Matusik Missive

There is little doubt that parts of Australia – and especially Brisbane – are heading towards apartment oversupply.

This oversupply is mostly in big buildings, with few points of difference.

Yet, there is an opportunity to buy well when it comes to apartments over the next couple of years.

It really comes down to what you buy; how much you pay and how long you hold it.

The wish list below is exactly that.  Not everything can be found in the one place.  But it is our starting list when it comes to reviewing an apartment project or product.

Preamble

We don’t believe in picking winning or losing suburbs when it comes to property.

Our experience is that a buyer isn’t buying a suburb, but rather a property within it.

Foremost should be:

• The property itself
• The price paid
• The conditions of the deal

Whilst location is important, it matters more about what property you buy.

For example, the Gold Coast might have strong base indicators, but an investor could (often, in our experience) buy the wrong property; pay too much and not get the most out of a sales negotiation.

Buyers need to also buy a property that suits not only today’s local housing demographic segments, but those likely to occur in the area in the future.  Very little property commentary adequately considers this.

So on that note, what to buy?

Given recent events, we think it is timely to revisit our rules when it comes to better apartment buying.

General parameters

• Buy smaller and/or staged developments
• Limited chance of being built out
• Good local amenity and attractive ground plane i.e. not on a major road
• Signature architecture – something that stands out from the crowd
• Low to medium building height; preferably no more than eight storeys
• Few apartments per level, best if limited to eight
• One lift per maximum of six apartments
• Disabled designed (if you can find it)
• Single loaded or apartments that allow cross ventilation (corner or end apartments)
• ESD provisions to help reduce energy bills
• Good sense of entry and foyer space
• Adequate space for garbage bins, designed for easy council removal
• Low to medium body corporate fees –remember, these include building insurance
• Must have owner-resident resale appeal, either for a young or older demographic

Base product

• Clear zonal living – private versus living/public space
• See ‘hero’ shot on, or soon after, entry
• Two bedroom with two bathrooms
• One secure car parking space, better if two
• Basement and bike storage
• Equally sized bedrooms, physically separated from each other via bathrooms or distance
• Equally appointed three point ensuites
• Galley kitchen with a view
• Well defined space for internal dining and living functions
• Separate or enclosed laundry with storage
• Walk in robe space in master bedroom
• Room for desk/study nook in bedrooms
• Fully covered balcony that comfortably sits four to six people

Important inclusions

• Plaster board ceilings with LED lighting
• Sufficient lighting in kitchens and ensuites
• Stone bench tops, quality appliances, fixtures and fittings
• Air-conditioning to living and master bedroom
• Ceiling fans to all major rooms/balconies
• Carpet in bedrooms, timber/tiles rest
• Secure building – key card swipe access
• Broadband or NBN internet access
• Pets allowed 

End note

Why two bedroom – two bathroom as a minimum?  Because more tenants are sharing and well-designed two+ bedroom apartments mean more rent and a higher rental yield.

Also, a couple (as an owner-resident) can live in this type of apartment.  It provides enough functional space and some room to escape each other.

Property spruikers are at pains to outline that because one area is cheaper than another, it must be a better buy.  Take Sydney versus south-east Queensland (SEQ), for example.

Some folks have been calling for – and still are – a SEQ real estate “boom”.

Yet, the latest figures show that dwelling values have risen by about 14% across Sydney and Melbourne over the last 12 months and, despite “boom” calls over several years now, SEQ’s annual growth rate remains well below the rate being experienced in our two largest cities.

It’s true that much of SEQ is in a better position on the property clock than Sydney and Melbourne, so things should continue improving.

It is also true that SEQ typically follows the Sydney/Melbourne cycle and receives buyer interest from down south due to price and rental yield differential.

But is it realistic to label SEQ as Australia’s next “boom” area?

What makes a market boom?

Let’s look at a few of the things that we think need to be happening before a place “booms”.

Population growth

First of all, the “boom” area has to be expanding.  More people should want to live there.  Population growth should be expanding.

Whilst SEQ’s annual population growth is improving, net interstate migration to Qld is still lacklustre and is very unlikely to bounce back to the levels seen during the late 1990s-early 2000s.

Why not?  Because Queensland, and many parts of SEQ, are not creating enough new jobs.

Employment growth

The second thing that needs to happen for a place to be labelled a “boom” town is that jobs, and lots of them, are being created.

Yet the baton change from mining to non-resource based employment is having a negative impact on Queensland’s economy.

Sydney and Melbourne are creating, and are projected to continue creating more new jobs than SEQ.  Sydney and Melbourne’s continued residential performance is being helped by these new jobs.

Resource-based jobs – in fact, lots of them – were being created in the early to mid-2000s, which was the last time the Queensland residential market went through a residential “boom”.

Tight supply

Also, housing supply – both existing and new stock – needs to be in tight supply before a residential market can “boom”.

Whilst undersupplied a few years back, some parts of SEQ are already struggling with its level of new and resale residential supplies.  The region’s vacancy rate is increasing; rental growth is now flat and the amount of stock for resale is on the rise.  This is especially the case for inner Brisbane apartments.

In simple terms, an increase in supply does place a cap on potential price growth, plus how far rents can increase.

Unvalued housing

Our experience is that housing needs to be a “steal” at the start of a potential “boom”.

Whilst SEQ values are less than Sydney’s and Melbourne’s, housing isn’t cheap in SEQ, when measured against local metrics – housing costs are far from a “steal”.

It was much cheaper to buy or rent in SEQ in the late 1990s/early 2000s – the last time this area experienced “boom”– like conditions.

Right demographic mix

Finally, an area needs the right demographic mix in order to help fuel a “boom”.

SEQ is facing a large demographic shift over the next decade or so.  In short, this shift involves an increase in the size of the downsizing and early retirement markets, with a contraction in the number of households upgrading their housing.  Also, fewer young people are moving to; or staying in; Queensland in general.

As people age, they spend less, not more, on housing.  Fewer upgraders in the demographic mix places a natural break on generic dwelling price growth.

The SEQ demographics were quite different 15-odd years ago – i.e. the start of SEQ’s last “boom”.

Households upgrading were a dominant market segment back then, helping to drive home prices higher, as this buyer group spent money in anticipation of future earnings; and as they tried to outdo “the Joneses” next door.

This was pre-GFC.  Post that event, quite a few older SEQ households are still licking their financial wounds; most remain cautious and are reluctant to start a house price bidding war.

X Factor

There is always something more – beyond the short list above – that drives a market to “boom”.

In Sydney and Melbourne, whilst many still want to deny such, this X Factor has been overseas buying, much of which is indirect, via friends and relatives already living in Australia.

In SEQ’s past, the X Factor was high paying Queensland resource-based jobs.

We live in a disinflationary world and the main worry is that this could extend to deflation – which, of course, means falling prices and much more.

There is monetary policy; but there isn’t much money in the bank anymore to pump prime out way out of the any coming funk, so the cash rate is set to drop further.

This is likely to extend our current property cycle, but not forever.

Sooner or later, we are very likely to face a property snake.

And just like in the board game – which is really based on luck – some might be able to fluke their way out of hitting a snake on the way up to the top square, but most won’t.

The game just doesn’t work that way.

What we face in coming years – which, when combined in even the slightest configuration, is likely to have a negative impact most on property – includes:

1. Disinflation and most likely deflation
2. Limited improvements in liquidity, even if we start printing money
3. Increasing financial regulation
4. Highest levels of household and government debt
5. Changing property taxation
6. Little noteworthy government assistance
7. Falling population growth
8. Aging population
9. Tightening and policing of foreign ownership rules
10. Baton change economy
11. General economic disruption
12. Rising unemployment and high underemployment
13. More part-time than full-time new job positions
14. Little or no wage growth (falling wages in real terms)
15. Low housing affordability
16. Weakening world economy
17. Potential Chinese economic correction
18. Overbuilding (especially of the wrong product)
19. Government deficits
20. Potential loss of our AAA credit rating

Have a quick go at marking off those on the list that won’t apply in the near future.  It is a short list indeed.

Exactly when we hit the snake is very hard to tell.  But with each roll of the dice, the chances increase.  We have very little wriggle room left on the board.

For those who were prepared and knew what to look for, past property slides presented great investment opportunities.  It doesn’t have to be all doom and gloom.  But what you buy and how you work your asset becomes paramount.

Over the last twenty years or so, we have seen our dwelling prices increase something like threefold, while rents have risen by more than double.

Whilst property fortunes have fluctuated over that time, in general, it has been an upward and quite lucrative path – a property ladder, as many correctly described it.

What drove the property ladder during this time includes:

1. Inflation
2. Falling interest rates
3. Increasing liquidity
4. Financial deregulation
5. Relaxed property taxation
6. GST on new property
7. Government handouts and assistance
8. Strong population growth
9. Baby boomer cohort
10. Loosened foreign ownership laws
11. Change from one to two income households
12. A strong China and Aussie resource boom
13. Strong wage growth
14. Low unemployment
15. Affordable housing
16. High rental yields
17. Hilmer and other government reforms
18. Introduction of regional town plans
19. Under-building
20. Government surplus

It is a convincing list and it is little wonder that dwelling prices and rents rose so much over the last two decades.

Now, revisit the list and tick off those that no longer apply.

Better still, have a go at marking off those that you think will apply in two; five or even ten years’ time.

We will let you draw your own conclusions.