Property Investment – The seven secret steps to buying a house (Ep.93)

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In this week’s episode, Dave, Cate and Pete take you through:

  1. State. Property cycles play a part in determining price increases (and decreases) so when you do buy, you want to ensure that you buy in a state that is about to enter the upward swing of the property cycle. If your plan is to hold for the long-term, the stage of the property cycle diminishes in importance. 
  2. (S)City or Town. Technically, not an ‘S’, but phonetically it works! When selecting a city or a town, understanding the capital growth drivers is paramount, including changing demographics and employment opportunities.  
  3. Suburb. Just like cities, regional towns also have desirable suburbs primed for capital growth and gentrification and those that are best to stear clear of!  The trio share the signs and data to look out for. 
  4. Street. In blue chip suburbs, the A-grade streets are evident. But in a gentrifying suburb, it may not be known yet and you have to go looking. The trio share with you the secret characteristics of spotting an A-grade street.   
  5. Style. The best styles of property, especially in our eastern and southern states are period and character style buildings. Dave, Cate and Pete explore the characteristics and styles of dwellings to target in your property search.  
  6. Size – it matters! The size of the dwelling is of critical importance, but bigger is not always better. The trio discuss the ideal size for an investment property.   
  7. Soil (Land). A common misconception that unravels many investors is that more land is better, regardless of the location or the dwelling. What really matters for capital growth out-performance is the proportionate value of the land. What we coined the land-to-asset-ratio of the property. 
  8. Sentiment. The Property Buyer sneaks in an eighth ‘S‘ for main stream buyer sentiment. Quality properties will always attract competition, if there’s great interest, it could mean that you’re on to a winner.  
  9. And of course, our ‘gold nuggets’ 

Market insights

  1. ABS and Core Logic data reinforces strong growth for 2021. According to ABS data for the December quarter of 2020, each capital city recorded growth between 2.6% and 3.4% which is between 10% and 15% annualised. CoreLogic data, which is more recent, for start of this year suggests even stronger growth of between 3% and 5% for Sydney, Melbourne, Adelaide, Perth and Brisbane which is in the 15% to 20% range when extrapolated. Property Planning Australia has now revised its forecast up to 15% house price growth for 2021.
  2. FOMO causing irrational buying behaviour from first home buyers. Fear of missing out is driving some first-time buyers, particularly those backed by the bank of mum and dad, to take “over the top” measures to secure properties. The Property Buyer shares her experiences at the coalface.
  3. NZ Government expand powers of the RBNZ. The Reserve Bank of New Zealand is now the first reserve bank in the world to include in its remit how its decisions may stabilise house prices. This part of the NZ government determination to take action against rapidly escalating house prices that have increased by over 20% over the last year. NZ were a world leader being the first bank to include a target for inflation under the Reserve Bank powers which all major economies subsequently followed. Could history be about to repeat this move by the NZ government be a harbinger of what’s to come as other Federal Reserve follow suit in the coming months and years.
  4. Property price growth is a world-wide phenomenon. Across the globe, 2020 was the fastest year of house price growth since 2016. But 2021 could set even larger records. Canada, NZ and the US have seen housing markets rise faster than Australia, but Australia is on the move following in therefootsteps as reserve bank employ previously unseen levels of monetary policy through rate setting and bond buying.
  5. APRA says increase in debt to income ratio is not a concern. Data released by APRA for the December 2020 quarter show that the number of property owners with debt greater than 6 times their income has almost doubled. The commentary from APRA is that debt to income ratios are broadly in line with historical averages and not something that they are concerned about currently with rates so low, but will this change? We think yes, the question is whether it is in 2021 or 2022.


Show notes:

  • 1. State 
  • The property cycle plays a big part in determining price increases (and decreases) so when you do buy, you want to ensure that you buy in a state that is about to enter the upward swing of the property cycle. 
  • If states are heavily reliant on a particular industry, look at what is happening in that industry – Eg: if mining is taking off, WA will have some money in their coffers and if tourism will take a hit, perhaps QLD will not fare so well.  
  • 2. City or Town 
  • If choosing a regional area – what does that area have going for it? Conduct a similar analysis as for state 
  • You need to look at the capital growth drivers in regional areas.  
  • Is the demographic shifting – eg: gin bars in Ballarat, now catering not only to locals, but also to city-siders looking to have a weekend away. 
  • Look at employment opportunities 
  • Often what will happen is once the capital city has had its price rises, there is a ripple effect and nearby regional areas take off.  
  • This is often because the capital city property prices are too high and more people look for cheaper accommodation outside of the city and just commute to their work in the city.  
  • Think Newcastle or Wollongong or Blue Mountains. 
  • 3. Suburb 
  • In each regional town, there are desirable suburbs primed for capital growth and gentrification and those that are dodgy as well. 
  • 4. Street 
  • Avoid main roads, because you’ll buy it cheap 
  • Wide, tree lined, houses set back from the front boundary 
  • Other appealing houses on the same street 
  • Blue chip suburb – you’ll know the top streets. When it’s a gentrifying suburb, you’ll want to pick the a-grade street. 
  • Chasing development potential when you’re not a developer – beware of this. People may be developing around you, you’ve purchased on a nice street, but by the time it’s all done, it’s not nice anymore. 
  • tree lined,  
  • quiet, low car activity,  
  • consistent property style,  
  • well located ‘pocket’ within the chosen suburb or town,  
  • little if any new development,  
  • minimal or zero sharing of amenities such as parks/schools,  
  • dead end street-you cannot drive from one street to another along the street so minimal thoroughfare. 
  • Walking distance to public transport and shops – 800m to 1.2km 
  • If you don’t know the location, look at a map and see if you can pick out the streets, then get in the car and drive around and have a look 
  • Larger proportion of house blocks to unit blocks – makes parking an issue. Some areas you just need to flex the rules, in Elwood, this will be very difficult.  
  • Orientation – favoured side of the street 
  • Bus routes – might be really convenient, but you’ll be hearing that noise all day. 
  • 5. Style 
  • The best styles of property, especially in our eastern and southern states are period/character style buildings.  
  • These properties were generally built before World War 2 and include such styles as Californian bungalows, Federation, Edwardian and Victorian. 
  • Millenials get really excited about mid-century – which is really 1970 – exposed rafters, timber floorboards, exposed brick, sunken floors. 
  • 6. Size 
  • Size does matter in property, especially the size of the dwelling.  
  • Bigger is not always better.  
  • For example, a brand new seven bedroom home might look great but it’s not very practical when it comes to finding a tenant and it may also diminishes your capital growth prospects.  
  • Not many renters are interested in seven bedroom homes and if the house is so big, you have probably sunk most of your money into the depreciating component (the building) rather than the appreciating asset (the land). 
  • In simple terms – houses are better than units. In particular 3 bedroom homes, or now due to covid, 4 bedroom homes.  
  • If you can’t work in your home without your kids in the background or someone making breakfast, there’s a problem. Covid has re-shaped the way we’re thinking, but there is a lot of elasticity to that as well. It’s not necessarily a permanent shift.  
  • 7. Soil (aka Land) 
  • If you want to make money in property, you’d better make sure that you buy a property that has a valuable land component.  
  • Interestingly, bigger is not always better. What’s more important is the location of the land. Rather have 100sq metres in A-grade inner ring location than 700sq metre block on the fringe. You need to look at land value, not land size. 
  • A house on a large block of land on the outskirts of the metropolitan area with limited amenities and facilities will probably not perform as well as a property on a smaller block of land which is close to the CBD. 
  • If you can’t afford to buy a house but a flat or unit (never a new high rise apartment!!) is within your budget, buy a flat/unit that is in a small group so that even though the flat/unit shares the block with other flats/units, it doesn’t share it with hundreds of other high rise apart 
  • If you can’t remember the Seven S, remember the 3 L.

Peter Koulizos – The Property Professor’s Golden nugget: The three L – location, land and looks. Location – want to be close to the city or the sea. Land you want to have significant component of the property to be land. Looks, not just the look of the property, but also the outlook – which is the view.

Cate Bakos – The Property Buyer’s Golden nugget: 8th S – sentiment. What is the sentiment for this property? If you’re choosing something with investment potential, the sentiment associated with the property from main stream buyers has to be good. If it’s got such good sentiment from the mainstream that you’re worried about competition, take that as a good sign. Be prepared for competition, because quality properties attract competition.

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