Game Changers That You Can Harness To Make You More Money in 2015


After astronomical gains in 2014, Australia’s property markets are now moving into a new phase of their respective cycles. Todd Polke looks at the factors that are continuing to affect the markets, as well as the changing and evolving issues that have the potential to impact your portfolio significantly.

Let’s be honest – 2014 was a bit of a dream year for property investors. Cheap and easy money with low interest rates, booming markets, especially in Sydney and Melbourne, and an underlying supply shortage still driving prices up and up.

The question is: are we going to see this same market in 2015 or something completely different, or perhaps even a transition phase?

The reality is the market is changing. The conditions which brought the dramatic growth we’ve seen over the last couple of years are not going to take us into the future. However, don’t think of it as an earth-shattering change. It’s a transition of market conditions that we need to be aware of to position ourselves over the next three to five years.

Let’s take stock of where we are right now.

Perth and the Northern Territory
These markets are calming down, along with the resource sectors, after some solid movement over the previous few years. Perth is also beginning to see a slowing of net interstate and overseas migration; however, high income levels will tend to support prices over the coming few years.

The nation’s capital city is feeling the impact of the record construction in recent years and the resulting oversupply in the apartment sector. This has been made worse by the continuing job cuts in the public service arena, as outlined in the 2014 Federal Budget.

However, don’t expect too much in the way of pullbacks in prices, due to the high incomes and affordability of property for locals. This is definitely not an overall market we are targeting for investment.

This city saw some strengthening in the market. Just be careful of it being an artificial boost due to the spike of buying from first home buyers as a result of the ending of government boosts. However, Adelaide’s affordability is a big plus, which could support modest price growth.

Currently touted as the next big thing, Brisbane is on everyone’s lips now, and rightly so. We have finally seen some strengthening in this market as it moves off the bottom of the property clock, especially in the inner regions. This is a trend we certainly expect to continue in other areas of Southeast Queensland, for example the Gold Coast and Sunshine Coast are also showing some solid life in the housing market.

Overall, Tasmania saw some nice movement up around the 9% mark over the past 12 months. Just be wary of the spike in first home buyer activity. Modest future price growth may continue due to affordability; however, there is definitely a concern over the lack of strong industry drivers and the excess in dwelling stock.

Sydney and Melbourne
The biggest movers over 2014 saw price growth of 17% and 19%, respectively.

Melbourne saw the greatest movement in median price. However, a weakening economy and high level of supply will have an impact, moving forward.

Sydney and its surrounds, such as Newcastle, definitely were the more fundamentally solid markets. Buyer activity is going through the roof, and potentially too far through the roof in Sydney, with affordability looking dubious now. Regionally, Newcastle and Wollongong look to benefit further from this affordability issue that Sydney is likely to experience, due to their proximity and comparative affordability.

What's ahead?

Let’s now shift gear and look at the factors that will influence the market in a more significant way.

First, the not-so-good news.
Like it or not, the markets are moving into a phase of more moderate growth across the country. Obviously, there will be outperformers and massive underperformers. In general, however, the craziness we’ve seen in markets like Sydney and Melbourne and, before that, Perth and the Northern Territory is unlikely to continue as rampantly as it has in recent times.

This doesn’t mean the sky is falling in and everything is doomed, as some American experts keep suggesting about Australia. Far from it. It is just different, and we need to adapt our strategies to stay current with the market and understand how to position ourselves to continue to create gains and leverage against the growing markets and shifting market conditions.

Let’s start by understanding what factors are continuing in the market and the impact this will have, and then we’ll look at what’s changing and what is simply an evolution of existing conditions.

Continuing Factors
These are the factors that have already been set in motion and will continue to play a crucial part in the property market:

1. Subdued economic growth
We’ve seen Australia operate at below-target GDP growth over the past couple of years – at just below 3%. This trend is likely to carry on as the Australian economy continues to transition from being heavily reliant on the mining sector to a more broad-based growth strategy. According to the ABS, this is likely to continue for another one to two years before falling back in line with target growth of 3.5%.

» Why should you care?
The low economic growth will impact on a number of things in the market, including the monetary policy of the RBA, the interest rate policy of the banks, certain industry sectors, and consumer sentiment.

Monetary policy of the RBA
With a weaker growth forecast for the economy, the RBA is unlikely to raise interest rates any time soon. At the time of writing, the Australian dollar has dropped below 84 cents against the US dollar, which has many economists pricing in another potential cut in the cash rate by the RBA.

Most believe we are likely to see interest rates remain low, with a slow, steady rise up towards the 6.5–7% mark over the coming three years, so make the most of the environment, but plan for the future increases. They will come.

Industry sectors
Some industries will fare better with a lower Australian dollar, while others will suffer. The lower dollar is great for sectors such as tourism, education, manufacturing and exports, but, frankly, it is terrible for imports.

Consumer sentiment
In some areas where consumer sentiment is highly leveraged against certain industries, which are sensitive to the rise and fall of the Australian dollar, it can have an impact on business growth and spending. When people are uncertain, they tend to stop spending.

Higher unemployment rate
This is currently sitting at 6.3% (as at November 2014), which is well above target. Expect this to be the case for another year or so before the unemployment rate begins to drop. Be mindful of the rise in part-time and casual positions on offer. Banks don’t like them, so do whatever you can to overdeliver in  your job, because without it, say goodbye to lending.

Now, it is great to listen to forecasts and follow them, but, to be honest, sometimes they can be up and down like a yo-yo, so remember to be flexible in your approach and move with the times.

» What should you do about it?
From an investor’s standpoint, with the economy how it is, these are some of the things you can do to ride it:

Avoid mining towns
I am bearish on mining towns and will tend to avoid them myself, nor will I advise my clients to invest there, unless they are very diversified in industry and larger markets, which are also exposed to the resource sector.

Maintain a squeaky clean credit record
Interest rates will likely to stay low, so we have cheaper money – but then again, so does everyone, and everyone wants it. Currently, the banks have an abundance of people to whom they can choose to lend money.

Make sure you stay squeaky clean as a borrower so you can continue to be approved for lending. Take care of your credit record, make your payments on time, show solid conduct on your loans, and move to the front of the line.

Look at fixing your interest rates
It’s still a good time to be fixing interest rates, depending on your strategy. Sure you can wait and see if rates go down, and try to guess the bottom, but going much lower than another .025% is considered unlikely, and there are some attractive rates available. But make sure you are strategic on this.

2. Rental yields
Rental yields have been falling across the country over the last couple of years in response to the increased buying activity and cheaper money, so it has become cheaper to buy than to rent in many areas. Yields have dropped from 6.5% in capital cities, down to 6%, then 5.5%, and now they sit at 5% in most areas, and in areas like Melbourne you will find yields much lower, at 4% or even less.

» Why should you care?
In any business, cash flow is considered king, and for your property investment business there is no exception.

The rental yields in your portfolio give you this cash flow, and this can be seriously squeezed when yields fall. This can potentially turn your positively or neutrally geared portfolio into negatively geared. Right now, the low interest rates are balancing this out somewhat, but it is still going to impact on your portfolio from a cash flow standpoint.

The lower yields are also going to impact on your serviceability – that’s the amount the banks are willing to lend you. This is one of the key areas which hold investors back more than almost anything else, and if you don’t take care of it, you will be one of those sitting there stagnant potentially for years.

» What should you do about it?
We need cash flow in our portfolio; there is no way to avoid it if you want to keep moving forward. So in an environment of compressed yields you need to be more creative in how you are going to bring this into your portfolio.

Boost your yield
You could go chasing yields in regional towns and mining areas, but, as I mentioned earlier, this comes with some inherent risks, which a lot of investors who went chasing the quick buck and high rentals are now realising, and they are subsequently in a lot of pain.

The other way is to manufacture your yields by potentially furnishing property, if there is a market, or through renovation or doing dual-income strategies such as granny flats and so on.

Fine-tune your loans and eliminate debt
Many investors waste money in their portfolios simply due to ineffective loan structures, so make sure you have your offset accounts set up and you have a system for running your cash flow. This can save you thousands.

Review your interest rates; negotiate them; fix them if that is part of your strategy. Make the most of what you currently have. You can then use this saved cash flow to pay down debt and therefore increase servicing.

Plan to trade
A key missing part of many investors’ strategy is a trading strategy. At some point we are all going to run into serviceability issues and we need to plan for when this is going to happen – not if, but when.

Buying certain properties with the outcome in the future of trading them back to the market, and turning over a chunk of cash so you can eliminate debt, is a much faster way of eliminating debt in a portfolio.

Strategy is key here, so unless you are a professional investor or have a lot of experience in this, then get help. You can’t be an expert in everything, and when it comes to investing you are putting hundreds of thousands of dollars into the market, so it is worthwhile getting it right.

Manage your business
Your investment portfolio is a business. This means you need to manage it as one. Make sure you regularly review your rental yields and actually manage your property managers. A good rule of thumb is to do a rent review every six months without fail.

Changing Factors

These are some key shifts happening in the market that we need to be aware of, as they will impact on the environment we will be investing in, moving forward. Unless you stay on top of current trends in investment and lending policy, they are likely to jump up and bite you at some point. Make sure you watch these factors and adjust your investment strategy accordingly.

1. Lending Policy
The Australian Prudential Regulation Authority has made special mention of more closely supervising lending practices. I won’t go into it here, but they have made particular reference to three key areas of concern:
1. Higher-risk lending such as high loan-to-income and high loan-to-value ratios (LVRs) and interest-only lending.
2. Concern about accelerated growth in investor lending.
3. Higher buffer factored in when calculating serviceability for borrowers of 7% minimum.

Note that these are just guidelines provided for lenders to adhere to, but even so, this will have an impact on the property market via lending.

» Why should you care?
If lenders tighten up lending policy, it is going to make the availability of lending to investors tighten, particularly for investors who might still require higher LVRs, or even investors who might require more lenient serviceability calculations.

» What should you do about it?
What this really means is that we need to make ourselves look better to lenders,in order to meet these new guidelines provided by APRA. What you need to do from this point is going to depend very much on where youare in your  current portfolio, so the following points need to be applied to the right situation:

Make yourself look good
If lenders are going to tighten up policy on lending to investors, they are going to be pickier, so don’t give them a reason to say no. This means show good conduct on all of your current credit cards, as well as phone, electricity and other bills. Believe me, it impacts on your credit score. Basically, pay your stuff on time and monitor your credit record using alerts like the Veda Alert service.

Manufacture extra cash flow and eliminate debt
If servicing is going to be assessed at a higher level, according to the banks, then your serviceability is going to be impacted.

This means you need to find ways to increase servicing, which can only be accomplished in two ways: either increase your income or decrease your debt. Refer to some of the above points on how to do this. Or again we can focus on lowering LVRs by eliminating debt in the portfolio.

2. Future Development Planning
There is a growing shift towards more diverse and affordable housing solutions by local and state governments, to plan for the growing population and encourage the delivery of more affordable housing across various areas.

It’s different in each state, but what we’re seeing is a shift towards smaller properties, whether it’s smaller units, smaller lot sizes, more townhouse or villa development, or even more unique development plans in Sydney, such as the introduction of ‘manor’ housing and ‘Fonzie’ flats. (Think the TV show Happy Days.)

» Why should you care?
The government is trying to provide more stock at more affordable prices. This means we are going to see more supply coming on to the market, and a different type of stock.

This is important to take note of as you need to think about what type of stock you should be putting into your portfolio. A good example of this is what we are seeing happen more and more in Melbourne with the flood of units coming on to the market at 35sqm, with the guts ripped out of them and close to transport.

» What should you do about it?
As an investor you need to start thinking about what type of stock is coming on the market and in what supply. This means thinking about what types of properties are going to become more desirable in the future.

Obviously, it all comes back to that supply and demand factor which will drive the market, so if there is going to be more supply of a certain product in the housing market, look for a product to invest in which is going to remain unique and desirable.

For example, think about two-bedroom, two-bathroom apartments as becoming more desirable than the tiny little 35sqm stock.

Evolving Factors

These are the factors that are still unfolding which could have a significant impact on the property market and therefore are worth paying close attention to.

1. Affordability
We’ve seen affordability deteriorate across Sydney and Melbourne as median house and unit price growth outstrips median wages growth. The average mortgage repayment on a median-priced home is now above the 30% of monthly disposable income, which is considered to be in the mortgage stress range, according to the ABS.

On the other hand, Brisbane has a median house price that is 40% less than Sydney’s and only takes up 22% of income, and this area is only just strengthening as a market now.

» Why does it matter?
If people can’t continue to afford paying higher and higher prices for property, and wages don’t keep up with price growth, we are going to see some type of correction happen in the market.

The level of growth that we have experienced in Sydney and Melbourne over the past one to two years is unsustainable over the longer term.

This does not equal a dramatic drop in prices in these markets, especially Sydney. However, there will be a softening, a sideways movement, or even a minor pullback. We will probably see some moderate growth over the coming few years.

This market shift will also start to trigger a move towards affordability buying in the market, and we will see home buyer activity and investor activity start to move towards areas where they see value.

» What should you do about it?
• Be prepared to move with the market and don’t get caught up just investing in one way and in one area.

• Get educated and go where the value is, and think about the areas that this move to affordability might mean. For example, in areas like Newcastle and Wollongong, which are in close proximity to Sydney and far more affordable, we expect to see increased migration that will further drive prices.

2. Supply and demand
In most areas the Australian market has been driven continuously by a growing undersupply of properties versus demand, and this has been driving prices up in the peaks and troughs of the property market’s trend curve.

The large undersupply still exists in Sydney, Brisbane and Perth, but according to BIS Shrapnel the undersupply is forecast to erode quickly in Sydney, Melbourne and Perth over the next three to four years, while remaining steady in Brisbane.

Every other state is forecast to head into an oversupplied market or further into one.

» Why should you care?
When there is more supply than demand, property prices don’t grow – it’s simple. It becomes a buyer’s market, with high levels of discounting, high vacancy rates, higher risk ratings by lenders – and the market stalls.

Now this is a very simplistic view of it all, and we have to look at what market, what suburb, what street and what type of property we are talking about, as there are micro markets within each market.

» What should you do about it?
This doesn’t mean there are no opportunities in the market. Far from it. But just throwing a dart onto a map in Sydney isn’t going to work any more.

• Start thinking about which specific suburbs or streets or products will perform well in which areas. For example, on the Gold Coast, the housing market has been correcting nicely over the last 12 months and we have seen some solid growth, but the apartment market is suffering and not an area in which I would be investing heavily – the same as for the Melbourne market, which is experiencing serious oversupply in the unit market.

• Be aware that in some areas there will be oversupply coming on to the market, and this is not good for the market; however, in other areas supply is not necessarily a bad thing for investors looking for capital growth, as long as the new product coming on pushes up and sets new benchmarks for properties across the board. It can work in your favour nicely. Just be prepared for higher vacancies in the rental market, and lock in higher buffers.

• Find the strategic areas to invest in which will outperform; or, if you are so inclined, get working on add-value strategies such as renovations or construction or development if that is your game to force value onto property.


Now more than ever, it’s important to recognise the current and emerging trends and act accordingly. Markets and market conditions shift and change on an ongoing basis. Our success as property investors is based on not getting stuck in one absolute idea of how to invest and where to invest. It’s about understanding that there is always profit, cash flow and capital growth available for the educated investor with their finger on the pulse.


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