Michael Matusik

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Well, more real estate baloney.
This time it is about first home buyers – or the lack of them.
The ABS statistics released today show that first home buyer activity, measured as the proportion of all owner-resident lending, is the lowest in 23 years.
You would have heard all about it on the news tonight or will read about in tomorrow’s papers.
But something is wrong here.
<blockquote>
The fact is, we should all question a lot more of the real estate data that is being fed to us.
</blockquote>
And like many things these days in the real estate world, it’s the figures that are incorrect.  The ‘official’ statistics are measuring only part of the whole, yet very few question the results.
In short, there is a hell of a lot of first home buying taking place.
Most first home buyers buy an established property, and in most places across Australia, first home buyer grants do not apply to established property, only new stock.  And where it does apply, it amounts to very little, and to many it isn’t worth the paper work.
So, for mine, the ABS (along with others) is not correctly corralling first home buying activity.
It is interesting to watch the property intelligentsia trying to explain the reasons for the fall in first home buyer interest, as shown in the first two charts below.
"Generation X are choosing to rent rather than buy – they are buying investment housing instead of homes for themselves – housing is unaffordable so they cannot buy – we need more grant monies"; and it goes on.
<a href="https://matusikmissive.com.au/wp-content/uploads/2014/06/FHB-1.jpg"><img class="alignnone size-full wp-image-7359" src="https://matusikmissive.com.au/wp-content/uploads/2014/06/FHB-1.jpg" alt="FHB #1"></a>
<a href="https://matusikmissive.com.au/wp-content/uploads/2014/06/FHB-2.jpg"><img class="alignnone size-full wp-image-7360" src="https://matusikmissive.com.au/wp-content/uploads/2014/06/FHB-2.jpg" alt="FHB #2"></a>
I think the statistics are wrong.
Why wouldn’t first home buyers be buying?
<ul>
<li>Interest rates are extremely low</li>
<li>Banks are keen to lend</li>
<li>Mum and dad are practically paying for the deposit to get rid of their ‘boomerang’ adult children (at 30, one wonders if ‘children’ should really apply)</li>
<li>Yet according to the same talking heads who claim low first home buyer take-up – housing affordability is the best in over a decade</li>
<li>And to prove that point, there has been little change in the size of the average first home loan in recent years – see my third chart below</li>
</ul>
<a href="https://matusikmissive.com.au/wp-content/uploads/2014/06/FHB-3.jpg"><img class="alignnone size-full wp-image-7361" src="https://matusikmissive.com.au/wp-content/uploads/2014/06/FHB-3.jpg" alt="FHB #3"></a>
Late last year the ABS put out a great study – sadly it comes out only every five years or so – called Housing Occupancy and Costs (catalogue number 4130.0 for those who want to read the 92 page document).  This shows that first home buyer activity is much higher than the housing finance loan data suggests.
The HOC study shows that over the past three (3) years (and importantly, covering much of the recent first home buyer slump) just short of 1 million households (988,000) bought a property across Australia.
Of the 988,000 transactions over the last three years, 36% or 355,000 were first home buyers.  Eight out of ten first home buyers (289,000 or 81%) bought a second-hand or established home.  Just 19% bought a new property or something off-plan.
My conversations with real estate agents, including those selling new stock, indicate that first home buyer activity is much higher than the low levels officially reported.
I suspect that first home buying activity is close to the historic average – something around 35% of the total owner-resident market and around 20% of the total housing market, when including investors.  This is what I am seeing on the ground; and it explains the strong sales results across much of the country over the last 12 to 18 months.
First home buyers must be taking part; otherwise those upgrading or downsizing would not be able to sell as fast or as often as they currently are.  It is first home buyers that make up a significant part of the buying audience for their established homes.
It is good to see that others, too, are starting to question the results.
I note that the RBA, in their current chart pack (June quarter), have left off first home buyers in the graph outlining loan activity across the country.  See the last chart on page 6 of <a href="https://www.rba.gov.au/chart-pack/index" target="_blank">this</a> document.  It has been included in previous RBA charts.
Michael Pascoe, too – thinking man that he is – has also questioned the results.  See <a href="https://www.smh.com.au/business/comment-and-analysis/first-home-buyer-statistics-not-adding-up-20140609-39sam" target="_blank">here</a>.
You should too.
The fact is, we should all question a lot more of the real estate data that is being fed to us.
The media – for the most part – aren’t interested in checking the statistics before they regurgitate them.
Much of what you read these days about property is sadly bunkum.
Ohh…….. and don’t get me started on the need for or accuracy of a daily price index or suburban median house/unit prices!
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
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michaelmatusik-49YzLvdmNv

Have first home buyers really gone missing?

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I am often asked how one can predict residential price growth. 
Well, the only way I know how – with any form of logic and indeed, accuracy – is based around borrowing capacity. 
Spare borrowing capacity by itself doesn’t automatically mean the prices will rise; nor does over-borrowing – in isolation – result in prices falling.   
But what often comes true is that if there is spare capacity in concert with tight supply, rising sales and improving buyer confidence, then prices often do rise.  Of course, the reverse also applies. 
So which major Australian markets have spare borrowing capacity?  Which ones are already pushed to the limit?  Read on….
Assumptions 
In a similar vein to our <a href="https://matusikmissive.com.au/2014/04/15/6858/" target="_blank">recent</a> missive on housing affordability, we have made some assumptions. And in this regard we did the following: 
<ul>
<li>Went to the 2011 Census for each capital city and found the median family household income.</li>
<li>Worked out – via average weekly earnings – which are updated by state/territory twice each year – how much, by proxy, family incomes may have risen since the last census.</li>
<li>Applied a basic online ‘how much can I borrow’ calculator using a principal and interest loan; 30 year time frame against several levels of interest.</li>
<li>Used AFG’s mortgage index to determine the average loan to value ratio for each state/territory.  We used this to determine the average level of deposit in each case.</li>
<li>Recorded dwelling prices by capital for all dwellings according to the latest release from RPData.</li>
</ul>
Interest rate settings
We used five interest rate settings.
<ul>
<li>5.2% – which is the average rate for a current three-year fixed loan, according to the RBA.</li>
<li>5.95% – which is the current average variable rate, again according to the RBA.</li>
<li>6.25% – which would represent a 0.25% movement upwards in the cash rate, based on the current average variable rate.</li>
<li>6.5% – or a 0.5% movement upwards in the cash rate.</li>
<li>7.5% – or the average variable interest rate over the last 20 years.</li>
</ul>
Our aim
Our aim here is to find out two things: 
<ul>
<li>The degree of potential price movement based on today’s record low interest rates</li>
<li>The possible impact rising interest rates would have on borrowing capacity and its potential impact on prices</li>
</ul>
So here are some of the results – all for March 2014.
Sydney
Median dwelling price                                                          $762,000
Median family household income                                           $97,500
Maximum borrowing capacity at 5.2%                                   $675,000
Maximum borrowing capacity at 5.95%                                 $620,000
Maximum borrowing capacity at 6.25%                                 $600,000
Maximum borrowing capacity at 6.5%                                   $585,000
Maximum borrowing capacity at 7.0%                                   $530,000
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Melbourne
Median dwelling price                                                          $669,000
Median family household income                                           $93,500
Maximum borrowing capacity at 5.2%                                   $590,000
Maximum borrowing capacity at 5.95%                                 $550,000
Maximum borrowing capacity at 6.25%                                 $525,000
Maximum borrowing capacity at 6.5%                                   $515,000
Maximum borrowing capacity at 7.0%                                   $465,000
 
Brisbane
Median dwelling price                                                          $482,000
Median family household income                                           $89,750
Maximum borrowing capacity at 5.2%                                   $590,000
Maximum borrowing capacity at 5.95%                                 $545,000
Maximum borrowing capacity at 6.25%                                 $530,000
Maximum borrowing capacity at 6.5%                                   $515,000
Maximum borrowing capacity at 7.0%                                   $465,000
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Perth
Median dwelling price                                                          $615,000
Median family household income                                           $105,750
Maximum borrowing capacity at 5.2%                                   $680,000
Maximum borrowing capacity at 5.95%                                 $625,000
Maximum borrowing capacity at 6.25%                                 $605,000
Maximum borrowing capacity at 6.5%                                   $590,000
Maximum borrowing capacity at 7.0%                                   $535,000
 
Australia 
Median dwelling price                                                          $500,000
Median family household income                                           $82,250
Maximum borrowing capacity at 5.2%                                   $555,000
Maximum borrowing capacity at 5.95%                                 $510,000
Maximum borrowing capacity at 6.25%                                 $495,000
Maximum borrowing capacity at 6.5%                                   $480,000
Maximum borrowing capacity at 7.0%                                   $435,000
Potential price direction
Dwelling prices in both Sydney and Melbourne, even at today’s low interest rates, appear to have overshot the average family’s capacity to pay. 
Our analysis suggests, based on a 5.2% three year variable interest rate, that Sydney’s current median dwelling price of $762,000 is 19% more than most living in Sydney can afford.  This ratio is 16% in Melbourne.
In contrast, and again using a 5.2% interest rate; Brisbane’s dwelling prices could increase by up to 14% before maxing out the average Brisbane family’s borrowing capacity.  Perth has about 9% spare capacity; and on average across the country there is about 7% potential dwelling price growth, given the present low interest rates.
Adelaide, Hobart, Darwin and even Canberra have some room to move – based on spare borrowing capacity and current low interest rates – when it comes to dwelling prices.
Rising interest rates
Rising interest rates could see price falls.  This is especially the case in both Sydney and Melbourne and to some degree in Perth, Brisbane and Canberra.  
A 0.25% lift in interest rates could see a 1% fall in Australian house prices.  A 0.5% lift in interest rates could mean a 3% to 5% fall in real estate prices is possible.  If variable interest rates went back to their longer term average of 7.5%, the dwellings prices could fall by as much as 10% Australia-wide.
Could rise and fall
Now they could fall; just like they could rise further across much of the country, given the current low interest rates.  
As said at the beginning, a range of other factors – supply, sales direction and confidence for example – also impact on a residential market’s direction.  
Additional factors
As seen in the case of Sydney and Melbourne – and as is now starting to emerge in Brisbane’s inner city new apartment market – several additional factors are pushing prices beyond even the maximum price levels rationalised by historically cheap interest rates.  
These include:
<ul>
<li>Chinese buyers seeking a safe harbour for their money and attracted, to some degree, by our favourable exchange rate.</li>
<li>Demand from self-managed super funds – burgeoning from the current ability to borrow for residential assets and by the banks pushing SMSFs to borrow, to help fuel their credit growth.</li>
<li>Human exuberance – we are like lemmings – there is no other way to describe it.</li>
</ul>
Final word
At present, purchasing power or the amount you can afford to borrow at prevailing low interest rates, is a major determinant of current dwelling values.  If buyers choose to max out their borrowing capacity, then dwellings prices across much of the country have got some way to grow yet.
Other factors have and are continuing to push some local price points beyond what’s rational. Interest rates, in time, will normalise.  Those markets which have broken logic are very likely to see price falls.
Buyers should be thinking about the worth of a dwelling based on a more normal interest rate setting, before bidding on it.  Investors need to think about local rental returns rather than inter-city price comparisons. 
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
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Residential price predictions: Which major Australian markets have spare borrowing capacity?

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Everywhere it’s Brisbane, Brisbane and more Brisbane! - the hottest place on the real estate planet if you believe the evening news, real estate junkies and local pollies. 
But how ‘hot’ is Brisbane really? This week, let’s peel back some layers and have a peak.
A quick peak
The Brisbane residential market is in recovery.  It crossed the threshold from trough to recovery in the second half of last year.
But recent lifts in new dwelling and rental supply, plus relatively high levels of second-hand property for sale, have placed a brake on potential price and rental growth. These are cyclical issues, not structural ones.
Brisbane is set to enjoy a much awaited upturn - an upturn in sales mostly; not much in the way of price or rental growth.
Enough new supply
Don’t get me wrong, the demand for new property is high in Brisbane.
There is a current need to build around 7,900 new dwellings in Brisbane City Council each year.  Yet over 9,000 new dwellings were approved during 2014.  There are plenty more in the pipeline, with some estimates exceeding 20,000 each year for the next three to five years.  Ouch!
At present, most of Brisbane’s new housing starts are in medium to highrise developments.  Such development is warranted (demographics; changing lifestyles; downtown gentrification; cost of living/travelling and even rent/housing prices), but the limitations on providing other attached housing supply (see <a href="https://matusikmissive.com.au/2014/02/12/opinion-highrise-oversupply/" target="_blank">here</a>) are exacerbating the inner city apartment cycle.
Since 2006, there has been a need to supply 63,000 new homes.  The amount of new dwellings actually approved was 66,000.
In short, the Brisbane housing market is at equilibrium.  Whilst previously undersupplied – during 2009, 2011 to 2013 – the recent lift in new housing starts has more than filled this void.
<img src="/images/2014/04/02/matusik%20april%202%20one.png" alt="">
Falling rents
There are about 4,400 residential properties for rent across Brisbane City (20 kilometre radius from the Brisbane GPO) and this is more than doubled just two years ago.
The city’s overall residential vacancy rate is rising and is now sits at 2.6%.  The rapid rise in properties for rent is largely an inner city apartment issue; as already mentioned, supply has increased sharply in this area.
Two-thirds of the properties for rent across Brisbane are in inner city suburbs, with 1,800 vacancies as at late February 2014.  The inner city vacancy rate is 4%; it was 3.6% late last year and just 1.4% during much of 2012.
The Brisbane rental market is approaching equilibrium with a vacancy rate nudging 3%.  Until this excess rental stock is absorbed – which, given the ramp up of new supply could take some years - rental growth, especially for second-hand apartments, will remain subdued.
Rents are already starting to fall for Brisbane apartments.
 <img src="/images/2014/04/02/matusik%20april%202%20two.png" alt="">
High resale numbers too
True, the amount of resale stock on the market is falling; but the decline (so far) has been quite slow.  About 9,500 properties remain for sale, which presents about 3% of the total housing stock across the city.
We should see resale stock levels fall across the city this year, which in turn should see some price growth for detached houses and infill compact housing.  Apartment price growth, this cycle, is likely to lag.
Article continues on next page. Please click below.
<hr class="system-pagebreak">
In summary, Brisbane’s housing supply line now exceeds demand.  Price and rental growth – especially for inner city apartments – is likely to remain very subdued.
The new apartment market – particularly when it comes to those ugly monolithic towers downtown – is now a very crowded space.  Investors need to buy into projects – and within them, an apartment – with a clear point of difference.
The rising tide, this cycle, isn’t strong enough – like it was during 2001 to 2007 - to float all ships.  Overseas and interstate investors, in particular, you have been forewarned.
Sales up
Brisbane is, at best, going to have a sales-led recovery.
29,500 residential sales are forecast for fiscal 2014.  We are anticipating 34,000 residential transactions during financial 2015 being: 1,400 land sales; 20,000 detached house sales and 12,600 attached dwelling transactions.  Rising sales volumes have been steadily increasing since 2011.
This is good news – and more sales need to happen – in order to absorb the high-ish amount of resale stock on the market.
<img src="/images/2014/04/02/matusik%20april%202%20three.png" alt="">
Rents down
Rents are rising for houses; flat for attached dwellings and already falling for some apartments.
Annual rent changes in Brisbane last year were: a drop of $10 per week for one bedroom apartments (-3%); -$10 per week for three bedroom apartments (-2%); No change for two bedroom attached and two bedroom houses; an increase of $5 per week for three bedroom attached (1%); +$10 per week for three bedroom houses (3%) and +$15 per week for four bedroom houses (3%).
Already high volumes of new apartment supply are forcing rents down. Tenants can afford more rent, but currently they have ample choice.
<img src="/images/2014/04/02/matusik%20april%202%20four.png" alt="">
Price growth?
Most price growth takes place during a property recovery and upturn – more on this topic next week – but during the recovery phase of the Brisbane cycle (calendar 2014), Brisbane’s residential prices aren’t likely to rise anywhere near as much as some are advocating.
Current median residential prices for Brisbane (again, the Brisbane City Council area) are - $310,000 suburban vacant land; $546,000 detached house and $406,000 attached dwelling.
We anticipate that these middle values could increase during 2014/15 to: $325,000 vacant land (up 5%); $580,000 detached house (up 7%) and just $412,000 attached dwelling (up 2%).
<img src="/images/2014/04/02/matusik%20april%202%20five.png" alt="">
Cycle and Structure
When you boil it down to its core, property investment is ruled by two things – the cycle and structural changes.
When it comes to things cyclical, Brisbane is in a recovery, but recovery in terms of price and rent growth is likely to be much milder than in the recent past.
The supply-demand imbalance, plus some limits of local housing affordability - exacerbated by local low wage growth - is placing a limit on how far prices and rents can grow.
We anticipate values to rise between 8% and 15% for detached houses and infill compact dwellings during the recovery and upswing (calendar 2016) phases of the Brisbane cycle.  We think this market will peak in early to mid-2016.  Price growth beyond these limits could see a harder downturn (late 2016 to 2018) than might otherwise be the case.
Some readers may deduce from this that detached houses are a better investment.  For a range of structural reasons, this may not be the case.  Demographics and value (affordability) are the two major structural influences.
True, there is more short-term upside for detached houses in Brisbane, but for mine, the longer-term safer bet is for an investor to buy something attached and somewhat unique, which has the capacity to be shared by tenants and sold – in time – to an owner-resident.
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
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How hot is the Brisbane market?

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Several have claimed, in response to our recent posts, that Queensland’s rising population growth, fuelled by interstate inflows from both Sydney and Melbourne, will create a ‘mini-real estate boom’ in south-east Queensland.
Could they be right?
Well, sadly, the stats tell a very different story.
Just spend a few seconds looking at the three charts below.
<img src="/images/2014/04/14/matusik%20april%2014%20one.png" alt="">
<img src="/images/2014/04/14/matusik%20april%2014%20two.png" alt="">
 <img src="/images/2014/04/14/matusik%20april%2014%20three.png" alt="">
One would think that rising house prices would get more residents to start leaving both Sydney and Melbourne.  But maybe it is more than just this that matters.
Migrants, mostly – from interstate or overseas – need to work.  Unless more jobs are created in Queensland and wages start to accelerate, then Queensland’s population growth will continue to slow.  As we have been saying for some time, the key to a sustainable Queensland recovery is job and wage growth.
Amenity is higher in Sydney and Melbourne – it is and don’t bother trying to argue otherwise. There is nothing wrong with Brisbane; I have chosen to live here.  It just hasn’t got the 24/7 lifestyle that the southern capitals offer.  And that appears to be increasingly important to many.
Climate alone doesn’t cut it anymore.  In fact, it never did – jobs and lower taxes attracted most interstate migrants in the past.  Those attracted mainly because of Queensland’s weather were often the underemployed or unemployed.  Yet, increasingly these days, it would appear that even the down and out prefer to live somewhere else. 
So Queensland’s population growth - my recalcitrant correspondents – maybe isn’t doing what you think it is.  Fewer people are migrating to Queensland from interstate than ever before.  In contrast, population growth is increasing in NSW and Victoria.
Now, we do expect more to move north from Sydney and Melbourne as their housing markets peak.  But this ‘priced-out of home’ movement northwards looks like it has lost a lot of its previous oomph.
Queensland’s declining market share of interstate migration – as the third chart clearly shows – has been a long trend.  Something is amiss; a past connection broken.  Maybe it cannot be fixed.
In short, it looks like there is no magic influx coming to float Queensland’s real estate boat.
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
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No magic interstate migrant influx coming to float Queensland’s real estate boat

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Given the amount of rhetoric about the housing cycle of late and the typical mudslinging that eventuates, it feels like it’s time, again, to discuss the obvious – that there is a distinct residential property cycle in Australia. 
In short
Past cycles have averaged between seven and eight years in duration. 
They have largely been smooth affairs – only on rare occasions have they rapidly peaked and troughed. Also, I cannot find – on an Australia-wide basis, going all the way back through more than a hundred years of data – when a current market low fell below a previous trough.
But I do think that residential cycles will get shorter and that they will become more ‘lumpy’.  Future lows might even drop below past furrows.  There is also likely to be less growth on an annual basis, throughout an entire cycle, than in the past.  
But essentially, what drives a property cycle and how it behaves is unlikely to change.
Cycle 101
Past cycles suggest that residential property appreciates by 8.5% per annum, with five years of upswing (where values lift by 11% per annum), followed by three years of downturn (where values drop by 5% each year).
A strong upswing is often followed by a hard downturn and vice versa.
Many things drive a property cycle – most of which are cyclical (no pun intended) – such as liquidity, economic growth, rising demand, investment returns, scarcity of supply and consumer confidence. 
But <a href="/expert-insights/investing/29201-whats-going-to-be-the-x-factor-in-this-property-cycle" target="_blank">there is always a “factor X”</a> which builds influence and is often the key ingredient/s that causes imbalance.
At present these X-factors include SMSFs, Chinese buying, FIRB rules and the lower Australian dollar.  You can see these in operation in Sydney, Melbourne and emerging across Brisbane’s new inner city apartment market. 
Property clock
The property clock is a simple but effective tool which outlines where certain locations are positioned in the overall property cycle.
The graphic below outlines the key measures we use to determine a location's position in the cycle.
<img src="/images/2014/04/07/matusik%20april%207%20one.png" alt="" style="line-height: 1.3em;">
Locations are also influenced by the position of other markets on the property clock.  For example, sales activity and property values  in south-east Queensland (SEQ) often increase after values rise (and become unaffordable) in Sydney and Melbourne.  SEQ is an affordable alternative for investment to our two major southern capitals. 
Please note – that doesn’t automatically mean – as often is suggested – that values will automatically rise in SEQ as a result of overseas or interstate buying. More sales take place;  not necessarily price or rental growth. There is absolutely no statistical connection in Australia between investor origins and medium to long-term price or rental performance.
Many markets across Australia are in the recovery phase of the cycle. 
Barring unforeseen major changes in the Australian and world economies, we anticipate positive market conditions to exist for the next two years with a generic market downturn – driven by those cyclical factors discussed above – in about mid-2016.
Volumes and growth
History shows that much of the price and rental growth that takes place over the life of a property cycle mostly takes place during the recovery and upswing phases. 
The same applies to the volume of sales.
For example, assuming values rose $100,000, from trough to trough (i.e. over the typical past cycle of seven years), then up to 40% or $40,000 in gains would take place during the recovery and up to 75% or $75,000 during the upswing. 
Rents usually show a similar trend.
40% of the sales take place during the recovery phase, with a further 35% during the upswing.
Values and rents often fall, during the downturn. Sales volumes also drop.
Typically, there is some price and rental growth during a trough – but usually much less than inflation at the time. 
Sales volumes are also usually quite sluggish.
<img src="/images/2014/04/07/matusik%20april%207%20two.png" alt="" style="line-height: 1.3em;">
Now is the time
For many readers, now is a good time to act regarding buying an investment property. 
It is also a good time to buy and sell for your own occupation. 
It is really a self-fulfilling process.  We largely cannot help the property market reach a tipping point.  Once a market gains enough momentum, there is really no stopping it.  It repeats. It cycles. Best stop, as I am starting to sound too much like Rafiki from The Lion King.   
Short and bumpy and less
But keep in mind that the cycle might be getting shorter and the ride bumpier than in the past. 
I think shorter, because of the way digital media and all our gadgets influence our decisions.  Our confidence seems to wax and wane with far more frequency that in the past.  We scare so very easily these days; buy and sell on hearsay and increasingly get side-tracked away from some basic fundamentals.  Now I’ve morphed into Will McAvoy from Aaron Sorkin’s The Newsroom.  Enough already!
Bumpier because of the rising proportion of apartments and townhouses in Australia’s new housing mix.  This product is delivered in large chunks – not individually like detached houses.  This is especially the case when it comes to mid-to-high rise apartment towers.
Investors need to understand that there will be periods where – for short periods of time – supply exceeds demand. This trend is likely to take place on a more frequent basis than in Australia’s past. And this changing scene will, in turn, make us more anxious – leading to a shorter overall cycle.
Property cycles in countries and major cities that are dominated by attached dwellings and apartments, have a wilder property cycle than those based on more traditional detached housing. 
Less because of many <a href="https://matusikmissive.com.au/2014/03/05/opinion-slow-down/" target="_blank">things</a>, including already low interest rates; relatively low housing affordability compared to past cycles (i.e. high ratio of dwelling price to disposable income); low inflation, potentially deflation; employment uncertainty (less full-time jobs); ageing baby boomers; poorer (money-wise) overseas migration intake; budget deficits; peaked mining-related capex; economic and financial restructuring …this list is a long one. 
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
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It's time for some basic property cycle 101

<html><body>
Living in compact housing is becoming more popular across Australia due to our changing demographic makeup and lifestyle expectations.
Demography
Every second household in Australia currently supports either one or two people.  Let me repeat, 51% of households, according to the 2011 Census, held just one or two people.
It is forecast that this proportion of one and two person households will rise.  Some estimates are that two-thirds of Australia’s homes will support singles or couples within a generation.
We are not just talking about the Gen Y rental markets here, but owner-resident households too.  This trend is even more pronounced for aging baby boomers and their first generation parents.
Lifestyle
Our time-short lifestyle is making the increased commuter time from ‘home’ to ‘work’ to ‘play’ (whether by car or public transport) less acceptable.
The increasing cost of long private commutes (petrol, car maintenance and insurance etc.) and the need for several cars is making the idea of a ‘go-card’ and public commutes/walking/cycling more appealing.
<blockquote>
The most important consideration in any new investment property purchase is who is likely to be the next owner after you.
</blockquote>
The lag in infrastructure provision to outlying new suburbs is adding additional strain on a public which increasingly wants more now.  Waiting for things (like neighbourhood services and amenity) is no longer part of our creed.
We, as a nation, by and large, seem happy to trade ‘space’ for ‘place’.
Creating place
I often repeat this simple phrase – “density needs to be offset”.
If we are going to live in a more compact dwelling space, then that space itself, and what surrounds it, needs to better than if our home and private yard was much more voluminous.
I am not staying that detached homes are potential dumps or that living on acreage is akin to being in a pigsty*, it’s just that the room for error is far greater in tight confines.
If I have learnt anything from watching those property shows on Foxtel, it is that space is often working against you when it comes to small builds.
Better buying
Compact housing design, like for apartments, must be clever in its use of space; finishes; building amenities and services.
One of the keys to better housing investment is to match the aspirations of the resident now and into the future.  The most important consideration in any new investment property purchase is who is likely to be the next owner after you.  It’s the next buyer who determines your capital growth potential and in most cases it is best if that next buyer is an owner-resident.
So what are some rules to buying a better compact dwelling?
<ol>
<li>
Space  Now this may sound like an oxymoron, but one should always buy as much space as one can afford.  There are basic human dimensions that can only be compromised so far.  For example, living areas must allow for residents and guests to easily move around.  One needs to be able to walk around a queen sized bed.   You do need to do the three S’s (shower, shave and s… well you get the picture) in a bathroom.  Kitchens aren’t just places for Clooney coffee machines, they need workable bench space, multiple storage options; good lighting and a full suite of appliances. 
</li>
<li>
Natural light and ventilation  Think energy efficiency.  The best way to do that is via natural light and ventilation.  All glass should be full floor to ceiling, designed to ensure privacy. 
</li>
<li>
Ceiling height  Space should not only be judged on floor area, but also by ceiling height.  It’s the perception of space that is important, not just the overall metereage. Buy apartments with a minimum ceiling height of 2.6 metres, over 2.7 metres is better still.  
</li>
<li>
Lighting and ceiling type  Down lights recessed into a plasterboard ceiling.   The plasterboard ceiling creates an air gap between the concrete slab structure and room itself.  This creates an important acoustic barrier that lessens noise from the apartment above.    Make sure there is enough lighting in the kitchen; bathrooms and laundry area. 
</li>
<li>
Hard floor finish  Carpet is out and tiles or timber is in when it comes to living areas.  Carpet in bedrooms is still strongly favored. 
</li>
<li>
Great kitchens  The kitchen is usually the ‘centerpiece’ of one’s home.  But when it comes to compact living, the kitchen’s status has lifted to ‘showpiece’. Let’s get a bit specific here, kitchens should incorporate:  Stone bench tops and high quality splash backs;  Designer cupboards and drawers – in fact the more drawers the better;  High quality appliance package with cooktop, oven, range hood, dishwasher, convection microwave and refrigerator – yes a microwave and fridge;  Good task lighting is vital  
</li>
<li>
Functional bathrooms  When it comes to local moves, one of the most cited reasons why is that the bathrooms weren’t practical.  Bathrooms need to have:  Sizable showers with detachable shower rose;  Mandatory WC;  Vanity with sufficient storage and shelves; Floor to ceiling tiled walls;  Natural light and direct ventilation if possible – i.e. operable windows;  Several towel rails;  Include stand-alone bath if space permits  
</li>
<li>
Separate laundry  A dedicated laundry area that is well ventilated and capable of linen and appliance storage - in fact the more storage the better.  
</li>
<li>
Storage Think about those designer closet advertisements you see in the weekend papers or on TV.  Storage is king when it comes to compact living.  The better the storage space the better your tenant and owner-resident resale appeal.  And this is the one area that most developers – like nearly all of them – don’t do well.  Sadly, most aren’t even interested in addressing this issue.  
</li>
<li>
MPR  One bedroom apartments – for example - can sometimes be a room short.  A small multiple purpose room or study has a variety of uses for a one or two person household.  It should be large enough to have a single bed, study desk and some robe space. 
</li>
<li>
Good sized balconies  A well-proportioned balcony not only allows for outside private entertaining, but allows the ‘outside in’.  The balcony should be able to accommodate a six seat table setting and room for a small BBQ.  A glass up stand is much better than a solid balustrade. 
</li>
<li>
Aspect and view  The most preferred aspect is north, but there are occasions where south, east and west can have a more appealing outlook and view.  An inviting view is a strong lifestyle and resale benefit. 
</li>
<li>
ASC  All living areas and all bedrooms these days should have individual air-conditioning.  Key card or intercom security to building and apartment floor is also mandatory.  Any new compact home should be capable of access to the NBN or broadband wireless. 
</li>
<li>
Car parking  One car per apartment is the minimum required to have future owner-resident appeal.  When it comes to the provision of visitor car spaces, one per four apartments is ideal. 
</li>
<li>
Lifts  Lifts and their operation are vital when it comes to apartment living.  A good lift service with access to basement carpark is one lift per 50 apartments. 
</li>
<li>
Recreational facilities  Residents and guests always appreciate a common area incorporating a swimming pool and deck.  Other meeting areas are also highly regarded.  A great foyer works wonders but gyms are better done offsite these days. These rules apply always.  But become vital when looking at buying in a crowded market.  Our property pick <a href="https://matusik.com.au/files/2013/03/Matusik-Property-Picks-March-2014.pdf" target="_blank" style="line-height: 1.3em;">rules</a> also apply.
</li>
</ol>
Good investing.
*I live on acreage in Brisbane’s west and let me tell you space allows one to hide a multitude of property sins.
Our thanks go to John Egan, <a href="https://www.eganprop.com.au/" target="_blank">Egan Property Solutions</a>, for his collaborative contribution to this article.
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
</body></html>

The rules for buying better compact housing investments 

<html><body>
I must be missing something here.  I have been told that I am slow.
But for the life of me I cannot see how the recent price growth in Sydney and Melbourne (up 15% and 12% respectively over the last 12 months) is anywhere near sustainable.
Nor can I see how the median Australian house price (which apparently is $535,000) is just over four times the disposable average family household income.  That would mean that on a gross basis, the average Aussie family earns about $175,000 each year.
Hmmm, something must be amiss.
Experiment
Each article i write is kind of like an experiment.  Topics are chosen often because the common rhetoric doesn’t seem to add up.  Sometimes they get picked because I like to disagree.  Many more are actually written than published.
In most cases we go back to basics – “explain it to me like I was a five year old” – it worked for Denzel Washington in the movie, Philadelphia, and it works for us too.
So in this regard we did the following:
<ul>
<li>Went to the 2011 Census for each capital city and found the median family household income 
</li>
<li>Worked out – via average weekly earnings – which are updated by state/territory twice each year –how much, by proxy, family incomes may have risen since the last census.  There was a big variation between each city. 
</li>
<li>Determined disposable income (gross wages minus tax) using an up-to-date (2013/14) online calculator. 
</li>
<li>Recorded dwelling prices by capital for all dwellings; houses and attached product according to the latest release from RP Data. 
</li>
<li>Used AFG’s mortgage index to determine the average loan to value ratio for each state/territory.  Overall, the average equity is 32% on recent home loans according to AFG. 
</li>
<li>Applied a basic online mortgage calculator using a principal and interest loan; 30 year time frame and 5.95% variable interest rate (the average rate, according to the RBA). </li>
</ul>
Our aim here is to find out two things:
<ul>
<li>The current dwelling price to income ratio for each capital, and 
</li>
<li>The proportion of disposable family income needed to pay the average mortgage in each city today. </li>
</ul>
Now that sounds pretty logical, right?  No silly things like prices versus nominal GPD; nor is income determined by national accounts.  Just a simple comparison between what we say we earn; what we have left over, in theory at least (as day to day expenses just seem to be escalating far beyond CPI), after tax; and how much a dwelling costs to buy.  Importantly, it is measured on a city by city basis.
So here are the results – all for March 2014.
Sydney 
<table style="width: 523px;" border="1" cellspacing="0" cellpadding="0"><tbody>
<tr>
<td width="433">
Median dwelling price
</td>
<td width="90">
$762,000
</td>
</tr>
<tr>
<td>
Median detached house price
</td>
<td>
$818,000
</td>
</tr>
<tr>
<td>
Median attached dwelling price
</td>
<td>
$585,000
</td>
</tr>
<tr>
<td>
 
</td>
<td>
 
</td>
</tr>
<tr>
<td>
Median family household income
</td>
<td>
$97,500
</td>
</tr>
<tr>
<td>
Median disposable household income
</td>
<td>
$72,000
</td>
</tr>
<tr>
<td>
 
</td>
<td>
 
</td>
</tr>
<tr>
<td>
Ratio - dwelling price to disposable income
</td>
<td>
10.6
</td>
</tr>
<tr>
<td>
Ratio - house price to dis. income
</td>
<td>
11.4
</td>
</tr>
<tr>
<td>
Ratio – attached price to dis. income
</td>
<td>
8.1
</td>
</tr>
<tr>
<td>
 
</td>
<td>
 
</td>
</tr>
<tr>
<td>
% dis, income needed to buy dwelling
</td>
<td>
50%
</td>
</tr>
<tr>
<td>
% dis, income needed to buy house
</td>
<td>
54%
</td>
</tr>
<tr>
<td>
% dis, income needed to buy attached
</td>
<td>
38%
</td>
</tr>
</tbody></table>
Houses are very overpriced; attached property is heading that way.
Melbourne
<table style="width: 523px;" border="1" cellspacing="0" cellpadding="0"><tbody>
<tr>
<td width="433">
Median dwelling price
</td>
<td width="90">
$669,000
</td>
</tr>
<tr>
<td>
Median detached house price
</td>
<td>
$699,000
</td>
</tr>
<tr>
<td>
Median attached dwelling price
</td>
<td>
$498,000
</td>
</tr>
<tr>
<td>
 
</td>
<td>
 
</td>
</tr>
<tr>
<td>
Median family household income
</td>
<td>
$93,500
</td>
</tr>
<tr>
<td>
Median disposable household income
</td>
<td>
$69,500
</td>
</tr>
<tr>
<td>
 
</td>
<td>
 
</td>
</tr>
<tr>
<td>
Ratio - dwelling price to disposable income
</td>
<td>
9.6
</td>
</tr>
<tr>
<td>
Ratio - house price to dis. income
</td>
<td>
10.1
</td>
</tr>
<tr>
<td>
Ratio – attached price to dis. income
</td>
<td>
7.2
</td>
</tr>
<tr>
<td>
 
</td>
<td>
 
</td>
</tr>
<tr>
<td>
% dis, income needed to buy dwelling
</td>
<td>
50%
</td>
</tr>
<tr>
<td>
% dis, income needed to buy house
</td>
<td>
52%
</td>
</tr>
<tr>
<td>
% dis, income needed to buy attached
</td>
<td>
37%
</td>
</tr>
</tbody></table>
Like Sydney, Melbourne’s houses are very expensive and attached property is heading the same way.
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
</body></html>

Price growth in Melbourne and Sydney is not sustainable

<html><body>
In short, very much so.
There is a lot of flak running around about dwelling prices at present.  It’s ‘budget impact’ this, ‘unemployment’ that.
Yes, dwelling price growth has slowed in recent months, but price growth is seasonal.
The important thing is to take the long-term view and don’t get spooked by the monthly and especially weekly reporting on price movements.
Publishers of property-related magazines or media property editors in general, will tell you that one of the hardest things they have to do is to find something fresh to write about each issue.
To help fill their publications, they write about the latest price machinations. The data houses don’t help matters when they release daily/weekly dwelling price indices.
Take a look at these two charts.
<a href="https://matusikmissive.com.au/wp-content/uploads/2014/05/HP-11.jpg"><img class="alignnone size-full wp-image-7240" src="https://matusikmissive.com.au/wp-content/uploads/2014/05/HP-11.jpg" alt="HP #1"></a>
<a href="https://matusikmissive.com.au/wp-content/uploads/2014/05/HP2.jpg"><img class="alignnone size-full wp-image-7241" src="https://matusikmissive.com.au/wp-content/uploads/2014/05/HP2.jpg" alt="HP#2"></a>
The first shows annual price movements; the second, quarterly changes in dwelling price.
In most cases, the middle and end of the year appear to be strongest when it comes to price growth. This makes some sense, given the end of the financial and calendar years and when you take into account when most new listings occur in Australia.  Many investors like to buy before the 30 June, whilst owner-residents often like to be in their new digs by Christmas.
Things do, however, get stuffed up a bit when we have a late Easter, as was this case this year; and for certain once-off events – like an overly reported hard budget or a pending federal election (2013).
So the statistics suggest to me that price growth is strongest in the June and December quarters (usually) and weaker during the March and September quarters.  The figures also show that sales volumes also follow suite, though not as dramatically so.
In contrast, new property listings seem to be higher during the March and September quarters each year.
Again, this makes sense as decisions about moving are often made during the Christmas break – so listings increase soon thereafter and as most real estate agents will tell you, spring is a great time to list a property for sale – and yes, many look to list at time of the year – as spring is often a good time (especially in our southern markets) to display property for sale.  It gives buyers enough time to settle and move in before Christmas.  And so the cycle continues.
It is this increase in listings and subsequent sales that often leads to high price growth results, especially when demand exceeds supply.
Don’t get me wrong, the property cycle is set to slow down over the next 18 months or so, depending on when interest rates next rise.  Revisit what we said earlier this year <a href="https://www.urban.com.au/expert-insights/investing/29201-whats-going-to-be-the-x-factor-in-this-property-cycle" target="_blank">here</a>.
But for mine, much of the current commentary about house prices is just seasonal fluctuations – or as <a href="https://www.urban.com.au/news/31707-rba-housing-bubble-alarm-bells-should-be-ringing-despite-may-price-correction-chris-joye-2" target="_blank">Christopher Joye described last week</a>, “an air pocket” rather than a “descent”.
Regardless, it is always best to take a long-term view when it comes to property – sale volumes; supply lines; prices and rents all “sawtooth” within the wider property cycle.
Think of a circular saw.
An annual review of price growth is adequate. You will drive yourself around the bend looking at more frequent fluctuations.
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
</body></html>

How seasonal are dwelling prices?

<html><body>
So the talk is that NRAS might be stopped in the upcoming May Federal Budget.
For mine, this is one government scheme that really works for the building industry and low-income households.
We have worked on several NRAS-based new projects.
I support the media blast by Metro and the UDIA.
Read on to see what we wrote about NRAS back in 2011.
To my surprise, very few investors (and sadly fewer property gate-keepers) know about NRAS.  And if they know something about it, then they are dismissive of it.  And mostly – I feel – out of fear and/or ignorance.
Yes, like most government schemes, what NRAS is and its merits, have been poorly communicated.  And in some instances, its application further entrenches its incorrect “welfare housing” persona.  But overall, it is a great scheme and too few investors (and developers) are taking the $10,000 annual rental subsidy seriously.
<blockquote>
For mine, NRAS is one government scheme that really works for the building industry and low-income households.
</blockquote>
So what exactly is NRAS?
The National Rental Affordability Scheme (NRAS) is a federal government initiative designed to tackle the issue of affordable housing.
NRAS is not a public or social housing programme, but rather a tax incentive to provide quality housing at below market rental rates.
Run in conjunction with state governments, NRAS aims to induce more investment in the lower price range of the residential construction and rental market by offering inducements to investors who participate in the scheme.
NRAS offers property investors a tax-free incentive for each property while participating in the scheme for a maximum of 10 years.
Currently, this incentive is $9,524 per year for every NRAS dwelling an investor owns, comprising a federal government contribution of $7,143 per dwelling, available as a refundable tax offset; plus a state or territory contribution of $2,381 per dwelling per year, as a cash payment or in-kind financial support.
In return, rents for NRAS dwellings must be charged at no more than 80% of the market rent valuation and there is to be a maximum of one rent increase for each dwelling each year.
In Queensland for example, the state government maintains a list of NRAS-approved tenants, who must meet strict eligibility requirements.
When a vacancy occurs, eligible rental applicants are referred to approved tenancy managers who manage NRAS properties on behalf of owners.
Standard residential tenancy laws apply to NRAS properties just as they do for any private residential investment.
In other words, the same rules regarding evictions, maintenance obligations and responsibilities of tenants apply to NRAS tenants as they do to other tenants in the private sector.
Rents are indexed annually in line with the percentage change in the rental CPI component, except in years four and seven when independent valuations are required.
And, importantly, investors may exit the scheme at any time with appropriate notice and without any financial penalties.
In general, NRAS projects are well-located in terms of jobs, amenities and public transport.  And in general, the design and quality of NRAS dwellings compares favourably with any private non-NRAS dwelling.
NRAS properties often co-exist within developments with other non-NRAS product.
Some of the points of difference that NRAS offers to property investors are:
<ul>
<li>All the benefits of a normal investment property with added annual tax-free government incentives</li>
</ul>
<ul>
<li>Investors can apply property expenses, non-cash deductions and allowances against a lower assessable rental income, increasing the gearing benefit</li>
</ul>
<ul>
<li>More than 1.5 million Australian households are eligible to rent NRAS properties, hence vacancy risk is negligible</li>
</ul>
<ul>
<li>Tenants are selected on their potential to be good tenants and their capacity to meet strict eligibility requirements</li>
</ul>
<ul>
<li>In many markets, NRAS properties often deliver a cash flow positive investment</li>
</ul>
<ul>
<li>Importantly, self-managed super funds can purchase</li>
</ul>
<ul>
<li>NRAS dwellings are private property – no government holds or caveats.</li>
</ul>
So here we have a scheme that shows many investment properties as cash-flow positive in the first year – and these are more often than not backed up by impressive (well by residential property standards) independent financial analysis.
What’s not to like here?  You are making money from day one; providing affordable rent for those that are finding it a bit hard; have a ten-year rental guarantee (assuming the government doesn’t water down or scrap the scheme); hassle free-management (on paper at least) and a box of chocolates from the government every year.
It appears to tick all the boxes.
Several of our developer clients inform us that their NRAS product is now the first to sell to investors.
Yet the banks are scared of it and will only finance 70% of the purchase price.  Some banks flatly refuse to be involved.  So, too, do too many solicitors, accountants, loan brokers and real estate agents.
True to form, valuers are discounting end prices by 20% – one assumes because the owner can only charge 80% of market rent and most valuers won’t include a subsidy when determining value, despite it coming from the government and being a 10-year programme.
Yes, NRAS is somewhat new; it hasn’t been that well communicated and it is a government-funded subsidy.  But welfare housing it isn’t and gone are the days where one’s residential investment strategy was as simple as “buy and forget”.
Our mindset is that property investors will need to look for every break they can get.
NRAS is a break worth considering.
Visit Michael's <a href="https://www.matusik.com.au/" target="_blank">website</a>, read <a href="https://www.matusikmissive.com.au/" target="_blank" rel="nofollow">his blog</a>, follow him on <a href="https://www.facebook.com/ThinkMatusik?fref=ts" target="_blank" rel="nofollow">Facebook</a> and <a href="https://www.twitter.com/michaelmatusik" target="_blank" rel="nofollow">Twitter</a>, or connect via <a href="https://www.linkedin.com/in/michaelmatusik" rel="nofollow">LinkedIn</a>.
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Michael Matusik

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