.
In a former life as bank manager during the 1990s my then employer had a policy that clients couldn’t afford a home loan if their total annual financial commitments were more than 30% of their gross annual income. This formula implied that 70% of a given client’s gross income was needed for taxes and living expenses. This formula was scrapped several years ago after even the conservative credit-Nazis who write polices acknowledged that it was inappropriate to generalise that a household earning (say) $300,000 lived a proportionately more extravagant lifestyle than the household earning $30,000.
“Median value : median wage” in the affordability debate is inappropriate. How do you compare the $250,000 salary of the boiler-maker who just purchased a $900,000 shack in the iron ore belt at Port Hedland to the retail assistant earning $60,000 and living in a nicer home in Port Adelaide?
For the economists out there trying to split the property atom I’ll spare everyone the excruciating pain that you will cause and share the formula with you: Property knowledge equals industry-specific education, plus real life experiences, divide by accountability, to the power of common sense.
Simon Pressley is a buyers' agent for <a href="https://www.propertyology.com.au">Propertyology</a>.
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spressley-sBoeMhannA

There is no magic formula to understand Australia's property markets

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Yesterday's announcement by BHP to delay and downsize its Olympic Dam expansion plans should be a lesson to all property investors. If you were ever seriously thinking of investing in a location on the back of the anticipated impact that a single major project might have on that property market, then make sure all of project approvals are in place.
The process leading up to the now famous boom that has occurred in Gladstone is an example. Our research on Gladstone was completed approximately three years ago, after various government approvals had been granted for the construction of an initial liquefied natural gas (LNG) plant. Importantly though, we intentionally kept things under wraps and delayed purchasing properties in Gladstone until the formal board approval had been granted to fund the first of Gladstone’s LNG plants. Clients whom we subsequently helped buy investment properties in specific pockets within Gladstone have made approximately $100,000 over the last 2 ½ years.
The unfortunate consequences for many property investment speculators who may have already invested on the expectation that Olympic Dam would be given the green light this year is that a rocky road is ahead.
Government approval for the Olympic Dam expansion was granted late last year. BHP had always advised that its board would not make its final investment decision until December this year. We had a very good look in to the potential property investment opportunities to spin off Olympic Dam on behalf of our clients. Investigation was definitely warranted when the biggest mining company in the world says that it is going to invest $30 billion to dig the biggest hole on the planet.
We’ve felt that the writing has been on the wall for BHP to back out of its original plans. South Australians will be shattered by this. The state’s economy has been in the doldrums for decades. From the premier to the suburban pie maker, the SA public have been waiting with baited breath for a large, good news story.
On the expectation that the Olympic Dam expansion was a fait accompli, and with very few other locations in SA that have high demand for new housing, several development projects have already commenced in towns like Whyalla. In the absence of the extra service contracts that were to support BHP and new job creation the Eyre Peninsula is now likely to be an over-supplied property market with low consumer confidence.
The Olympic Dam scenario should highlight to property investors the risks of getting caught up in all the hoopla and making major financial decisions without the expertise to conduct a comprehensive feasibility.
For what it's worth, we think the expansion will go ahead at some stage. BHP’s decision is primarily due to funding pressures. It requires significant capital to be invested in multiple projects, not just in Australia, and in a climate where it's increasingly difficult to secure funding. The copper, zinc, gold and uranium won't disappear. The opportunities to BHP from of expanding Olympic Dam are too big for it not to proceed.
Olympic Dam isn’t the only project to be put in hold because of funding challenges. While stakeholders such as shareholders, governments, property investors, and the like would prefer to see BHP proceed as scheduled, the silver lining is that deferments of some projects reduces pressure on availability of skilled labour for those projects which are underway. It is also likely to "smooth" out what was an enormous spike in the Australia's project pipeline and spread it over a longer period.
Other than when will the expansion proceed, the biggest questions is where will the biggest impacts on property markets be felt. The consensus appears to be debated over Roxby Downs, Whyalla, or Port Augusta. While we do expect the economy in each of these towns to benefit we are turned off by the Eyre Peninsula’s over-reliance on mining. We believe that Adelaide will be the main beneficiary of Olympic Dam. A majority of workers will operate on a fly-in-fly-out basis, similar to those who commute from Perth to the Pilbara. Adelaide’s economy unfortunately has challenges that even a project as big as Olympic Dam won’t fully address. Adelaide also has a history of being more than capable of supplying adequate housing to meet demand.
Simon Pressley is a buyers' agent for <a href="https://www.propertyology.com.au">Propertyology</a>.
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Rocky road ahead for property investors dependent on Olympic Dam expansion

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The Queensland government appears to have followed the lead of its NSW counterpart by scrapping the existing $7,000 first-home buyer grant and replacing it with a $15,000 grant applicable (only) to new property. While it’s not clear as to whether the policy is intended to stimulate first-home buyer activity or the construction industry it won’t matter either way – the policy will fail on both fronts.
It never ceases to amaze me how governments are fixated with new builds. Liberal, Labor, state, federal – every government’s solution to the construction industry’s belly-aching appears to be to stock up on the latest flavour of government grants that are on special for new property.
Memo to policy writers: If your government wants to introduce a policy with genuine intent to support a targeted audience, pause before you reach for your pen, engage with the targeted audience first and find out what they actually want.
Only a small percentage of first-home buyers actually want to live in mass-produced, high-rise apartments with large body corporate fees. The same goes for a house-and-land package far out in the 'burbs, disconnected from employment nodes, social amenities and recreation facilities. The reality is that’s what you get when buying a new property, and with a significantly higher price tag than established properties in the immediate proximity.
Don’t expect to hear members of the construction industry complain about government grants though. Not yet, anyway. See how they go trying to sell the properties. Then they’ll lobby for the grants to be targeted at investors and / or more NRAS projects. Guess what? We investors don’t want these new properties, either – we see much better investment potential in well-chosen established properties.
According to the REIQ, the $21,000 grants for new property at the height of the GFC only attracted 24% of first-home buyers. Subsequent to that, the former Bligh government’s $17,000 Building Boost for new property also had a poor take-up rate; ditto to numerous other state government initiatives around the country targeted at new properties.
There are approximately 8.4 million residential dwellings in this country; buying one is a big decision. Recognising that buyers don’t want their choices restricted to 1.5% – the 130,000 new homes built each year – should be the starting point for designing good policy. This is not rocket science!
Governments would also do well to understand property cycles before developing policies. A buoyant first-home buyer market is a buoyant economy for everyone. Benefits from increased first-home buyer activity extend far beyond people establishing a footing in their own homes. Increased first-home buyer activity is often the first phase of price growth. Initiatives targeted at encouraging first home buyers causes competition in property markets, encourages investors to become more active, and is a proactive way of releasing this country’s heavy reliance on tax-payer funded pensions.
Increasing property transaction volumes creates jobs in real estate and other service industries, improves retail spending, creates more opportunities for blue-collar tradies in the form of renovation projects, and increases loan volumes for banks. Consumer confidence increases across the board. Governments get a clip of the ticket all the way through via stamp duty revenues, GST receipts, and payroll taxes. The cycle starts with the first-home buyer, not the investor. Policies need to be targeted to encourage first-home buyers, not restricting them!
I agree wholeheartedly that we all need a healthy construction industry, however we should not be fooled in to thinking that the solution is in the form of grants for new homes. This country does not have an over-supply of homes. If we did we would see very few properties for sale, much lower vacancy rates, and banks comfortable with approving more development projects. With a decline in the rate of population growth over recent years maybe the question should be asked “do we have more people seeking employment in the sector than current demand requires?” Or maybe governments need to relax our immigration policy. Now that’s a different debate.
Simon Pressley is a buyers' agent for Queensland-based <a href="https://www.propertyology.com.au">Propertyology</a>.
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Queensland first-home buyer grants targeted at new property miss the mark

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Widespread media reporting earlier this week suggested that Australia’s mining boom was near its end. Radio broadcasts, tabloids, even Channel 10’s The Project – they all lead with headlines claiming that our mining boom would end in two years.
Had the reporting stemmed from an article written by some random journo I would have given it the usual through-to-the-keeper treatment. To hear that credible economics advisory firm, Deloitte Access Economics, was the apparent source of these statements almost made me choke on my morning coffee. The copious amount of reports and articles that I’ve read over the last few years must be written in a language that I don’t understand.
I’ve been on record describing this not as a “mining boom” but a “resources revolution”. Suddenly, I’m hearing that the large volumes of natural resources which are responsible for powering up so many electricity sockets around the world, not to mention Australia’s own economy, is about to come to a grinding halt. Is someone going to turn the lights off?
From dirt to dollars
A number of the locations which we’ve been buying investment properties in over the last couple of years have benefitted from the economic stimulus from the mining sector. That said, they have all been strategically selected locations with a stable population base, a diverse mix of industries that contribute to the local economy, an abundance of employment opportunities, and demand for accommodation which is not matched by comparable supply.
Suggestions that the mining boom will end in 2014-2015 is misleading. But hey, it makes a good headline so the media will always milk that for what they can.
What is true is that the timeline for completing construction of much of the $240 billion in fully approved major projects is around 2014-2015. What is also true is that there are a number of factors which are deterring large resource companies (especially foreign companies) from investing in additional major projects. I also think policymakers need to be more proactive in developing other buoyant industries.
What has been overlooked by the doomsayers however is what happens when construction of these projects is finished – they are built for a purpose not for practice!
It’s not until key infrastructure such as processing plants, ports, pipelines and railways are constructed that those valuable resources below the dirt can be converted to dollars. That’s when commodities such as coal, gas and iron-ore are processed and exported to the likes of China, India, Japan, South Korea and France. That’s when our governments start to receive billions of dollars in extra revenue each year in the form of royalties. That’s when some of Australia’s biggest companies expect to return bigger profits, which will affect retail superannuation holdings. That’s when consumers will start seeing some of the fortunes promised by Treasurer Wayne Swan – tax cuts, increased superannuation contributions and infrastructure projects. Supply contracts which underwrite these royalties are on terms of up to 20 years.
Suddenly, now that (alleged) end to the mining boom has quite a wag in its tail. Mining doesn’t stop when construction finishes – it starts! The proponents need to get a return on their investment.
To suggest that the mining boom is near an end is admission of shortsightedness. Disregard the doomsayers for a minute and think about this logically. In Australia and around the world, are we likely to continue to breed, thereby resulting in continued population growth? In Australia and around the world, are we likely to continue to manufacture, produce, process and construct? If the answer to both these questions is “yes” then in Australia and around the world we will need more fuel for electricity and steel. If the answer is “no” then we all better stock up on candles.
Australia has some of the biggest reserves in the world of thermal coal and gas (both used in power generation) and iron-ore and coking coal (both used to produce steel). With the world’s pledge to reduce pollution the demand for gas-powered electricity will continue to skyrocket.
A majority of Australia’s natural resources are contained in Western Australia and Queensland. Consequently, the economic fundamentals of these states are the best in the country. And, many of the best property investment opportunities are also in these states.
It’s called the Asian “century” for a reason
Over this last decade the world has become acutely aware of the abundance of natural resources contained within Australian soils. Over the same decade most of Asia (home to 60% of the world’s population) has entered an era of mass urbanisation; an era which is expected to last so long that it is referred to it as “The Asian century” by people, including our very own Prime Minister.
Asia’s demand for natural resources is propelled by its enormous population, its ambition to transverse from an undeveloped to a developed region, and considerable financial capacity to support this.
Forecasts are for Asia’s middle class to explode from approximately 0.5 billion people to 1.7 billion over the next decade. Australia’s total population is only 22 million.
These changes in Asia are structural, they are real, and they will be long lasting. These changes have already altered the landscape for Australian property markets. To explain these changes we have produced a <a href="https://www.youtube.com/watch?v=4gNXE-J4Ge4&amp;feature=plcp">short educational video</a>.
To suggest that the mining boom is near an end is an omission of the important role which Australia will play in “the Asian century”.
There will always be demand for Australia’s resources. In addition to the $240 billion in approved projects there is a similar value in proposed projects. Future project volumes will ebb and flow depending upon the economic and political climate at the time.
The biggest challenges stopping Australia from realising greater potential from additional resource projects include heavy taxes imposed on the mining industry and the lack of confidence/certainty that foreign investors have in our government. The inability of governments to contribute their own funding to some of the infrastructure required (ports, roads, rail lines), the cost and availability of skilled labour, and lost productivity due to industrial relations unrest are also inhibitors.
The opportunities to Australia from “the Asian century” extend well beyond the mining sector. As featured in our video, there are opportunities for agriculture, education, health and tourism.
Glass half full
As a nation, we need to stop moaning and start embracing the opportunities. It’s been four years since the onset of the GFC. Australia’s economy has been strong throughout, yet we persist with paranoia about Europe. Asia continues to boom, yet we continue to worry how long it will last. And the opportunities for our mining sector are enormous, yet we’re trying to predict how long it will last.
Those of us who naturally have aspirations for success look at problems and see solutions. Those of us who are naturally positive people don’t sit idle because of perceived risks; we look to mitigate and maximise opportunities. And those of us looking for confirmation don’t look towards governments or the media; we look at industry leaders and achievers.
For reassurance we should listen to people like Reserve Bank Governor Glenn Stevens who recently said: “Most Australians I encounter who return from overseas remark how good it is to be living and working here. We are indeed ‘lucky’ in so many ways, relative economic stability being only one of them.”
For direction we should follow the doers not the doubters. People like James Packer (entertainment and tourism), Gerry Harvey (retail) and Andrew Forrest (mining).
Leadership from government and business is integral to Australia cashing in on the Asian century. Regrettably, we shouldn’t hold our breath while waiting for this to occur.
Some friendly advice for those of us who are serious about goals and aspirations – focus on the opportunities, tell those around you to stop arguing about how to fix the problems, and remind the doomsayers to stock up on those candles before the lights go out.
Simon Pressley is a buyers' agent for <a href="https://www.propertyology.com.au">Propertyology</a>.
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Decrying the end to the mining boom hysteria: Simon Pressley

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With property acquisition and disposal costs being what they are, investing in property needs to be undertaken with a mid- to long-term focus. So, with large-scale urbanisation unfolding across many Asian countries, it is essential for a property analyst to look at how the resultant structural changes to world economies might impact Australian property markets over the mid- to long term too.
The rise and rise of Asia has kept me keenly interested over the past few years. Asia’s urbanisation and rising middle class are generating demand for natural resources and presenting economic opportunities on a scale not seen since the Industrial Revolution.
Where Australia sits as these globally significant megatrends play out is the subject of the federal government’s white paper Australia in the Asian Century, due out within weeks.
We expect the white paper will outline opportunities and possible roles for Australia in what is known as the ‘Asian Century’ — the current 100-year period in which great economic, political and strategic change in Asia (encompassing China, India, the key ASEAN countries, Japan and the Republic of Korea) is underway. (Although given we’re a good 12 years in and we haven’t yet seen, let alone begun planning and implementing, the contents of this white paper, it’s fortunate for the federal government that it is a century of opportunity or we’d be missing the boat entirely.)
You need to be a visionary to invest successfully, so documents such as this white paper interest me. Government policy changes and business decisions will have an impact on industry sectors, employment opportunities, and demand for that essential commodity we property investors love: accommodation.
This white paper will outline opportunities resulting from stronger ties with the Red Dragon (China) and other emerging countries, such as India, South Korea and Vietnam. So you could say, the opportunity is in the "red" and the detail is in the "white". Bring it on!
Asia is on a mission to replace the simple lifestyles of its villages with the creature comforts of modern cities, which the Western world has taken for granted for generations. As this evolves, dozens of new cities the size of our own capitals will be built and Asia’s middle class is forecast to grow from 0.5 billion (in 2009) to 1.5 billion by 2020. To put this in to perspective, Australia’s total population is 0.02 billion.
The opportunities for Australia should already be obvious. Australia has what Asia wants: energy resources, commodities for construction and manufacturing, agricultural products, education facilities, and quality tourism locations. But it’s not just one-way traffic.
Asia has something Australia is short on: capital. With federal and state budgets increasingly under pressure and funding difficult to secure generally, there is scope for Australian-based private investors to partner with Asian companies to secure the funds they need to get major infrastructure projects off the ground, thus creating enormous economic and employment opportunities and improving facilities, which would otherwise have taken decades.
To this end, Australia must relax its foreign investment policy to encourage joint ventures. Because 50% of something is much more than 100% of nothing!
If all levels of Australia’s governments are smart, they will use this once-in-a-lifetime opportunity to score two wins: decentralise our population away from the capital cities where there’s an unsustainably high concentration of people, and add economic diversity to specific regional communities. With some lateral thinking and an eye for the future, governments could create unprecedented opportunities out of the Asian Century.


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Here’s the chance to take the focus away from capital cities and to work with the strengths of many regional locations. Just a few examples:
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<li>Asia’s rising middle class is seeking quality education facilities. Strong regional locations such as Orange (Charles Sturt University and specialist medical facilities) and Townsville (James Cook University and the CSIRO facility) have potential to become a future breeding ground for Asian professionals. The same could be said for Perth’s expanding Murdoch medical precinct. Adelaide might also consider jumping on board and investing in facilities to support Asia’s future demand for higher education.</li>
<li>Vast areas of dust bowl land from the Pilbara to Cape York could be irrigated to produce thriving agricultural crops to serve as Asia’s future "food bowl". In return, Asian capital could help fund strategically-positioned communities that could provide goods and services to support thousands of new jobs in these precincts.</li>
<li>Cairns and the Gold Coast, with their unhealthy reliance on tourism, could both benefit from adding an alternative string to their economic bow. </li>
<li>Geraldton would do well to explore investment in hotel accommodation and to promote its pristine beaches and Abrolhos coral islands to tap into the Asian tourism market. And a Chinese partnership could secure the venture capital necessary to fund the proposed Oakajee Port and rail infrastructure, enabling several inland iron ore mines to deliver their product to the Asian market and creating tens of thousands of jobs.</li>
<li>The natural beauties of Darwin and Broome could be boosted by investment in better facilities, which would also make these areas strong attractions to the Asian tourism market.</li>
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But if Australia is going to prosper from the urbanisation of the world’s largest population and fastest-growing economy, a bit of elbow grease will be needed. We’ll have to strive to understand Asian culture and how these countries do business, and overcome any language barriers. We’ll need to overhaul our school curriculum, our foreign investment policy, and our immigration policy for (specific) skilled labour and Asian students.
Dare we hope the long-awaited white paper will cement the path ahead with its recommendations? I’ve read dozens of government planning documents over the years and I expect the Australia in the Asian Century White Paper to be much the same as the rest. It’ll use the words "plan" and "projected" a lot. There’ll be plenty of media hype, delegated responsibility, and money spent on feasibilities.
Property spruikers will see it and other related reports as an extra sales tool. Selectively chosen comments will be lifted from the White Paper and recited as if the outcome is guaranteed.
Oh, and one last thing. The author of this long-awaited white paper is former Treasury Secretary Dr Ken Henry. Yes, the same man who the same government commissioned to prepare a different report that was designed to give Australia’s inefficient tax system a complete overhaul.
The same report that has mostly blank spaces in the ‘implemented’ column alongside its 138 recommendations. Perhaps that’s why they call it a ‘white paper’?
Let’s hope for a very different outcome with this next one.
Simon Pressley is a buyers' agent for Queensland-based <a href="https://www.propertyology.com.au">Propertyology</a>.
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The Asian Century provides unprecedented opportunities for regional Australian property

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According to some, Australia has an (under-supplied) housing crisis and an affordability crisis. I don’t subscribe to either claim. I agree we have a crisis. A very big one. But it’s got nothing to do with undersupply or affordability. Our crisis is a financial literacy one.
Let’s get this clear: there is a big difference between general intelligence and financial intelligence. A respectable occupation, a university degree, business ownership and a six-figure salary may imply a person has above average intelligence. But these are simply the byproducts of that person using general intelligence to generate income. We all have skills, and we use them to make money. Financial intelligence, on the other hand, is more a measure of what we do with the money we make. And it’s staggering how few people truly have financial intelligence. They don’t understand the basics, such as the power of compounding and leveraging, good debt versus bad debt, and how negative gearing works. And most shocking of all: it’s because, as a nation, we don’t teach people these fundamental financial principles.
Every day, as a property investment advisor, I see the consequences of Australia failing to invest in its financial intelligence. For example, when planning and strategising an investor’s investment choices, there is a huge advantage in looking at different combinations of the best use of their available capital and cashflow. But a lot of people don’t see that a tweak to the amount of capital one way will have a very different effect on their cashflow than would a tweak to the amount of capital another way. An investor who can afford one property can afford multiple. Most property investors do little more than select a property and get a loan approved to pay for it. With greater financial literacy, they could make their money work so much harder.
The statistics are damning
According to the Australian Bureau of Statistics, only 4% of Australians aged 65 years and over are self-funded retirees. The other 96% of people rely on a taxpayer-funded pension, remain in the workforce, or are dead. These shocking statistics unequivocally confirm that Australians in general are financially illiterate.
Ask yourself these questions (and be honest):
•             Were your parents in a financial position to exit the workforce when they wanted and continue living their desired lifestyle? Have they passed these skills on to you?
•             At high school, did you study a subject about managing money, budgeting, the power of compounding and leveraging, and the importance of saving?
•             On entering the workforce, did someone explain to you basics such as how interest rates are set, the difference between good debt and bad debt, and how negative gearing works?
•             Has anyone ever sat you down and explained that your superannuation will be nowhere near enough money to comfortably retire on?
•             Do you have any idea how big your investment portfolio needs to be if you wish to live your desired lifestyle without having to work?
I’m tipping that you answered “no” to most, if not all, of these questions, and the reason is simply that there’s a yawning gap in your knowledge. You’re not alone.
Australians have above average education, are hard-working, enjoy low unemployment and earn above average incomes. So why is the self-funded retiree portion of the population barely a drop in the bucket? Because too few people understand what it takes to get there. They aren’t financially literate. And this includes many of the white-collar professionals often revered in the community. (They answered “no” to most of these questions too!)
Those who choose to invest in assets such as property because they understand and want to avoid the consequences of relying on pensions and superannuation will, generally speaking, achieve more financially than those who don’t. But we still shouldn’t kid ourselves that we are adequately educated in financial matters.
 
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We can’t be trusted to invest responsibly
The underlying principle of compulsory superannuation is: We know that you need assistance, but we don’t trust you to be responsible or to make sound decisions.
A household (couple) receiving a government pension gets the grand sum of about $26,000 a year. This only permits a very modest retirement lifestyle, but the sheer volume of people depending on taxpayer-funded pensions places a massive financial burden on our growing and ageing population. In an attempt to address this burden, the Keating Labor government first introduced compulsory superannuation in 1992 by forcing employers to contribute 3% of an employee’s wage to a fund that is preserved until the employee retires. As we know, the contribution rate has progressively increased to the current 9%.
There are many advantages to compulsory superannuation, but it being set up so the funds can’t be accessed until retirement and having someone other than the recipient make the investment decisions for the funds are arguably the most compelling indicators of a frightening degree of financial illiteracy among Australians generally.
I put it to you that if, instead of increasing the employer superannuation by just 1% we invested it in financial literacy among the Australian workforce, we’d be making a much bigger dent in the burden of taxpayer-funded pensions than superannuation does.
We have to grasp ‘opportunity cost’
I find very few investors understand the concept of “opportunity cost”. While we’d prefer to be sharing our property market research with our investor clients in preparation for their next purchase, it is becoming increasingly common in this post-GFC era to need to deliver clients some bad news about the outlook for a market in which they previously invested as a DIY. We commonly see this with investors who bought a house-and-land package within a recently converted greenfield site. It’s not uncommon for the property’s current market value to be as much as $100,000 less than what they paid for it brand new only three or four years ago.
Unfortunately, not everyone can understand the benefits of disposing of one asset with a poor outlook in order to put the capital in to a different asset with a much better outlook. Opportunity lost.
 
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We have to stop blaming affordability and undersupply
I don’t agree with those who claim Australia has a housing affordability crisis. Most people have a job and a reasonable income but have never been taught how to use that income responsibly and so they go forward financially illiterate and worse off than they could be.
I think the attitude of a lot of Gen Ys should not be underestimated in the affordability debate. They seem to want the creature comforts they see others having, but aren’t prepared to make the sacrifices over time to acquire them. They want the nice car, the fancy clothes, fine dining and an inner-city apartment all by the age of 25. Then there are others who could make a few changes to boost their earning capacity, but think “w/e” is an abbreviation for “weekend”, not “work ethic”. This isn’t about affordability. This is about attitude and choice.
Then there’s the choice we all have about where we live. We shouldn’t cry poor over not being able to afford a $500,000 inner-city pad when we’ve got the choice of downgrading our “must haves” wish list, being a bit further out of town, or selecting small digs. There are locations all around the country with below average unemployment rates, a great lifestyle, and quality three-bedroom houses for around $300,000 – just like the many we invest in for clients all the time.
So affordability isn’t the issue. Undersupply isn’t the issue. Financial education is the issue! Investing as a country in our financial literacy and encouraging people to learn and apply the basics when using their income and making investment decisions would see far more people much better off and the nation less burdened over time. It’s simple maths, people!
Simon Pressley is a property investment advisor and buyers' agent for Queensland-based <a href="https://www.propertyology.com.au">Propertyology</a>.
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Australia's property market has a financial literacy crisis, not an affordability crisis

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Can someone please tell the Victorian state government that Kevin Costner is an actor, not a policy maker?
Costner’s infamous theory of “Build it and they will come” worked a treat for him in the 1989 film Field of Dreams, when he built a baseball field on a cane farm in the middle of nowhere, then attracted a crowd to see his team relive their glory days. But in Melbourne, where it’s not baseball diamonds that successive governments are building but too many greenfield housing estates and high-rise apartments, the “Build it and they will come” theory is way off base.
Melbourne has around 41,000 properties for sale right now – that’s a whopping 74% more than Sydney’s 23,467. And yet, Sydney’s population is 12% higher.
Melbourne’s glaring error is that the “baseball field” it has built is now bigger than two MCGs put together, yet the number of people who’ve turned up at the "game" could comfortably fit inside Rod Laver Arena. It’s construction on steroids!
You could say Melbourne’s property market won the "World Series" in 2009 and 2010. The $155,000 (38%) increase in the median value of established houses topped the table in Australian property terms and rightly created jubilation for its fans.
Then, property owners in Melbourne hit a home run when the Victorian government added significant stamp duty incentives to the federal government’s GFC stimulus package incentives. It created a buyer frenzy, which was further fuelled by an influx of Indian students needing somewhere to live.
"Sign me up for season tickets!" was the call of many DIY property investors looking to join a winning team. Instead, they’ve witnessed successive wooden spoons, with Melbourne’s property market performing abysmally over the past two years. In Costner terms, we could say the crowd numbers are way down. In property parlance, we can say Melbourne’s got high vacancy rates and low rental yields right now.
The problem with Victoria’s "field of dreams" strategy is that, while they certainly have "built it", they no longer have the people to come. Large-scale job cuts in the public service, manufacturing, and financial services sectors are putting punters out of action. This "field of dreams" is fast turning into a "boulevard of broken dreams".
I love Melbourne for its culture. But as a property market, unless it can rid itself of its addiction to construction steroids, its performance is more likely to resemble a B-grade spaghetti western than an Oscar-winning epic. And even Kevin Costner couldn’t save it.
Simon Pressley is managing director of <a href="https://www.propertyology.com.au/" target="_blank">Propertyology</a>, a full-time property market analyst, accredited property investment adviser, and 2012 REIA / REIQ Buyer’s Agent of the Year.
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If you build greenfield housing estates, they won't necessarily come: Simon Pressley

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Eight years ago, if we lived in Brisbane, were tempted to buy an investment property, and were a creature of habit, the chances are that the property we purchased also would have been in Brisbane.
The typical Brisbane house in 2003 cost $226,000 and would today be worth around $425,000. That’s pretty good growth on our capital, even with three years of this eight-year period being the GFC-gloom times!
If we lived in Perth and were that same creature of habit our investment capital would have performed slightly better ($202,000 to $469,000). In Sydney, where affordability constraints have acted as a deterrent for people buying homes, the typical house increased in value from $500,000 to $641,000.
What if we were that same person looking to invest in property eight years ago only this time we were not a creature of habit? What if we understood that property investment was not an act of “buying” but an act of reading the science of property markets and making the most money we could within a level of risk which we were comfortable with?
If we were this person, our research back then might have taught us that there was going to be an enormous demand for housing in West Australia’s Pilbara region, a demand that could not be matched by supply. We might have purchased a home in <a href="https://www.urban.com.au/property-observer" target="_blank">Karratha</a>, where thousands of new jobs would be created to support a relatively new industry called liquefied natural gas. Or we might have purchased a similar home in <a href="https://www.urban.com.au/property-observer" target="_blank">Port Hedland</a>, where new infrastructure would be built to support the most lucrative reserves of iron ore in the world.
If we purchased that home in Karratha or Port Hedland we would have paid $185,000 and $210,000 respectively – a similar price to what we could have paid for a home in most of the capital cities. The same home today would be worth an incredible $755,000 in Karratha and $1.1 million in Port Hedland.
With a current population of 19,000 in Karratha and 15,000 in Port Hedland, housing is now so expensive that many people elect to rent instead of buy. If you are one of those landlords you would today be receiving rent of $1,500 per week in Karratha or $2,650 per week in Port Hedland.
Of course, the key words used throughout this story are “if” and “might”.
The reality is that, of all of those Australians who could afford to invest only a small percentage of them actually do it. They either don’t understand how acute the consequences will be later in life or they allow the rat-race of life to take precedence over their own finances. Many others can afford to invest although they’ve never sought out a skilled advisor to assist them to (safely) maximise their investment returns – they are the creatures of habit.
The moral of this story is not to encourage property investors to buy property in Karratha or Port Hedland today. While rental yields there continue to be among the best in the country our research suggests that housing supply will catch up soon so rates of growth will normalise – and might even go backwards. In addition, home prices are such there now that we wouldn’t consider it wise to tie up so much capital in a single property.
Moreover, the moral of this story lies in the importance of investing as soon as you can afford to. And don't be a creature of habit! An astute share investor acknowledges that the share market will always contain a plethora of opportunities. Similarly, an astute property investor will look at the credentials of property markets across the country and not restrict their search to a handful of suburbs in their home town.
While Karrathas and Port Hedlands don’t pop up for property investors very often there will always been several locations throughout the country that have exceptional investment credentials; you are not going to find them being a creature of habit!
Simon Pressley is managing director of <a target="_blank" href="https://www.propertyology.com.au/">Propertyology</a>, a full-time property market analyst, accredited property investment adviser, and 2012 REIA / REIQ Buyers' Agent of the Year.
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Astute property investors are not creatures of habit and will buy to maximise their returns

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Gold is rare because it’s not found everywhere. And yet, if you listen to some in the property investment industry (often those whose income depends on a particular ‘scheme’), you’d swear there was a glittering new gold mine discovered every other day.
There are some who have been giving Greater Western Sydney the gold-plated sales pitch. So is this densely populated and diverse region of Australia’s most expensive city really worth plundering for profit? Let’s replace the spin and wishful-thinking with objectivity.
For Greater Western Sydney (GWS), which takes in 14 local government areas as far west as the Blue Mountains, the hype is all about population booms, better housing affordability, and major infrastructure projects in the pipeline.
While there might be some truth to these tales, the only story that ever matters is: how will this influence property values?
It’s densely populated and demographically diverse
A whopping 9% of Australia’s total population (that’s one in 11 people) lives in GWS. If you put all the people from South Australia, the ACT, Tasmania and the Northern Territory within its borders, you’d still fall short of the 2.02 million people who actually live in the region.
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And that 2011 population figure is increasing by 1.6% a year (above the state average of 1.1% and the national average of 1.4%) so that by 2036, it will be tipping the 2.96 million mark.
The region is demographically diverse: around 35% of the region’s population was born overseas, and 37.3% of all residents are aged 24 years or younger.
Crime is a significant factor too. Half of New South Wales’ recorded incidents of ‘discharge firearm into premises’ were recorded in GWS in 2011, according to a report from the state’s Bureau of Crime Statistics and Research.
It’s no wonder then that GWS is a political battlefield in the lead up to every federal election as both sides of government attempt to buy votes with (broken) promises ranging from reducing crime to easing traffic congestion to creating jobs. For certainly these are some of the greatest problems facing what is the most densely populated part of our country.
The economy and employment aren’t real rosy
The region’s gross regional product in 2010–11 was $95.6 billion, accounting for one-third of the entire Sydney Metropolitan GRP. Manufacturing made up 16%, which is quite a worry when the Aussie dollar is so high. One fifth of all businesses are in the construction industry, and some big multinationals including BHP Billiton, Coca-Cola, and Qantas have a presence in the region.  
GWS’ median household income is well below the national average and unemployment is significantly higher. Jobs for white-collar professionals are light-on. Accordingly, a lot of people have to commute out of the region, which puts strain on the region’s roads.
By 2036, when the population is nudging the three million mark, forecasters project the region will need an extra 450,000 jobs. Already there’s a jobs deficit of 182,000, which is expected to grow to 290,000 over the next 25 years (according to the Penrith Business Alliance’s Metropolitan Plan).
In 2011, 12% of Sydney homebuyers and 25% of renters were experiencing housing stress. These figures are higher for low–middle income earners, and eight of the 10 worst affected areas are in GWS.
Housing is more affordable than Sydney metro, but some of it’s a bit misguided
Since Sydney Metro has the most expensive housing in Sydney, a lot of locals look to GWS to invest because it offers a considerably lower entry price and a higher rental return.
Interestingly, granny flats are at almost plague proportions, especially in the Penrith and Blacktown LGAs. Some investors think granny flats are a great way to generate a dual income stream, and the NSW government supports granny flats through its Affordable Rental Housing State Environmental Planning Policy.
But lately there’s been a rise in the number of property valuers not supporting purchase prices, and banks are also being more conservative by limiting the amount they will lend for these purchases or not recognising the dual income stream.
I’m not a big fan of granny flat properties – not just in GWS, but across the board. Granny flats can be a triple whammy. High initial purchase price, extended vacancy rates (because not everyone wants to live with someone else in their backyard), and a restricted resale market (because 70% of buyers, the owner-occupiers, aren’t real keen on the set-up) can combine to give the investor limited capital growth. Others may (conveniently) overlook these important investment fundamentals. 
 
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Transport infrastructure is appalling
While Sydney’s 2000 Olympic Games was a roaring success its infrastructure planning was deplorable at best. The city has never recovered. Transport routes in GWS are the least efficient in Australia and will get worse as population grows.  
Infrastructure upgrades have not kept pace with population growth. The rail network has not been significantly expanded since the 1930s, yet the region’s population is now five times greater.
So the region relies heavily on passenger cars, adding to traffic congestion, fuel costs, poor air quality, and stress-related health issues. Not surprisingly, people aren’t keen to cosy up in places with such financial and emotional stressors, and potential property investors would soon see the results of this in their capital return.  
Education and social infrastructure are sadly lacking
GWS has the University of Western Sydney (36,000 students), Western Sydney TAFE and South Western Sydney TAFE. The region has a high proportion of low income families and staff shortages are a major issue for its early childhood centres.
High school retention rates for GWS are the lowest in the Sydney Metropolitan area, sitting at 69.5% compared with 95.2% for Northern Sydney.  
Western Sydney’s Urban Frontiers Program: A new vision for Western Sydney – options for 21st Century governance (April 2002) probably best sums up the social infrastructure: ‘Decades of under-investment of policy and fiscal resources in Western Sydney by successive state and federal governments have left many of the region’s cultural, social and environmental needs unmet. The legacy of this undernourished development includes mounting social and environmental problems, including hardening pockets of poverty and social exclusion, a dwindling and fraying public sphere and ever increasing ecological stress.’  
Major projects are stalling at the starting gates
GWS’s infrastructure problems are dire and a growing population continues to accentuate the problems. Decades of state government instability, poor planning, and limited funding continues to prolong the chaos for GWS residents.  
Take the North West Rail Link, first proposed back in 1998 and redesigned a few times since.
The O’Farrell Government has declared the latest design (a 23-kilometre line from Chatswood to Riverstone, including eight new stations) will commence late-2014, but doubt remains and there’s (still) no federal government funding for this project, which some say could cost as much as $10 billion.
Or take Westconnex, a proposed $10 billion road project to extend 33 kilometres of motorway along the M4 from Parramatta to Sydney and unclog arterial roads around Port Botany and Sydney Airport.
Planning is not finalised, federal and state governments don’t see eye-to-eye and funding is not in place so the 2022 completion date is dubious.
So where does this leave us?
I personally wouldn’t recommend GWS to my clients now or in the foreseeable future, but what I would recommend about GWS – and every property investment opportunity you’re ever presented with – is to push past the glitter to see what really lies beneath.
You’ve got to go in with your hard hat on, get your hands dirty and be prepared to drill down into the details to determine the real and potential impacts on your capital return.
Because sadly, all that glitters is not gold. And it’s not called fool’s gold for nothing, folks!  
Simon Pressley is Managing Director of <a target="_blank" href="https://www.propertyology.com.au/">Propertyology</a>, an accredited property investment advisor, and Australia’s Buyer’s Agent of the Year (2012 and 2013).
 
 
 
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Greater Western Sydney is spruiked as a gold mine but investors should be wary: Simon Pressley

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If you’ve been strategic and capitalised on the booming mining industry and the myriad of opportunities coming from the Asian Century, you might have bought an investment property in a town or mining-related region over the past few years.
If you have been reading the news lately, you might now be getting jittery and questioning the cleverness of that move. The media is reporting declining commodity prices and job losses.
The prices of coal and iron ore (Australia’s two biggest export commodities) are down on their highs of late 2012 and there have indeed been layoffs. But is this cause for panic over the value of your investment property? Or is the better strategy a little education and a lot of savvy staying power?
The first part of the answer lies in whether or not your property is in a town that has more going for it than a couple of mines.
Clever investors look for locations with a solid economy and strong employment opportunities stemming from diverse industries and growth drivers. Towns whose fortunes rise and fall solely on the back of a few mining businesses can quickly become ghost towns if opportunities stall or projects fail.
Because, regardless of what else mining means to Australia’s economy, it is a boom or bust proposition and falling prices might mean it’s time for you to pull up stumps.
If the economy of the market in which your property is located has more strings to its bow than a few mines, I’d say a little education and some savvy staying power would be a wise choice.
Let’s start with education. We all know coal is big business. Despite pushes towards renewable energy, coal remains the world’s main fuel source. Coal is the world’s largest source of electricity (43 per cent).
Australia is the world’s fourth largest coal exporter (behind China, USA and India). Domestically we use coal to generate about three-quarters of Australia’s electricity.
Iron ore (used to make steel) is actually even bigger business than coal: it’s Australia’s biggest export commodity and we have the world’s second largest iron ore deposits. The greater majority of these are in Western Australia.
Both coal and iron ore are commodities, which means they’re useful, valuable and can be bought and sold. Just like money or gold, say.
But commodities are, by nature, volatile and their price fluctuates for a wide range of reasons. What we’re seeing now with coal and iron ore are some lower price points than we had six to nine months ago although still sitting above average for the past decade.
The price of iron ore has dropped from its late-2012 high, but even at today’s prices, it’s considerably higher than it was in about October last year.
That said, declining coal and iron ore prices plus a high Aussie dollar, rising wage costs, and the costs to miners of government red tape can put a brake on both mining operations and mining construction which can inevitably lead to job losses.
These cuts to workforces can then have a flow-on effect to rental returns because fewer miners and tradies need fewer houses to accommodate them. But economies are cyclical, good times follow bad times and circumstances change.
Job losses in the mining sector often create paranoia among some property investors, but it’s important to remember that job losses aren’t restricted to the mining industry. There are always market conditions at play in any industry.
State and federal governments have shed thousands of public sector jobs in capital cities throughout the country over the past few years, and major companies like Ford, Holden and Boeing (manufacturing) and various major retail chains have also shed staff.
So the lessons here are these: coal and iron ore are valuable commodities, their market price goes up and down depending on market forces, they won’t stop being valuable and they won’t disappear any time soon. Down times do bring job losses but good times bring growth.
There might well be short-term market volatility but the megatrends aren’t stopping. The Asian middle class is still getting bigger and richer and consuming more of what Australia has in abundance. The Asian Century has really only just begun.
 
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Employing some savvy staying power with your investment property would clearly be the smart strategy then. If you’ve got higher vacancy rates in your location, determine the reasons for the downturn. If it’s caused by some of this commodity market volatility, but other industries and projects are going strong, be proactive:
·     Engage more with your property manager.
·     Find out your tenant’s intentions about six weeks before their lease is due to expire.
·     Be guided by your property manager about the likely rent your property is going to generate in the current market.
·     Accept less rent if necessary (because ninety per cent of something is always better than 100 per cent of nothing!).
·     Make sure your property manager is actively advertising for a new tenant the minute your current tenant notifies of their intention to leave.
·     Stay positive and stay pleasant with your property manager.
Above all, remember property is a long-term asset class. Like shares, you need to ride the waves with the distant shore in sight. In my opinion, falling commodity prices are not cause for panic if you’ve researched your investment location and are managing your asset to suit market conditions.
Over the past few years, my company, Propertyology has been actively investing in a few major regional towns that have benefitted from mining industry projects, a couple of smaller mining communities, and a couple of capital city locations.
Interestingly, even with declining commodity prices and the scaling back of some projects, rental returns still remain higher in our regional and mining-related communities than in the capital cities. The locations in which we’ve successfully helped investors to purchase property have multiple approved projects in their pipeline.
In some cases, falling commodity prices and rising costs have resulted in project commencements being delayed, certainly; but the resources have not evaporated and projects are still very likely to proceed once the economic cycle settles down.
Other industries supporting these communities provide stability and sustainability for their economy. It’s not overly important whether the best couple of years are now or in a few years time; the property market outlook remains just as promising.
So if you’re a property investor who’s been wondering whether you’ve made the right choice with mining, remember this: even a fire whose coals aren’t burning red hot still has plenty of heat!
Simon Pressley is Managing Director of <a target="_blank" href="https://www.propertyology.com.au/">Propertyology</a>, a full-time property market analyst, accredited property investment adviser, and the 2012 and 2013 REIA / REIQ Buyer’s Agent of the Year.
 
 
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Simon Pressley

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