The Experts

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John McGrath
Property Expert
+ About John McGrath
About John McGrath - Founder & Executive Director, McGrath Limited

John McGrath is considered one of the most influential figures in the Australian property industry.  As Founder and Executive Director of McGrath Limited, he took McGrath Estate Agents from a lounge room start-up in 1988 to one of Australia's most successful residential real estate groups, listing McGrath Limited on the Australian Stock Exchange in November 2015.

An integrated real estate services business, McGrath today is one of the most successful real estate companies in Australia with an established and respected market presence in NSW, the ACT, Queensland, and more recently Victoria.

In October 2008, John was honoured by the Real Estate Institute of NSW with the Woodrow Weight OBE Award, a lifetime achievement award for his outstanding contribution to the real estate industry.  John was founding director of the REA Group and served on its board from 1999 to January 2018, serving as chairman from 2003-2007. 

John himself has become a spokesperson for the industry both in Australia and internationally. John has five books that have reached bestseller status including “You Don’t Have To Be Born Brilliant” and “You Inc.”.  In “The Ultimate Guide to Real Estate”, John shares with the reader his invaluable knowledge on the Australian property market.

Two big questions for the property market in 2019

Tuesday, January 22, 2019

Two big questions loom large in the Australian property market this year. What will happen to credit conditions once the Royal Commission into banking is over; and how will the Federal Election affect the market, especially if Labor wins and major changes to tax policy on property investments are introduced?

Latest figures from CoreLogic show most regions across Australia were weakened by the banks’ tighter lending practices in 2018.  The effect was magnified in Sydney and Melbourne, where many buyers were unable to purchase at the price level they expected or unable to compete at auction due to longer approval processes.

Property prices and auction clearance rates fell faster than is normal for the first year of a correction, culminating in a -10% dip in house prices in Sydney to a median $918,000 and a -9.1% drop in Melbourne to a median $751,000.

Apartment prices also fell by -6.3% in Sydney to a median value of $711,000 and -2.3% in Melbourne to a median $541,000, according to CoreLogic.

RBA Governor Philip Lowe and Federal Treasurer Josh Frydenberg have both indicated that credit is too restricted but nothing is going to change until the Royal Commission delivers its final report on February 1.

This report will include recommendations to improve accountability and regulation and should lead to more universal standards of lending for property buyers. Those standards should rightly be stricter than in previous years when credit was too easy; but hopefully they’ll also be more workable than they are now.  

The Federal Election will be a major disruption this year.  It’s highly likely to happen in mid-May, which means market activity will dampen down around April, as most people adopt a ‘wait and see’ mentality. This is typical close to elections but buyers and sellers will be even more cautious this year – especially investors.

Here’s a quick re-cap of Labor’s proposed changes to negative gearing and capital gains tax for investors.

  • If Labor wins, it intends to limit negative gearing to new or off-the-plan investments; and it will reduce the current capital gains discount from 50% to 25% if you hold your property for more than a year.
  • These changes will apply to investments purchased after a certain date, which will be announced after the election.  Existing property investments will be grandfathered, meaning those owners can carry on with negative gearing and will still receive the 50% capital gains discount when they sell.

This year in Sydney and Melbourne, I’m expecting cooling market conditions to continue. I think both cities are getting close to the bottom of their cycles, however it might get a bit worse before it gets better.

I think we’re through the worst part of the correction in both markets, so Autumn could be the best time to buy. The bulk of new campaigns will begin after the Australia Day weekend, so buyers should expect to see lots of new options advertised.

First home buyers in Sydney and Melbourne are certainly taking advantage of the market cooldown, with activity in NSW reaching its highest level since stamp duty concessions were introduced in July 2017.

Latest data from the Australian Bureau of Statistics shows 16% of new loans in NSW for the month of November 2018 were for first home buyers. In Victoria, activity was even stronger at 19%.

Changing market conditions always present opportunities. Here’s my advice for 2019:  

  • If you’re a buyer, now’s the time in Sydney and Melbourne.
  • If you’re a seller, seek advice from an experienced agent who has been through market highs and lows before. They will know how to maximise your sale price in today’s market.  
  • If you’re an owner, ignore the scary headlines and focus on interest rates. Some lenders are offering fixed loans at far lower rates than variable, so there might be an opportunity for you here. Loan rates in the 3%-4% range will not last forever. Remember, the long term average in Australia is above 7%.
  • If you’re an investor looking to buy in the future, consider whether you can afford to invest without the benefits of negative gearing.  Every poll has Labor ahead, so it’s best to be prepared for a change in tax policy should that be the case.

Whatever your real estate goals are this year, I wish you all the very best.

 

What's ahead for property?

Thursday, January 10, 2019

A friend chatted to me over coffee recently. He was disappointed and concerned that property values were all falling and even more distressed about a TV programme that predicted a seismic 40% drop in values in the near future. As I listened, I wondered how many other Australians were sitting with this same fear.

Firstly, I pointed out that in Sydney (and Melbourne), the 5–10% drop we’ve seen so far followed a growth cycle that added 60–100% to property values overall. Many Australians owned property for the entire duration of this cycle and therefore have enjoyed the full benefit. I suggested he consider shifting his view. In reality, his particular property had gone up by 70% and that included the recent 10% correction in his area. 

Next I addressed the sensational and erroneous theory being bandied about by some purported experts that there is another 40% drop in values to go. There is zero chance we will see a collapse like this. There would have to be a global economic ice age to generate this sort of slump and then it wouldn’t matter where your cash was tied up, we’d all be in trouble! The fundamentals underpinning property values in Australia remain solid. Rock solid. What we are seeing now is an important part of every major asset cycle – a correction in values after a sustained period of growth. 

Remember, it was only Sydney and Melbourne that had significant growth (over 50%) in recent years. The rest of Australia has had pretty subdued price increases post-GFC. I’ve heard the “40% overvalued” theory four times in my 35 years in property. It’s like the same groups are chasing the same headline impact every time the market corrects. Not once has this provocative prediction come true – or even close to it. It won’t this time, either. 

So, what’s next? Sydney and Melbourne prices might correct by another 5% to a maximum of around 10%. In 2019, I see the strong possibility of a mini rebound as buyer demand grows at adjusted pricing levels. It’s impossible to pick the top or bottom until they are behind us but my instincts tell me the market has corrected quickly and we are within a few percentage points of new price benchmarks. 

Only three things could change this. A spike in interest rates over the next 24 months, which would return us to the long-term average of around 7%. Banks tightening lending even further. Unemployment escalating rapidly. None of these are likely to happen. I believe the worst of this correction is already over and we’re in for a much softer landing than many pundits predicted. 

Meanwhile, it couldn’t be a better time for first home buyers. With the bank of mum and dad by their side, along with generous stamp duty concessions and government savings initiatives, there are excellent opportunities to get a foot in the door after a long period of difficulty. Within the broader market, I believe there is still solid demand across most price points but lending restrictions are ruling many buyers out. In the long run, it’s strengthening our broader financial system but the market needs time to adjust. 

As our major cities become more crowded, congested and expensive, will more people trade off size for location? Will people sacrifice a bedroom or garden to live closer to the CBD? 

As Uber Eats feeds more Australians, will kitchens become less important or even vanish in some instances? Will young families and empty nesters pull the rip cord on city life and escape to our vibrant, re-emerging regional centres that are readily available within a 90 minute radius of the capitals? 

Will Brisbane and South East Queensland finally get their time in the sun? The Sunshine State is once again Australia’s favourite destination for internal migration and most importantly, the economy is turning a corner. Prospects for investment up north are as good as I’ve seen them. 

Finally, a note on Sydney. You might think this great city has reached its limits, with affordability far too strained and little room for further capital growth in the medium term. I disagree. We are on the cusp of what will go down in history as the great renaissance of Western Sydney.  Massive new infrastructure, billions in new investment and tens of thousands of new jobs are about to emerge in Sydney’s most affordable region, where prices have the most room to grow. We hope this provides fresh insights and ideas for your benefit into the future.

 

Paid a fortune for your property? What should you do?

Friday, January 04, 2019

There’s a cohort of home and property investment owners in Sydney and Melbourne today who bought at the top of the market, which was around mid-year 2017 for Sydney and late 2017 for Melbourne. 

If you’re in this boat, I understand your disappointment in terms of timing but please don’t despair. No one can pick the top – and that includes me, and I’ve been around in real estate for 35 years! 

Unfortunately, in boom markets, there will always be people who happen to exchange at the peak but try to remember you are one of many – thousands of people did the same thing. What’s important now is for you not to panic and to look at the situation objectively.  

If you’re an owner-occupier, stop worrying.  You have a new home to enjoy for as long as you can afford your payments in what continues to be a low interest rate environment.

If the capital value of your home has come back a bit, it doesn’t matter because you’re going to be there long term and prices will eventually rise again. 

If you’re an investor, you’ve bought for different reasons but the time period should be the same – always long term. No investor likes to lose money or see the value of their asset go down. It’s not pretty to watch but you’ve got to hang in there. 

All that has changed is the amount of time your asset needs to bear fruit. We’re in the winter period now but the sun will come out again. Whether you invest in shares, managed funds, property or any other asset class, there are always going to be highs and lows. Smart investors ride out the lows. 

Don’t feel compelled to get out.  It won’t take long for Sydney and Melbourne to rebound.  These are two major international cities with many unique factors keeping property prices strong. You just have to be patient while the magic of capital growth takes effect. 

As I said in my column last week, I think the worst is already over. There have been 5%-10% declines in values this year and we might see another 5%-7% in some areas. After that, there will either be a steady period of market stability or even a small positive rebound by a few per cent.  

If you bought at the top and you’re negatively geared, there’s a few things you can do to keep your cash flow healthy: 

1. Watch your tax deductions like a hawk. Many property investors short change themselves by claiming less back from the taxman than they are entitled to. Pretty much every expense is tax deductible or depreciable so keep every single receipt!  So make sure you get good tax advice on this.

2. If your investment property is new, you’re entitled to depreciation benefits and these can be substantial, so get a quantity surveyor to compile a tax depreciation schedule. It will tell you how much money you can claim every year.

3. If you’re negatively geared, you don’t have to wait until the end of the year to claim your tax back. Say your property returns a loss of $10,000 pa; and your salary is $90,000. This makes your estimated taxable income $80,000. You can apply for a PAYG Withholding Variation to have your withholding rate recalculated based on this. You’ll have more money in your pay packet each period, which you can use immediately to pay the costs of owning the property.

Finally, whether you’re an owner/occupier or investor, it would be a good idea to put some spare money into your loan or an offset account while interest rates remain this low. 

Many people panic when they’re negatively geared, with no capital growth on the horizon and interest rates going up. This is a situation that could very well eventuate in the next few years, so get yourself mentally prepared now to wait it out.  Long term, you’ll be glad you hung in there.  

 

My top 5 suburb picks

Wednesday, January 02, 2019

In our 2019 McGrath Report, we give a much needed simpler and clearer perspective on what’s happening in Sydney and Melbourne as both cities continue to cool.

The 5% to 10% drop we’ve seen so far followed a growth cycle that added 60% to 100% to property values overall. Many people owned property for the entire duration of this cycle and therefore have enjoyed the full benefit.

I believe we have seen the worst of Sydney and Melbourne’s correction and we’re in for a much softer landing than many pundits predicted.  My instincts tell me the market has corrected quickly and we are within a few percentage points of new price benchmarks.

In 2019, I see the strong possibility of a mini rebound as buyer demand grows at adjusted pricing levels.

It’s been about a year since both markets began to cool.  The theory of a 40% drop has resurfaced, like it did after the last boom and the boom before that; and retreated in the face of indisputable evidence that our market will be just fine.

Our two biggest cities have held the spotlight for many years, so in this year’s McGrath Report we ask the exciting question: which city will be next to step on stage?

History tells us Brisbane and South East Queensland tend to follow Sydney and Melbourne; and with the state economy up north in a turnaround phase, boosted by the biggest infrastructure spend since the 2011 flood recovery, we see great opportunities there now.  

Also in this year’s Report, we review some of the social trends impacting Australian real estate.

As our major cities become more crowded, congested and expensive, will more people trade off size for location?  Will people sacrifice a bedroom or garden to live closer to the CBD?

As Uber Eats feeds more Australians, will kitchens become less important or even vanish in some instances?

Will young families and empty nesters pull the rip cord on city life and escape to our vibrant, re-emerging regional centres that are readily available within a 90-minute radius of the capitals?

We’ll discuss all these questions in detail over the next few months here on Switzer. 

For now, let’s get started with my Top 5 Suburb Picks for greatest capital growth potential in each east coast capital city.

John McGrath’s top suburb Picks

My Sydney suburb picks

1. Putney: Once dominated by mainly public housing residences, this charming waterside pocket is one of Sydney’s least known riverfront addresses. When it goes the way of its sought-after neighbor, Hunters Hill, you’ll be regretting not owning a small piece of it.

2. Avalon Beach: The glorious Northern Beaches continues to offer value to Sydney buyers for a world-class coastal lifestyle. Avalon Beach and surrounds is my pick of the available addresses mainly because of the charming retail village which sets it apart. Enjoy the Palm Beach lifestyle without the hefty price tag.

3. Maroubra: Like Avalon in the north, Maroubra Beach offers relative value if you’re prepared to travel a few extra minutes to track into the CBD. The heartland of the South Sydney Rabbitohs, this beachside neighbourhood will catch up in time to its slightly more glamorous neighbouring beaches.

4. Earlwood: This is one of Sydney’s most diverse multicultural communities with Greek, Italian and Lebanese heritage delivering a wonderful vibe to this beautiful garden suburb. And with Marrickville shops up the road, you won’t go wanting for great eating options or a strong Turkish coffee or two. 

5. Stanmore: The Inner West continues to attract both upwardly mobile executives and families, as well as downsizing baby boomers looking to move closer to the action. Attached cottages, bungalows and now a selection of apartments delivers something for almost everyone within 15 minutes of the city.

My Brisbane suburb picks

1. Maroochydore (Sunshine Coast): The economic hub of the Sunshine Coast, the reinvention of Maroochydore is starting to take shape courtesy of its Priority Development Area designation. A 53-hectare greenfield site in the heart of Maroochydore is being transformed into a cutting-edge CBD, with a pledge to provide a 21st century epicentre that includes a high speed, high quality fibre optic network, free public Wi-Fi and an Australian first underground automated waste collection system of this size.

2. Pimpama (Gold Coast): Pimpama recorded Queensland’s fastest population growth at 31% in FY17, with buyers enthusiastically buying or building brand new homes. Pimpama is affordable with a median house price of $475,000 and is located within the rapidly developing northern Gold Coast region along the M1 corridor. The $100 million Pimpama City Shopping Centre is opening in September 2018 and the $56 million Northern Gold Coast Sports and Community Precinct is slated to open in 2020. A brand new $470 million Westfield will open in nearby Coomera in late 2018 and there is a proposed new train station to better connect it to Surfers Paradise. The northern Gold Coast population is projected to double from 75,000 residents to 167,000 in 20 years, accounting for one third of the city’s total growth.

3. Annerley (Brisbane): Only 4km from Brisbane CBD, this suburb has been under the radar until now. It neighbours the more prestigious Highgate Hill and Dutton Park, which is partly why the market is showing signs of growth and gentrification. While you need about $865,000 to buy a house in Dutton Park, next door in Annerley you can pick up a solid home for less than $710,000.

4. Grange (Brisbane): The leafy inner city suburb of Grange is fast becoming popular with young families with its easy access to the CBD, relative affordability, quality schools such as Wilston State School, and access to the airport and both the Sunshine and Gold Coast. The blocks are typically a little larger than the average and for a family friendly suburb, this is king.

5. Springfield Lakes (Brisbane surrounds): Located in the Ipswich region west of Brisbane, this popular master planned community continues to attract new residents with its population growing by 8.7% or 1,400 people in FY17. With a median house price of $440,000, two new releases have come to market over the past year – Springfield Rise and Creekwood. The region is set to benefit from a proposed passenger rail line extension between Ipswich and Springfield via Ripley, which is likely to be constructed after the Cross River Rail project is completed in 2024.

My Melbourne suburb picks

1. Bonbeach: If hunting beachside bargains, Bonbeach must top the 2019 shopping list. With a median house price of just $900,500, expect the ripple effect of pricier neighbours Edithvale and Aspendale to wash over this undervalued postcode. Cafes arrived in 2018; a sure sign of what’s ahead.

2. Thornbury: First home buyers are keen to stay as close to Brunswick’s action as money will allow, which will continue to underpin value growth. Interestingly, apartments listed with a median price of $500,000 are on the market for just 30 days. Strong investor interest and low 1% vacancy rates suggest a strong performer going forward, according to SQM Research.

3. Box Hill: Just 14km from the CBD with its own rail hub and hospital, Box Hill’s astonishing 118.9% growth since 2013 has pushed the median house price to $1.696 million. But its golden era is far from over. The Chinese community, which represents about 27% of residents, fights hard to buy in Box Hill Secondary College zone, one of the city’s top public schools. Houses on large blocks remain goldmines for small developers.

4. Wantirna: Wantirna South’s median entered the $1 million club in 2018, so its sister suburb, Wantirna is inevitably next in line. With a median house price of $960,600, it offers excellent transport links, schools and proximity to Westfield Knox Shopping Centre, which will undergo a long awaited major redevelopment from November 2019. 

5. Cheltenham: Straddling Nepean Highway, house prices on Cheltenham’s west side are still well beneath those of its salubrious neighbours Sandringham, Mentone and Black Rock. Its second metro commuter rail option, the recently opened Southland Station, cements this suburb’s profile as a business and commuter hub.

My Canberra suburb picks

1. Campbell: This inner north suburb is a 25 minute walk into the city and a short stroll to Lake Burley Griffin. Several substantial new apartment projects have opened in recent times. A decade-long transformation of Constitution Avenue on the border of Campbell has provided plenty of new eateries and shops for locals.

2. Greenway: A happy hunting ground for investors with impressive apartment median yields of around 6.4%. Greenway’s waterside living is enhanced by mountain views. It is enjoying an influx of people buying affordable new townhouses and drawn by jobs at two government departments including the Department of Social Services national headquarters, which opened in September 2017.

3. Kaleen: This suburb provides a good entry point into the inner north, with original older style homes remaining affordable. Kaleen Plaza, with its major supermarket and specialty shops, is complemented by smaller local shops. Proximity to the city and good transport links are a major plus. Demand pushed house prices up 12.8% in the year to June 2018 to a median $733,000. 

4. Mawson: The Mawson Southlands Shopping Centre is about to be redeveloped and upgraded. Young couples are overhauling the older housing stock and a bigger assortment of housing choices is on the way.

5. Harrison: Harrison has expanded rapidly in the past few years, embracing multiculturalism and an inner-city vibe where unit and semi-detached living is popular with young families and professionals. It is set for future growth with local shopping amenity and eateries, close proximity to the airport, and the added benefit of brand new light rail opening in December 2018 providing direct access to the CBD.

We hope the 2019 McGrath Report provides fresh insights and ideas for your benefit into the future. Please download your copy from www.mcgrath.com.au

 

Does flipping work?

Thursday, December 27, 2018

Flipping is a strategy employed by property investors who typically buy, make improvements (such as renovating, sub-dividing or securing DA approval for development) and re-sell within a very short timeframe for a profit.  

It sounds like a great idea and all those TV renovation shows make it look pretty easy. The reality, however, can be far different, especially for people with no experience or skills relating to home renovation.

Mistakes get made, costs and timetables blow out and in the meantime, you’re covering the full loan repayments yourself with no rental income to help.

Successful flipping means recovering the cost of the purchase, the improvements, the loan repayments during your hold period and hefty trading costs, including stamp duty when you buy and agents’ fees and capital gains tax when you sell. After you’ve covered all of that, what’s left is your profit.

In short – it’s tough to do well and this is why flipping accounts for only a very small percentage of sales each year.

CoreLogic data shows only 1.3% of homes re-sold over the 12 months to June 2017 in Australia were held for less than a year. Only 5.7% were re-sold within 1-2 years of purchase.

Does flipping work? Well, yes it can, if you get absolutely everything right, including buying the right type of property at a good price in the right location; adding enough value through high quality renovations, sub-division or other means; and selling in reasonably strong market conditions.

Flipping, by definition, is done in a very short timeframe, which is why you can’t afford to make mistakes. There isn’t the luxury of time, which is the one factor that every investor can count on to deliver capital growth on a good quality investment.  

You have a better chance of making a profit flipping during boom markets, when rapid price growth coupled with the value of your renovations can deliver a handsome profit.

In fact, you can buy a property at the start of a boom, do nothing to it; and sell within a few years for a profit, too. We’ve seen that happen in many cases over the past few years in Sydney. But few people get all the ingredients right.

The biggest challenge for flippers during booms is buying at a reasonable price. If you pay too much, there’s less profit to be achieved at the other end because you’re selling in such a finite timeframe.  

CoreLogic recently released its inaugural Property Flipping Report, which provides a national analysis of properties that were bought and re-sold within either 12 months or 1-2 years by sellers specifically aiming to make a profit.

Among the capital cities, it found that flipping was most successful in Sydney and Melbourne, where 9 out of 10 homes flipped within 1-2 years of purchase turned a profit in 2017.

The report doesn’t go into how much of a profit, but it’s not surprising that people made money when both cities were in the midst of a boom.

In flat or normal markets, it was a different story. Only 3 in 10 properties in Darwin and 5 in 10 properties in Perth flipped within 1-2 years of purchase sold for a profit.

The report identified several flipping trends and hot spots nationwide, as follows.

NSW

  • The highest rate of flipping nationally occurred in Sydney, where 6.8% of re-sales in 2017 were flips of properties held for only 1-2 years
  • Nine out of 10 flips in Sydney and regional NSW turned a profit in 2017
  • The Illawarra on the NSW South Coast recorded the highest percentage of flips in the state (8.7% of re-sales within 1-2 years of purchase)
  • About 98% of flips in the Illawarra turned a profit

VIC

  • Most flips occurred in South East and North West Melbourne (7.8% and 7.6% of re-sales within 1-2 years of purchase)
  • The Mornington Peninsula was the most successful regional area for flipping and Bendigo was the worst

QLD 

  • The highest rate of flipping was on the Gold Coast, with flips accounting for 7.9% of re-sales within 1-2 years of purchase
  • Flipping was most successful in Moreton Bay North (95.6% of flips sold within 1-2 years of purchase turned a profit) and least successful in Townsville (48.8% of flips sold at a loss)

WA

  • Losses were high for WA flippers in 2017, with 47.7% of properties flipped within 1-2 years of purchase in Perth sold at a loss
  • North East Perth recorded the highest losses

SA

  • An increasing number of people are flipping in West Adelaide

Flipping is not a wealth strategy I would recommend to the average property investor. It’s a great idea for builders or others in the construction, real estate or interior design industries, as they bring special skills to the table. But for ordinary investors, I will always recommend that you simply buy and hold.

Renovating is a great way to add value and there’s plenty of low cost ways to do it. But time in the market is a much more important and effective element for average investors to achieve capital growth through property.

 

Close to the bottom

Tuesday, December 18, 2018

It’s been a year of volatility in Sydney and Melbourne but despite the scary headlines, this downward market cycle was entirely expected and very welcome following a protracted period of high price growth that probably went about a year too long.  

Latest figures from CoreLogic show Sydney house prices are down -9.2% in the 12 months to November 30 and Melbourne prices are down -7.6%. I think both cities have fallen further than this, as statistics tend to lag behind actual market activity.

I think Sydney is down 10-15% already and Melbourne is down about 10%. Both cities are getting close to the bottom of their cycles. It might get a bit worse before it gets better but I think we are through the worst part of the correction.

I think Sydney will soften another 2-3%, then there will be mini rebound, followed by two to three years of stabilisation, then another uptick.

As discussed in our latest annual McGrath Report 2019, affordability and declining investor activity are key drivers of this market fall, as is usual at the end of booms. But it is the engineered changes to lending that have arguably had the biggest impact below $5 million.

Greater scrutiny of borrowers’ personal expenses and debt-to-income ratios were implemented virtually overnight and affected almost every buyer this year. Suddenly, people couldn’t borrow as much as they thought, or get finance approved in time to bid at auction.

The impact on market momentum was quick and dramatic in comparison to normal cooling forces, such as affordability and rising interest rates, which have a much more gradual effect.

Tighter credit is a key reason for clearance rates dipping quite low in a comparatively short timeframe. So, you need to put screaming headlines like ‘biggest monthly fall for 14 years’ into perspective. The pace of this change is about lending – not market fundamentals. 

The economy is strong, unemployment is low, we have high population growth, an undersupply of housing and an extraordinary concentration of people living in our eight capitals (just under 70% of the entire Australian population), which puts a solid floor under major city home values.

APRA is insisting on tighter lending standards to shore up our financial system following high investor activity during the boom. The Royal Commission has added further pressure to the banks, who are curbing new credit so they can build an image as responsible lenders.

Credit is tough right now but it’s achieving a higher purpose in strengthening our financial system and it won’t be this way forever.

Lending standards have probably been too loose for a while; and in response to the Royal Commission, the banks have now set standards arguably too tight for the moment. Somewhere in the middle is probably where we will end up for the long term.

In a speech last month, RBA Governor Philip Lowe highlighted the need for reasonable availability of credit to keep the economy healthy. 

“Banks need to take risk and manage that risk well. If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer. So a balance needs to be struck here.”

The impact of tighter credit is still filtering through and it’s going to take time for the market to adapt. Prices have fallen a bit more and a bit faster in Sydney and Melbourne than we’d usually expect in a correction because buyer competition has dropped away very quickly.

CoreLogic figures show the worst peak-to-trough losses in our big markets since 1980 were -11.6% in Sydney in the correction of 1988–1991 and -9.4% in Melbourne during 2008–2009. 

I think we’re already beyond those numbers but it’s no reason to panic. Cyclical price corrections must occur to ensure the long-term stability of our property markets and the broader national economy.

If you bought at the top, remind yourself that property is a long-term proposition and you simply need to wait this out. The fundamentals of Australian real estate will continue to underpin property prices through the volatility of this shift period.

Meantime, the RBA is keeping the official cash rate at historical lows. Savvy owners should use this quieter time to pay down debt; and recent borrowers should start preparing now for the inevitable switch from interest only to principal and interest over the next few years.

This is my final column for 2018. I’ll be back in January with my outlook for 2019. Until then, I wish you and your family a great Christmas and a relaxing holiday season.

 

Has Uber Eats shrunk the kitchen?

Thursday, December 13, 2018

The kitchen is now the design centrepiece of our family homes, while Uber Eats shrinks the kitchens of apartment dwellers. 

We’re sharing cars, installing moveable walls, creating socialising spaces in residential buildings and swimming in demountable pools.

Feature walls are now feature ceilings and curves are replacing straight lines in the shapes of our best architectural abodes. 

The future of Australian home design is a dynamic space.

Adam Haddow, Director of Sydney architecture and urban design studio, SJB says today’s housing design buzzword is diversity.

“In the past, we had this fixed idea of what you got in a house – three bedrooms, backyard, maybe a pool,” says Haddow, who is a Churchill Fellowship recipient and thought leader on urban design and the modern evolution of city living environments in Australia.

“That hasn’t gone away but many people are realising they don’t need lawns to mow and four bedrooms. 

“You used to need a desk and possibly an office; now you need a kitchen bench the right height for your laptop, or a sunny courtyard with connectivity.

“These changes are dialling down in home design because we don’t need to create a space (for study/work); it is more about creating spaces where people want to live.”

In our recently released McGrath Report 2019, we revealed the hottest trends in urban residential design this year.

Repurposed living 

When Australia embraced open plan living at the start of the 21st century, there were inevitable casualties. Goodbye formal dining and lounge rooms.  Also over is the short-lived dalliance with the media room.

In came integrated study zones or home offices, with at least 3.5 million Australians now doing at least some work at home and nearly one million of us running home-based businesses. 

The future view is more flexible dwellings, reflecting the shrinking size of Australian homes with couple-only households due to outnumber couples with children by 2030. Greater use of moveable walls will allow room conversions and adaptable furniture will serve as room dividers.

Glamour kitchens in houses

Kitchens are still the heart of our homes but have evolved from utility rooms to social and entertaining spaces, Haddow says.

The open plan layout has brought the once segregated kitchen into the living and dining zones, typically with a sizeable island dining bench creating a gathering point for guests so they can chat with their host as the meal is prepared.

Prepping kitchens and butlers’ pantries are on-trend in new high end family home design.

As showcased in the luxury family-sized apartments of this year’s season of The Block, these separate private spaces enable home chefs to get messy, away from guests’ eyes and without detracting from their entertaining kitchen.

Smaller kitchens in apartments

Has Uber Eats shrunk the kitchen? The popularity of home delivered meals and our rising café and restaurant culture, particularly in big cities, has changed how Australians think about kitchens in the new millennium.

Food and drink delivery apps such as Deliveroo, Menulog and Uber Eats have exploded, with Australians spending $2.6 billion annually.

These trends are impacting how much of the modern floor plan is dedicated to food preparation, particularly in apartments which are more commonly occupied by time-poor couples and singles increasingly opting for Uber Eats over preparing food themselves. 

So, they don’t need a full kitchen anymore.

A rising trend in new development today is the glamorous communal kitchen and dining area that residents can hire to entertain guests, with more modest and functional kitchens in their own apartments.

Garaging parking

Our car-loving culture is rapidly changing, with 3.1 million active Uber users and 100,000 GoGet members nationally. 

These share services, along with expanding public transport, environmental awareness and dedicated bicycle lanes are reducing the need for parking on title.

Haddow says more small home designs will forego car parks. “What we are seeing is movement from majority to minority car ownership in the not too distant future. People are totally okay with using the one shared car on the street.”

City of Sydney figures show a 500% increase in the usage of its Kent Street Cycleway since 2008. Apartment blocks are increasingly supporting two-wheeling residents with shared bike rooms or racks. 

Blue sky thinking 

Textured housing exteriors made from recycled natural or industrial material like rammed earth, stone and bottle bricks are in vogue.

Architects are also departing from the traditional square shape, with curvy facades maximising the illusion of space and spherical structures emulating igloos offering bolstered thermal efficiency.

Fifth wall feature ceilings with stencil art and complex imagery have arty home makers talking. All the rage when Michelangelo was painting churches in the 16th century and Marie Antoinette was decorating ceilings with mirrors in the 18th century, housing costs eventually quashed the trend. 

Today, some owners and designers are resurrecting it, realising that ceilings are a blank canvas for injecting personality and texture into a home, Haddow says.

Keep a (goggled) eye out for the new wave of above ground pools. Able to be disassembled, the waist deep water features promise flexible all-seasons living in tight inner city spaces.

Green homes

Sustainability is becoming a major influence on home design, with record levels of solar use and rising interest in battery power resulting in the equivalent of 8.28 million households using renewable energy in 2017.

Savvy developers and home owners are fitting and retro-fitting properties to boost their appeal to an increasingly eco-conscious buyer pool.

Low cost improvements include draught sealing, insulation, low flow showerheads and taps, window shading and low wattage lighting.

Your personal touch 

Australians have embraced the concept of using their homes to reflect their lives and personalities. The ‘showroom look’ used in property marketing is often held up as the ideal, however that sort of styling is designed to appeal to the masses. Your own property, whilst you’re living there, only needs to suit you. So, make bold choices and I believe the real take-away is to create the ultimate home environment for your own enjoyment as it’s where you live.

 

Regional is the new black

Thursday, December 06, 2018

With their impressive population growth, buzzing local economies, improved amenities and infrastructure, affordable housing and increasingly attractive lifestyle as our capital cities get busier and more expensive, regional bridesmaid cities are beginning to rival the real estate brides of Sydney, Melbourne and Brisbane

No longer sleepy, second-tier towns overshadowed by the glamorous capitals, many of Australia’s regional cities have come of age and are now thriving economic centres with hundreds of thousands of residents.

Housing has always been cheaper but regional areas now offer so much more, with burgeoning café scenes, major shopping centres, good transport and plentiful job opportunities without the traffic, pollution, noise and time poverty that comes with big city life.

As revealed in our recently released annual McGrath Report 2019, lifestyle markets and satellite cities within two hours’ commute of primary metropolitan areas are the biggest winners of the metro-regional switch.

While affordability remains a key reason to move, buyers are increasingly talking about escaping from city stress, traffic and cost of living pressures, too.

Population growth is no doubt contributing to the greater hustle and bustle of city life. Australia’s population hit 25 million in August 2018, 33 years earlier than forecasts published by the Australian Bureau of Statistics (ABS) in 1998.

Given almost 80% of Australia’s residents live in the four east coast capitals alone, it is not surprising that some of us are feeling a bit crammed in. 

With surprisingly comparable wages and a vast differential in house prices, the metro-regional trade-off is increasingly compelling.

Improved infrastructure has reduced the commute from many regional areas to capital cities, enabling switchers to enjoy a big city income with a relaxed small town lifestyle.

The NBN rollout has led to more city folk working remotely or establishing start-ups as part of their lifestyle change.

Jobs in the larger regional centres are increasingly plentiful, boosted by a deliberate strategy to decentralise government departments to regional locations.

Bendigo is set to benefit from a new GovHub office that will bring 1,000 new and relocated public sector jobs to the CBD. Construction will create 70 jobs, with completion due in late 2021. Two other GovHubs are also being developed in Ballarat and Latrobe Valley.

Massive infrastructure investment is also boosting employment in regional centres.

After Geelong in Victoria lost its Ford and Alcoa steel plants, the local jobs market rebounded following federal support for a $100 million rail duplication project and a $100 million pledge for an Advanced Manufacturing Fund for Victoria and South Australia in 2017.

In some cases, average wages in regional areas are higher than capital cities.

In Geelong, individuals aged 15 and over received a median $616 weekly income in 2016, $84 more than their Melbourne peers despite higher living costs in the capital, according to ABS statistics.

The data also shows that middle aged blue collar workers, in particular, are more likely to be paid similarly or better in regional centres of New South Wales and Victoria.

Large regional cities have been some of the east coast’s best performing property markets this year, largely due to the ripple effect following Sydney and Melbourne’s peak. 

Geelong, 70km south west of big sister Melbourne, recorded the largest increase in dwelling values across non-capital city Australia at 9.8% over the 12 months to April 2018, yet its median house price remained more than $200,000 cheaper than Melbourne.

Shoalhaven/Southern Highlands was the strongest performing regional market in New South Wales with 9.2% growth, driven by demand from sea changing and tree changing downsizers and families.

Fellow New South Wales bridesmaid, Newcastle posted a 7.1% surge. Australia’s largest coal port by volume and the Hunter Valley’s economic hub, it offers a world class university, vibrant coastal lifestyle and strong employment with 37% of residents in professional or managerial roles. 

Queensland’s top two regional performers were the Sunshine Coast (5.1%) and the Gold Coast (1.9%) due to rising demand from interstate home owners and investors. Increased tourism played its part, with 7.4 million interstate visitors holidaying there in 2017.

It is now more expensive to buy a house on the Sunshine Coast, where the median is $589,000; and the Gold Coast with a median of $650,000 compared to Brisbane at $536,000.

ABS data shows tens of thousands of big smoke property owners opted to cash in their assets or upgrade their homes more affordably with a metro-regional switch in FY17. 

The top two locations chosen by Sydney escapees were Newcastle/Lake Macquarie in the north (5,500 arrivals from Sydney) and Illawarra in the south (5,300 arrivals).

Melbourne switchers favoured Latrobe-Gippsland (7,300 arrivals from Melbourne) and Geelong (6,900 arrivals).

Up north, seven of the top 10 Australian regions to benefit from departing Brisbane residents were Queensland centres, with beach cities topping the list. The Gold Coast, 70km south, gained 8,800 former Brisbane residents and the Sunshine Coast 6,700.

City slickers’ exodus to tree change and sea change localities is evident in CoreLogic’s latest property sales analysis, which shows that dwelling values fell by -3.7% across the capital cities but rose by 1.2% across the combined regional markets in the 12 months to September.

If you’re contemplating a metro-regional switch, consider renting for the first six to 12 months to learn the local market and ensure you’re comfortable in your new lifestyle before investing in a new home.

 

House prices in the nation’s capital

Thursday, November 29, 2018

The rate of growth in Canberra’s market slowed in FY18 but the city is expecting its fifth consecutive year of price rises in FY19, driven by above average population growth, limited supply of greenfield land for new housing, ongoing job security and the country’s highest wages.

 CoreLogic figures show the median house price rose by 3.3% to $674,000 in FY18, a deceleration on FY17 (9.7%) that is largely attributable to tighter lending restrictions, which are impacting every major market across Australia.

Economic forecaster BIS Oxford Economics says Canberra house prices will continue to rise at a slow and steady pace through to 2021, with 10% capital growth predicted – the second highest rate of forecasted growth in the country behind Brisbane at 13%. 

As discussed in our recently released annual McGrath Report, the most exciting thing happening in Canberra is the prospect of significant zoning changes that will reshape the city’s largely single level housing landscape to better meet the needs of residents in the future.

Strong population growth, limited greenfield sites for new homes and an impending wave of downsizing are prompting city planners to begin preparing for a ‘more compact city’ with higher density living.

The community’s desire for greater diversity of housing options was acknowledged in The Australian Capital Territory Government Housing Choices Discussion Paper, released in November 2017.

The territory’s residential stock is 81% separate dwellings, which has served the city well in the past but does not suit its rapidly changing community profile. Canberra has one of the fasting ageing populations in the country and single and couple-only households are becoming far more prevalent.

The apartment construction boom has met some of this demand but it has mostly been in town centres and along major transport routes, which does not serve the 50% of residents surveyed who would like to downsize in their existing suburban communities as they age but have little to no small home options.

This is a significant consideration for planners, given Canberra is expecting a 93% increase in over 65s by 2041.

There is a clear preference amongst residents for more terraces, townhouses and dual occupancies in established areas close to the city.

Infill development in the inner north and inner south has been a success, with valuations firm Herron Todd White noting particularly strong price growth in the inner north in 2018 due to the rising mix of housing, the intrinsic appeal of the leafy district and the buzz over the new light rail.

The challenge for the government is to meet the needs of its changing community whilst also maintaining Canberra’s character as a garden city. 

Canberra’s median apartment price decreased -0.8% to $438,000 in FY18, with demand still high enough to meet new levels of supply even with a drop-off in investor activity.

The city has seen significant development, with 6,700 new apartments still in the pipeline until the end of FY20, according to forecasts from Master Builders Australia.

For now, there is enough interest from local, interstate and foreign investors as well as younger generations to keep prices stable.

The vacancy rate remains extremely low, there is a strong tenant base of public servants and yields are very appealing at 5.7% – the highest amongst the East Coast capitals.

Premium developments are attracting the strongest enquiry. Local developer, Geocon sold 500 apartments pre-launch in its luxury High Society 27-storey twin tower project at Belconnen in July 2018. Earlier in the year, they sold 250 apartments in one night at the launch of Grand Central Towers in Woden.

A temporary oversupply might eventuate, given weakening investor demand and the cultural challenge of a city that is unaccustomed to apartment living.

First home buyer activity in Canberra peaked at 25% of new loans in early 2018 – the highest it has been since 2009 and well above its long-term average of 19%. From 1 July 2019, first home buyers with a household income under $160,000 will pay no stamp duty on new or established properties.

The long-term fundamentals underpinning Canberra’s property market remain strong. The territory’s population grew by 2.2% in CY17 – well above its long-term trend of 1.5%. It is forecast to grow by 1.75% in FY19 and FY20 before returning to 1.5% thereafter.

Employment is forecast to grow by 2% in FY19, before returning to trend growth of 1.5%.

Canberrans continue to enjoy high incomes averaging $1,016 per week. Jobs growth has attracted new residents, with Canberra amongst the top 10 destinations for all capital city migrants in FY17. It welcomed 12,000 people from the other capitals, including 5,200 from Sydney.

Canberra is quickly maturing into a major metropolitan city. One of the biggest transport projects in its history will launch next month, with the gleaming new light rail corridors snaking through Canberra’s north linking the fast-growing Gungahlin region to the city.

More international flights are opening tourism and trade opportunities, with Singapore Airlines and Qatar Airways flying daily from Canberra to Singapore and Doha. Tourism is up and international education has become the city’s largest services export, with 17,000 overseas students studying there.

The City Renewal Authority, established in 2017, is reviving London Circuit with new office space, a hotel, and retailers, as well as transforming the 19-hectare Haig Park into a more socially active recreational zone.

 

Jewels in the crown

Tuesday, November 20, 2018

The big news in Melbourne of late was the buoyant auction results for this year’s hit renovation series ‘The Block’ in St Kilda.  

Our McGrath St Kilda office achieved the highest sale price in The Gatwick for Hayden and Sara’s apartment, selling for $3.020 million – $545,000 above reserve and delivering them $645,000 in prize money.

Every apartment sold well above reserve and whilst it is a blockbuster TV show, these are also real sales to real buyers.  I agree with McGrath Chief Auctioneer Scott Kennedy-Green, who did an excellent job on the night, that high quality properties will always have an edge, even in challenging markets.

As discussed in our newly released annual McGrath Report 2019, Melbourne has been cooling down over the past year, following 51% growth in home values over five years during the boom.

The market peaked in November 2017 – five months later than Sydney, with its cooling phase starting slowly but gathering pace in mid-2018.

Properties retained their value in FY18, with 1% growth, however, overall, buyer demand is clearly weaker, primarily amongst investors but increasingly also owner occupiers, as tightened lending criteria takes hold of the market.

In the 12 months to June 2018, the number of homes listed for sale remained roughly the same as the previous year, however sales fell by -16.8%.  At the end of FY18, Melbourne’s median house price was $821,000 and the median apartment price was $574,000.

As always in a slowdown, the citywide market has become patchy with prices in outer areas continuing to grow, while the inner and middle Melbourne markets broadly taper off.

Entry level suburbs with houses under $600,000 are drawing strong interest from first home buyers aided by stamp duty concessions and the new $50 million HomesVic co-purchasing program, whereby the government takes a 25% equity share to increase affordability for buyers and reduce the need for larger deposits.

Official figures show 250 buyers have provisional approval to buy via the pioneering program, which offers up to 400 properties in Melbourne suburbs including Dandenong, Ringwood and Sunshine, and regional hubs including Ballarat, Bendigo and Geelong.

Nine of Melbourne’s top 10 suburbs for median house price growth in the year to June 2018 were located in the middle to outer ring areas in the sub-$700,000 price range. The best performers were Coolaroo (37%), Melton South (32%), Melton (27%), Sanctuary Lakes (29%) and Sunbury (26%), according to CoreLogic figures.

Family buyers are also fuelling strong construction activity in the city’s outer east, north and west at the rate of 1,500 new family households per week, according to the Housing Industry Association.

A longstanding correlation between property prices and school zones means homes in sought-after districts should somewhat defy the slowdown, particularly given the premium that families are willing to pay.

Real Estate Institute of Victoria (REIV) sales figures for CY17 show houses in popular public school catchments were up to $400,000 more expensive than homes just outside the zone.

Examples include South Yarra Primary (median house price $410,000 higher than homes 1km outside the zone), Altona Primary ($325,000), Valkstone Primary ($250,000), Camberwell High ($289,000) and McKinnon Secondary College ($235,000).

“Parents of school-aged children are investing in the family home by buying into areas zoned for some of the city’s best public schools, rather than paying the equivalent in private school fees,” says Richard Simpson, REIV President.

Victoria continues to attract the lion’s share of international investment in Australian residential real estate. Victoria represented 41% of Australia’s 13,198 approved applications in FY17, more than any other state and 8% higher than New South Wales.

The total value of proposals was $10.33 billion of the nationwide $25.2 billion pie. 

Top flight education facilities continue to attract international students, with the University of Melbourne and Monash named in the World Higher Education Top 100 rankings again in 2018. 

Foreign buyers with deep pockets also remain active in Melbourne’s prestige market, reportedly setting a new house price record in February 2018 when Stonington Mansion in Malvern changed hands for $52.5 million.

Looking long term, Melbourne offers far more robust prospects for capital growth due to strong population and employment growth, major investment in infrastructure and cheaper housing than Sydney.  All of this should provide a comparatively softer market landing.

 

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