A view from the top of the Australian property market

Some believe it was the usual Federal Budget PR, and some believe it was just a timely release of information.  Whatever your view, there was plenty of interest in the property ownership data published by the ATO earlier this month.

While the data related to the 2015 tax year, it provided yet another insight into the changing state of the Australian property market.  Married to other available information, it throws a different light on any bubble trouble the media loves to play with.

What was it?

The ATO statistics revealed that 1,468,949 Australians have an interest / owned one rental property, and 19,198 own six or more properties.  Interestingly, those with an interest in five rental properties have increased at 9.8% in the past three years, while those only owning one have remained fairly stable with a minimal change of 2%.

 

The table above calculates the estimated number of properties owned by individuals.  Acknowledging that we can’t calculate the number of properties owned by the ‘6 or more’ group or the properties owned by companies or trusts, the table shows roughly 3,000,000 properties can be categorised as investment properties.

If CoreLogic report (to the RBA) that our total market is comprised of roughly 9,800,000 properties, then who owns the other 6,800,000 properties?  CoreLogic also report that the combined value of these properties is $7 trillion, with an outstanding mortgage debt of $1.65 trillion.  This means our nation-wide loan to value ratio (LVR) is 23%.  Does this really represent the makings of an unstable market?

Owners in charge

Calling upon good old CoreLogic again, outlined below is a set of graphs published this month and used by the RBA to track property market activity.  Note that this information relates to lending, not ownership which is a common misconception when looking at this data.

The pivotal piece of information is the donut graph, showing that investor loans overtook owner-occupier loans in January 2017.  This is a concern because we know that investors have a higher propensity to sell when a market begins to turn, speeding a downturn and directly de-valuing the wealth of owner occupiers.

However, if we only have outstanding debt of 23%, and investors only own less than 30% of the total market, what are the chances of a major overall market downturn?  If 70% of properties belong to owner occupiers, does the low LVR mean those who own their properties have mostly paid them off?  Probably, but we won’t know until we can find an organisation tracking this detail.

Investor insights

Looking at the following graph,  what we do have is some level of detail on the approach investors have taken.  And that news isn’t good.  Approximately 75% of investors are negatively geared.  It’s theorized these investors will take the force of any upward pressure in interest rates, tipping a market turn.  However, we don’t have information about the buffers these investors have or insights into their overall strategy.  Here’s hoping they have a good game plan though.  If you’re one of these people and don’t have a plan . .you had better call us . . .very quickly.

Another view

The saving grace of a potential mini-market turn is the excessive heat in demand for property as a true pathway to lifetime (actually endless) income.  Crave recently published a blog outlining a way to calculate the number of properties required to replace earned income with rental income (read ‘How many properties do you need’ here).

Read the blog to get an understanding of the calculation, but if we say for modelling purposes that each individual may need three or four properties for income and one to live in (or half a property if married), then we’re way off having the amount of properties we need.

How many will we collectively need?

Australia currently has a population of 24.5 million, and it’s a sad fact that not all of us will own any property, let alone two or more.

Using the employment statistics as a guide (see below for the latest ABS statistics), the 12 million people listed as currently employed may consider using property as an income replacement strategy.  And if each of these 12 million working Australians want just four properties . . that means 48,000,000 properties will be required : -).

While we acknowledge not everyone will need four properties (because the number required to replace earned income will vary according to the rent generated by each property), it makes perfect sense that some people will want more than four.  And we haven’t even factored in the number of homes required – that is, property people are living in as opposed to property they’re renting out.

It’s timely here to also acknowledge there’s an extensive number of ways to generate an income, and many Australian residents will be perfectly fine without holding property.  The flipside though, is that we have not taken into account one pivotal factor into our calculations – a growing population.

Population projections

Outlined below is the Australian Bureau of Statistics population forecast.  They’re projecting an increase of roughly six million Australian residents in just 15 years.  Excuse me while I run out and buy some more property before it runs out – literally.

Looking at our market from this perspective helps throw light on the claims that supply is the key issue and interest rates could continue to be a minor issue.  It’s easy to see that if more people want to use property to prepare for retirement and our population continues to rise, the construction industry could be in for a ‘century of building’ instead of just the ‘decade of building’ we’re currently experiencing.

 

 

Thinking about the variables that can occur, there is a chance we won’t have the population increase as projected.  And there’s also the very real possibility that the ABS projections are conservative, and the increase will be much more than six million.

Demand v supply

But let’s return to where we started.  Even looking at the number of properties currently available – 9,800,000 – against a current population of nearly 24,500,000 it’s easy to see how demand doesn’t have much of a stopper on the top.  This is reflected in the following performance graphs from CoreLogic.

 

 

Luckily, both government and the private sector are working on supply, which is great.   Here’s hoping they get a bit more of a move on the supply side, rather than just make it incredibly unattractive to invest in property.

Which way ahead?

Absorbing this view from the top of the Australian property market, the future looks bright.  The reality though is not so certain.  At Crave, we see three key issues property portfolio builders need to consider.

  1. Policy changes such as taxation legislation, super regulations and associated requirements.
  2. Interest rate changes and their effect on the general economy.
  3. Yield – specifically, rent as a percentage of purchase price.

As per our usual advice, the best mitigation against the above three risks along with a range of other risks, is to build a diverse and flexible portfolio.  The best portfolio is one you have the most control over and will allow you to respond to market changes.  This may include divesting of property that no longer suits your needs, or being in a position to purchase effective bargains during a downturn.

The other key approach is activating projects such as renovations and small lot developments, which will continue to deliver good returns if your property is selected well and the project is managed with skill.  Use projects to pay down loans and balance your portfolio to increase your level of control and income.

If Australia continues on the current trajectory with residential properties increasing in price while yields start to decline, consider better markets such as commercial property or international property.

 

Buy smarter = limitless ways to build lifetime income

Crave Property Advisory is a unique property strategy and buyers agent service. As the only independent and unbiased advisory that can help you use any property strategy Australia-wide, Crave’s services extend to home, investment and commercial property.  A highly client focused organization, Crave developed the Modular Investing System (MI System) to provide clients with the ability to use a tailored mix of strategies and efficiently build profitable portfolios that create lifetime income. 

Debra Beck-Mewing is the CEO of Crave Property Advisory, and has more than 20 years’ experience in property investing, Australia-wide. She has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. A licensed real estate agent, Debra also holds a Bachelor of Commerce and Master of Business.

Follow us on facebook.com/CravePropertyAdvisory for regular updates, or book in for a strategy session to discuss your property questions.

Disclaimer – This information is of a general nature only and does not constitute professional advice.  We strongly recommend you seek your own professional advice in relation to your particular circumstances.

 

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