459 | How Can We Solve Australia's Growing Demand for Property? - Chat with Paul Ryan

And finally , in what's making property news , I'm going to give everyone a timely reminder nationally about making sure you're not paying too much land tax . So hang around for that as well .

And Ben Kingsley , chair of Property Investors Council of Australia and a back-to-back winner of the Property Investment Advisor of the Year Award . And both the partners of the multi-award winning Empower Wealth , co-creators of more the free lifestyle design app , as well as bestselling authors of the armchair guide to Property Investor . And make money simple again .

Stay tuned as they bring you the Insiders Guide to Property Finance and Money Management . Hi folks .

It couldn't have happened , been you better could it ?

So , but not to worry for our podcast community , because we've got some incredible content , some incredible guests that we share during the time , but we won't be able to have the live commentary bit , so it's going to go dark .

You know what my nightmare scenario is and I'm happy to put this out in the public airway is that we lose against Melbourne and then Carlton say they beat Sydney and then we play Carlton Collingwood . That would just that they're the sort of team that I just never want to lose to in a final right in terms of Carlton Collingwood .

So , just if anyone wonders if they leave us some feedback on iTunes , we do periodically read them and go through them and use them as opportunities to grow as podcasters and as humans . So this one's come from Josie Routh , who left this at the end of August , ben , so very , very fresh .

The title is insightful and passionate , so sounds pretty good so far , ben . Hey guys love your work . Just wanted to offer a quick suggestion . I've noticed a tendency to emphasize the accurate predictions whilst downplaying the ones that didn't quite hit the mark . This might unintentionally give off an impression of being less than sincere .

For instance , you often refer back to your February forecast of an interest rate hold at 3.35 to 3.6% , but I recall your fairly confident prediction in December that it would stay on hold at 3.1% even though rates ended up rising 100 basis points over the next five meetings .

If it held at 3.1 , you would have claimed that you predicted it , but then you threw that one out and claim a revised prediction after the rate rise in February . A more honest reflection would help build more trust with listeners and in brackets , and potential clients like me . Nonetheless , I'm really appreciative of the content you provide .

Your expertise is truly valuable and I'm grateful for the knowledge shared by both of you . Keep up the good work . Now , ben , there is a life lesson here for everyone . The way to give someone feedback is the way Josie's just did it Compliment at the front , compliment at the back , recommendation in the middle . So it's called the sandwich .

What do you feel about that , ben ? It's probably a fair call . It's probably highlighting that you and I are humans .

Now , the truth is we got those wrong and so Josie's absolutely right in regards to what that story looks like . So thank you for that feedback . In terms of the property story , that one seems to have played out a little bit more in our favor .

I mean , one of the greatest problems you have with macroeconomics they call it the dismal science , for a reason , right , because it is a social science and it's incredibly difficult to consistently be accurate in your forecasting , and we're no different .

That's why a lot of commentators and alike really just don't play in that space , because they don't like to be wrong . We try to give you guidance in terms of where we see it fitting , only in the context of the property story .

So we've also mentioned as well that if people are taking on our feedback around where we see the cash rate landing and they're making decisions on lending fixed rates or variable rates , then it's really important for people to also take those messages on board .

So that's why this type of feedback is important to us , because we know that people may be making generalized decisions off the back of that . So here's a point to make . We may not be out of the woods yet in regards to the cash rate services inflation , as what was discussed by the RBA board . That's our problem area .

There we saw the economists and also a lot of market feedback from public listed markets is that they are continuing to push through with higher price increases and double digit price increases , which is going to be interesting , and that's why , for the several months up to now , I've been pleading with people to stop spending , and I'll have a lot more to say about

that in my next RBA and economic update , because there's a real piece of information in here that I want everyone to be aware of , and that is I've fallen victim to this idea that consumers will be more conservative with their savings and their money , but it's proven to be fruitless in terms of no , you give people money and the bulk of them spend it , and

that's what we're basically saying in terms of why we've got higher interest rates than we actually need to have is because businesses can continually keep passing on prices , because we keep happily accepting these increases .

So there's a whole bunch of human emotions . So , to your point , josie , ben and I have human emotions too . Right , we don't want to . We want to avoid decreasing our status by saying we're wrong . But I reckon the feedback is fair . So , hopefully , there's a couple of things .

We don't always get it right , but we always give 100% of our understanding at the time of making the call and I feel like our history has proven that Also . It just proves we're like every other forecaster . Sometimes we're lucky and sometimes we get a stroke of reality . So we've seen that too . But here's a couple of things .

Part of the conversation and to your point , ben and maybe is this me trying to justify it again as part of trying to increase status rather than decrease status but part of what we're doing as well is , to your point , around the property story is trying to be a voice of calm as well , and in the midst of headlines that are scary , in the midst of lots of

negative clickbait stuff , we were the voice of calm through the pandemic and we look back on that with a sense of pride because that calm proved to be correct . And obviously there's a whole bunch of anxiety that comes from an interest rate tightening cycle that we've just experienced .

So we're trying to provide some calm there as well , in reference to the property market . But there you go , we are putting it out there . If you're using you and I as a reference for where the cash rate is going to go , you're probably flawed in your thinking , but we're having the best swing that we can . So thanks for highlighting this , josie .

A very timely reminder to our community that Ben and I are very much flawed . So we should take some time to acknowledge that . But I feel like the heart of anyone who's listened to our podcast maybe I'm justifying again , ben maybe at the heart of the history of our podcast , we've tried to give as much as we can to the benefit of our community .

So , with that as a backdrop , that just proves if anyone gives us feedback , ben , we don't always just read out the good ones . We also read out the stuff that gives us some opportunities to straighten up as well .

So you're always going to make mistakes in what we do and , to your point , we're just trying to bring all of the experience and the data together to make a conversation around what we see . I have been thinking a little bit about changing the approach for next year in alignment with what's going to be happening with the RVA .

They're going to move to only eight meetings a year and I think , considering that we are long term investors and we have a long term view of property , the monthly economic and RVA update can get people focused in on the real here and now and the short term . And when you're reading the paper you can get that sentiment challenge and what we call recency bias .

So I am thinking about maybe turning those more into more quarterly updates and giving the sort of more bigger picture .

I mean , I read a lot of data out during those sessions and some of it might be wasted , but I'm trying to build a narrative for each market that I'm looking at and , look , I get some great feedback on it in terms of people , really in giving them some sense .

But , to the point I'm trying to make is really months and months and months and months is really irrelevant in terms of what you're trying to do . Where we're trying to get to is basically holding long term assets for a longer period of time and building that passive wealth off the top of that . So , really appreciate the feedback .

We'll continue to keep doing our best , but to that point we won't , you know we'll avoid the hubris around , you know , declaring we're correct when you know , maybe earlier on we had earlier predictions on the cash rate , which we're wrong .

There's that famous call from you and then you know , on the on the Today Show , that breakfast show in the morning , and I said , you know , they asked me what I've got my scarf on , saying yeah , and I don't think it will win , like so that was a bit silly of me to sort of I should have been , you know , more confident in the boys on that day .

But there's the other one , at the Australian Open , which one's a classic as well , where you know I'm getting asked by Ali in terms of what's going to happen with the cash rate and I said , oh no , the cash rate could go lower from here . And she's going what ? There's absolutely no way the cash rate could go lower than the 2% or 2.1% at a time .

And look where it went to , you know , in terms of that . So you just never know .

I mean , and this is the problem with macroeconomic forecasting , it's just so hard because there's so many moving parts and Black Swan events , you know , change everything and obviously you know government decisions change everything you know in terms of you know how an economy responds , based on its natural growth , but also the regulatory implications that happen both

domestically and also globally .

Ben , with the art of spending the anecdotes of spending money by Morgan Housel , today we're up to number 12 . And it is it's , a really good one . So the social hierarchy of spending positioning you against your peers . So at the beginning he talks about this old Jake Ben . You probably heard it .

There's two hikers out in the woods and they come across a bear . One of the hikers puts on his shoes and he starts to run . The other hiker says are you crazy ? You can't outrun a bear . To which the runner says I don't need to run faster than a bear , I just need to run faster than you . So good way to frame up the discussion , right ?

So he says all success is simply relative to somebody else . So am I going to be successful from the bear ? Well , relative to if you're a slower runner than me , the answer is yes . So it's usually those around you .

So there's no object measure of wealth or success except potentially the wealthiest person in the world and outside of that , then everyone else still has someone to objectively strive for , right . So it's just relative to the people around you . Are you doing better or worse than they are ?

That's important for spending , because for so many people , the question of whether you're actually buying nice things is more about other things . You're buying nicer than other people's things . So the question of whether your home is big enough is actually just is your home bigger than your neighbors ? Because that's the question you're trying to ask .

So not only does it urge to one up your peers exist , but you may also continually need to surpass your own spending . So , ie , is this vacation you take this year better than the one you took last year ? Is your car fancier than your old car ? Or you're not just trying to match your peers , you're actually trying to one up yourself .

Isn't that interesting , right ? So here we are thinking it's all about comparison with others . So money to some people is less of an asset and more of a social liability . It indents them to a status-chasing life and can leave them miserable . It's a dangerous trap . You don't recognize the game and how that game is .

If you don't recognize the game and how it's played , it's been going on forever . So listen to this quote from 275 years ago from a guy by the name of Montesquieu . If you only wish to be happy , this could be easily accomplished , but we wish to be happier than other people , and this is always difficult , for we believe others to be happier than they are .

Huh , there we go . So think about that , folks , when you're doing spending , is your social hierarchy of spending got anything to do with your person over the fence , the person down the road , a mate who lives a couple of suburbs away , or trying to up what you've done before ?

Because to that last point , it's pretty easy to be happy if you really think about it , but when you're referencing to other people , it becomes an infinite game , ben .

And the goal with that is not about the outspending , it's about is our spending excessive compared to that ? So you can get a benefit on that side . But to Morgan Housel's point here it's trying to continue to keep living this life of opulence and keeping up with the Joneses just isn't worth it . It's just not worth it .

But certainly overspending on discretionary items and trying to measure against your peers in that respect to hopefully change behavior around overspending is can be very helpful in terms of building long term financial freedom and financial comfort . And if you really get this point , ben .

So if you're reducing the amount of times you need to impress someone else who the man in the car paradox proved that they're not even looking anyway means that the less commitments you have , the less commitments you have means the less money you need to actually receive the freedom that you're actually wanting the first place .

It is a really powerful concept if it lands and we're all humans and we all fall victim to this at some point but the secret source in it is , if you really do take this to heart , your expenses drop down to next to nothing , because all you need is a car that gets you from A to B , not one that you're trying to impress .

All you need a house is that provides you shelter , rather than one that you're trying to impress . All you need is going to holidays to rejuvenate and relax , rather than trying to impress someone else . Easier said than done . That is why money is simple and behavior is hard folks .

The behavior is hard is the 80% of the equation , even though the money is simple , seems to be 50% . It's not . Well said mate , well said , undoing the behaviors . Hey , we have got a very special guest today .

We are talking to a man who has got an enormous amount of experience in the world of economics , because not only does he have access to a lot of incredible data at the RIA group , but previously worked for the RBA and got to look under the veil . We asked him a lot of questions about that , ben .

So let's cut to the interview you and I had recently with Paul Ryan . All right , ben , we've got a very special guest today we are chatting with Paul Ryan . He is an economist at REA , specializing in housing finance , market forecasting and big data analysis .

Before joining REA in December 2020 , paul spent a decade at the Reserve Bank of Australia conducting research on the Australian economy , focusing on housing markets , lending risks and regulatory effects on the property markets . Welcome to the property couch , paul .

If you could just talk to us a little bit about what conversations were like for you growing up over the dinner table with regards to money , it's a good start off .

I remember my mother trying to explain to me how shares worked and I was just saying you know you're own part of the company . I couldn't understand like which part do you get ? Like the chairs that people are sitting on , like the front doors ? So that perplexed me for some time .

But it shows that we were talking about not just weekly ins and outs of money , but long term , like what is wealth and things like that from a relatively young age . And how did that ?

I was always a very like analytical kind of person .

Are you a sort of good delayed gratification person or someone who you know wants to spend today and not worry about tomorrow ? How does that play out for you ?

What do we do , like stick mixer ? That's the last thing I bought . What's the best one of these ? You know , $70 at the end .

What is your action threshold like in terms of ?

You know because you're at the cold face of understanding it to better than most people the mechanisms of how market forces work , and so have you been able to hack that side of your extreme delayed gratification and match it with your you know propensity to research so that you do find the appropriate amount of action threshold for you ?

And yeah , a lot of the times I think what I've learned is I can't sit down and just say , okay , at the end of today I'm going to have taken a make a decision , you know , say an investment decision or something similar It'll be .

I'll do some research and kind of let that sit in my brain for a while and then come back to it , you know , a couple of weeks later and think , okay , how do I still feel about that ?

I think that's my approach there is is if you still feel good about it a week later and it's not just like , oh , I just , you know , saw that ad on TV and you still wanted it or need it . That's that's when you know kind of it's the right decision . That's that's where I've come to .

But before that , what was your first , what was the first gig on your professional career once you graduated , and how did you go from vet science background to ending up in in economics and one of the leading economists in the country ? What was the ? What was that first stepping stone ?

I can do political science on the side , and that that is what what I viewed economics is is I've always been very analytical , I'm very math driven , and economics is it's an enormously broad field , but broadly speaking , it is a like analytical expression of how people operate in the world .

So it's how do we understand what everyone together as as a society , is doing ? And it's so influential Like that's . What I saw is is all the interesting things in politics , all the big debates , are fundamentally their economics debates . So that's I'm really happy with it .

And more and more I've done more and more data focused things , and that's kind of how I ended up in property , because you know , that's that's how you really get into to understand things in a way that no one else can before is we've had this kind of renaissance of big data and more data availability and that's been living that kind of moving from when I

started my career to now , what's expected of an economist has changed enormously rapidly in 10 , 15 years , and that's just been a really , really fun development .

We could see total spending , we could see total savings , we could see total economic activity and since then we've gotten much , much more data on what , what individual people are doing , and just that has meant that people can actually test . You know , if you , if you're , change this one policy , what effect does it have on specific outcomes ?

And so you're moving from . So you're still . Economics is still very much grounded in theory . Is your the hypotheses you're testing always ? Does human behavior respond as we'd expect with theory ? But more and more you've been able to test these little kind of micro things .

And that's been the big revelation is is economics has gone from a very macroeconomics focused discipline to more and more it's a microeconomics focused discipline . It's more in the like how are you or I making decisions ?

And with that , that's the stuff that really interests me is like , you know , if you know attacks , policy changes , how many more people does that induce to do something or stop doing something they were doing before those ?

So if we pivot to the RBA , can you get you know it's , it's been on everyone's mind , the RBA , but you know , over the last interest rate cycling , interest rate tightening cycle , can you give us a little insider's understanding , on , on , on what it's like on the inside ?

You're seeing next people that have been researchers in the Australian economy for decades and they take that really seriously .

People are , you know , they're researching every aspect of the Australian economy and , although I was never a kind of macro focused guy and that's obviously the place where real macro people go to macro being , people care about aggregate activity and how interest rates affects the economy and whether the economy is , you know , performing stronger or weaker than expected .

Whereas I was kind of in the micro-data , you know , I was kind of in the micro details of you know , how do these little things affect people's behavior ? The RBA does does research on the whole breadth of the economy , because they need to understand all of that to really to really get where the economy is at at any point in time .

So so , yeah , essentially they . What is great about it is that there's this , there's processes that go into the monetary policy decision , but then the the thing you're pushing towards is everyone is trying to do their own individual research , and so you are professionally a researcher in both topics that the RBA as an institution finds interesting .

But also you've got a lot of license yourself to to research the Australian economy , aspects of the economy that other people haven't looked at yet , and that's just . You know . There's not many places that you can work where you've got a kind of free license to do research and with the only goal of being can we just understand what's going on better ?

I mean , we know economics is basically the study of human behavior , as you were saying before , and and obviously those the incentives around that human behavior , whether we're going to act or not act . Did you get close to any of the sort of research that was being done about driving property activity ?

Like you know , ultimately , there's this great debate around negative gearing and , you know , is that a stimulus to actually get supply into the market ? Is it not a stimulus ?

I mean , it's those types of macro policy decisions that do impact , you know , not only just in the short term , but medium to longer term in terms of the level of supply that we're going to see made available . For what is these days , you know , a differing type of economy where we've got people who are happily mobile .

They'll happily move from place to place for work .

I talk a lot about , you know , the risk you have of just thinking about a certain type of renter that just is stuck and wants to stay in the one particular space , as opposed to human talent and that human capital and the mobility of that human capital is important to develop areas and regions and being able to sort of see those cities and those towns grow .

So was there any sort of experiences of any research you were doing in the RVA that sort of exposed you to a bit of that sort of insight ?

The really fun kind of bit that I contributed to was when , again after the global financial crisis , there was this big push to say , hey , the housing market is this huge risk , it can be this huge risk . It was a huge risk overseas , particularly in the United States and places like Ireland and Spain . How do we understand these risks ?

And that's when I think regulation in Australia has moved away from kind of what was called like prudential regulation , which is what APRA does , which is basically banks just have to hold capital and then , other than that , do lend in an appropriate way to people , but make up your own mind about how you lend .

And it's become a much more targeted in how regulators impact lending .

And this culminated in what APRA or other people call macro potential measures , which it was deemed in late 2014 that investor lending was a risk to the Australian economy , basically , and so there were limits on how much investors , how many investors banks could lend to , and later there were limits on interest only lending .

Interest only lending was a risk , and so I think I played a small part in researching . You know , what are the impacts of these things ? Do they ? Firstly , are there was investor ? Is investor lending a risk ? What are the mechanisms ? So what's the theory behind that ? What's the evidence of it ?

What happens when you implement these things , which , which culminated in higher interest rates for investors and interest only loans , which persists to this day , despite those kind of limits being removed For reasons we can get into , banks are still charging a premium to investors today .

These , these are the types of things that I was looking at while I was there . As well as yeah , I mean the broader questions . Here are what you spoke about , ben . People move around less now than they used to . Why is that ? Is that because of high housing prices ? Is that just because ?

you know the economy is less dynamic , it's less productive and we see that everywhere , not just in Australia . There's fewer people move around the United States than they used to . There are hypotheses for this and papers really good papers about it , but this is one of the things .

If we're talking about productivity , I'm sure you would have seen this , this like the housing theory of everything . Like to what extent , to what ? To what extent are people getting married later and having families later because housing is expensive ?

Or is housing expensive because people are delaying this stage of their life because , you know , more people want to university education ? I'm tangling these , these things , and I think housing is such an important thing to people . Really , right , it's , it's almost always your largest asset is your home .

It's , if we think about why has Australia gotten wealthy over time , it's because everything's gotten cheaper . Really , you have to spend less of your work week to buy clothes and food , and the one thing that's gotten more expensive relative to , say , your parents , is housing . So that's increasingly housing is is an important focus for welfare .

That's , that's why it's so interesting .

I mean all of the , all of the papers and all of the . The banking people that I've been able to talk to over the last 15 , 20 years have indicated to me that , in terms of default risk , the greater proportion of default risk actually comes from owner occupiers as it does from investors .

Yet obviously you can you can see the natural response from a regulator , seeing what happened in the US , where they've got no recourse borrowing versus we've got full recourse borrowing here . So it's a little bit of a different , you know , sort of outcome . But what was the ?

What was the sort of evidence to suggest that investor activity was such a greater risk ? I mean , I definitely also flagged and , bryson , I were quite concerned in I think it was 2014 15 were 50% of new lending was going to investors . That was unsustainable .

There was no doubt that that was problematic and certainly some of those macro prudential throttles that we saw coming out there were well founded in terms of , you know everyone's irrational behavior , thinking that property is , you know , the gold mine to the future . But I am curious to your point .

You said that the major banks and most lenders have still put a premium on top of the investor lending , when the irony here is based on the evidence that I've seen , we're actually a lower risk than what you're seeing from owner occupiers and everyone might be going . Why would there be a higher risk for owner occupiers ?

Well , in a lot of cases , a lot of relationship breakdowns , debt management , financial household management becomes quite challenging , having families unplanned all of those things add up to a greater ground swell of risk in the in the owner occupy space . But tell us , tell us what you learned in terms of your own research .

More investors buy in that location that pushes prices up more , say above some theoretical fundamental value at some point that that unwinds and on the downslope it's investors who can leave . You know owner occupiers fundamentally they need somewhere to live . They're less likely to say , hey , I think prices are going to go down in my , so I'm going to sell now .

You know , if they lose their job , so and so forth , like that's , they can't sell their house . If you're in , if you're underwater , in a position of negative equity , it can have these really bad effects , even though , fundamentally , if you're still living in the house , it you know , doesn't matter until you sell .

The most effective way to deal with that potentially is like hat like just have really high transaction costs , which is really what stamped it is . Getting in and out of the market Costs you an enormous amount . So that's the as much .

As I'm very much not a fan of stamp duty for broader productivity and efficiency reasons , that's the kind of the biggest argument for stamp duty continuing in this country , I think . But what's what's ? What's occurred at the moment is is now those macro potential measures have have been removed .

What they've been replaced with is this this very complicated system of capital requirements for different loans , and so banks have to hold fundamentally more capital against the investor loan than an owner occupy a loan . So , now my , my critique of that is like , how do you calibrate that ? Like , what's the right amount of extra capital to balance against this ?

Because , as you say right in good times before the pandemic , you see lower a rears rates or lower rates of default for investors than owner occupiers and that's partly because investors tend to be higher income , higher wealth , partly because of the tire , the part of the life stage that they're at .

So but in downturns there's you know the RBI has some some paper on default risks that showed that in the post mining boom , wa regional areas are very small housing markets . They did see investor areas rates increase a bit more than owner occupiers . So there's the kind of .

There is some evidence here that the theory translates into into actually now I think my critique is we , before we go out there and we charge all of these people you know what is it at the moment the premiums , you know , 30 to 40 basis points more for an investor than the owner occupier . That's a real cost to a third of the market .

There should be some more evidence on , like , the level of risk and whether that that additional cost is commensurate with that risk .

They've released papers that say here are the conditions under which we would implement new macro potential policies . Again , my critique of this is like they're like hey , we just look at the market and we'd say that we need more measures . How about we do the research now and what those measures should look like and what effect they have ?

The research that we released , that I worked on at the RBA was that those higher interest rates for investors did affect home prices , and in regions that had more investors we saw home prices increase more slowly than other parts of the country . Again , that impacts not just the investors who are not making those gains .

It impacts everyone who has a house in that reach .

Did you get to reference a broad spectrum of countries and you're nodding there . So what sort of comparisons and interesting anomalies did you notice in the Australian market compared to some of the other big international countries that you're observing ?

The number one reason is that all of the debt for the rental stock is held by the household sector , not by the corporate sector . If you take that away , is Australia more indebted than other countries ? A little bit , but nowhere near the 100% more of household income than anywhere else . That's a big risk , right .

So if you think about risks like , how much risks does the housing sector hold , those kind of stats overstate that . Now , why in Australia do corporates not buy rental properties ? Why is it always households ? That's then the next big important question . And is that a risk ? And subsequently , is that bad for people ?

Is it bad for renters to have a mum and dad owning their home ? Now , to go through that , mainly it's tax settings that mean that households are incentivised or they have basically an advantage over corporates buying rental properties . Now , mostly that's land tax .

So if a corporate buys a whole bunch of properties , they're going to end up paying land tax on the whole portfolio A household . New South Wales , less so in places like Victoria , you pay no land tax because you've got a threshold under which you don't pay any . So there's these structural reasons that at the moment we're stuck with what we've got of .

There's huge pressure for more build-to-rent investment . And how can we encourage more build-to-rent investment ? And really the answer overseas is they give huge tax breaks to corporates to build housing . Maybe that's the answer . If you make it really really attractive for corporates to build housing , they will build it .

Now , whether it's bad , is it bad for households to , or renters to , have their home owned by another household ?

That's an interesting question because it says the ideal here is that suppose you're a renter and you're a renter with a big corporate and you say I've got to move house for work and I'm moving from Sydney to Brisbane and your landlord says , oh great , I've got another building in Brisbane , I know you're a good renter , you can just move straight to that .

That's really appealing . I haven't rented overseas so I don't know how realistic that vision of the corporate-owned rental stock is , but it's an interesting one and I think it speaks to , I think a lot of .

If you talk to renters , a lot of their concerns are about professionalization of property managers and quality of rental accommodation , and I think those people that are pushing for more corporate-owned rental properties are doing so to have higher quality rental accommodation . I think that's something we all agree is a good thing .

When I talk to build to rent developers , in fact , they say it's profitable to provide high quality rental accommodation because you get less rented churn . So they say it washes its face . You get a good return from providing high quality rental accommodation . So I think there doesn't have to be an either or here . I think everyone can win .

We do need more of that affordable housing , one of the I'm trying to remember what the paper was that I read but the cost for governments to provide social and public housing and those types of because of the compliance levels and the cleanliness and the rotation and all that , it actually doesn't sound like it's as efficient as potentially , the way in which the

small business owners because that's what they are , it's a passive business , but the mum and dad investor they're running a small little business and they've got a property manager who's obviously holding them on . So I hope that the sort of powers that be and the regulators and all that that are having these conversations aren't saying this or this .

It should be , and rather than or in terms of the blend of accommodation that's being provided , because I think I could argue quite strongly that a really good quality property that's well looked after by its landlord is providing quiet and clean enjoyment and safe enjoyment for that and that's pretty efficient because the only sort of middle ground cost .

In there is the property manager who might be taking about 8.5% , 9% in terms of their fee on the rent . So it's definitely , to your point , around the land tax . That's the other challenge .

I mean , there's probably a lot of property investors who would happily add to their portfolios , but the land tax is exactly the same for the investor as it is for the business who's trying to provide volume .

And , but , to your point , there's no one in the household is going to be able to provide , you know , 2000 , 3000 , 5000 affordable in a rental accommodation in a meaningful way , though I'll never get the lending .

I'm interested in your assessment of what's happened in the property market since the beginning of the year , paul , because clearly , clearly there's at the back end of last year there was , you know , the interest rate tightening cycle was in full force , but but the the east coast and the biggest cities have actually performed really well for the beginning of the year

. So what , what's your take on that , and do you see that as sustainable , or do you think that there is , I guess , some flattening out of that to come ?

We put up forecasts in January that had similar to a lot of forecasts in the market that were very negative , following on from really what was six to eight months of price falls throughout the second half of 2022 . Now , since then , what's happened ?

Interest rates have continued to go up , although looking like flattening out now , but prices have increased , increased every month . This year . Capitals are up now over the past 12 months , like 2% . Regional areas have flat over the past 12 months so they've kind of regained everything .

They mostly that , or all the falls that happened in the second half of 2022 have been regained now in most markets , not everywhere . Sydney's been leading the leading the charge , the most expensive market . So what's surprised us has been the weight of demand this year relative to kind of new stock coming on the market . That's been kind of the key .

The key factor here is that demand has been much stronger than we expected , and partly I'm speaking about stronger like catch up immigration , but mostly I'm referring to really how households have reorganized themselves since the pandemic . There's been a big increase in the amount of space people want .

People want , you know , bedrooms , spare bedrooms for home officers , bigger gardens because they're working from home , and that's translated into really we need more homes for the same number of people than we did before the pandemic , and so that weight of demand has been being really much stronger than we expected . Now . Is that sustainable ?

A really good follow up question . It's tough . I mean , the way that I always think about home price valuations is always in this , like in an asset pricing framework . So fundamentally , what people can borrow really affects where prices are at and over the long run . That is what you see , and we've seen a big divergence over the past year .

Borrowing capacity since mid 2022 is down somewhat , like a third , and we've now got prices roughly flat over that period .

So the chief risk is that what we've seen over the past six months is we've seen lots of buyers with really big deposits so borrowing kind of half or less than the property's value , so people who are less affected by these interest rate increases . Now we don't know who those people are , but you can hypothesize that these are people that need more space .

Since the pandemic have seen really big equity increases , that's . The other big story is that people who are already in the property market have seen huge property price gains over the past three years .

So on one side , do run out of those buyers that have really big deposits and aren't as affected by interest rate increases and you start to get the long term trend of borrowing capacities really driving price increases . That might be what we see , but fundamentally I don't know . We still see really strong demand in the market .

All our indicators , auction clearance rates , are really strong . Properties are starting to sell quickly again . I was wrong at the start of the year , so I'm much more reticent to make bold claims . For the next few months or so , it looks like we're going to continue to see property price growth .

You were talking about predominantly owner occupies then when you were saying more space and potentially gardens and those people working from home wanting more area to move around for their quiet enjoyment . So what about the investor ?

What did you see investors activity in the last sort of six months play into that story and has there been price points where you may have seen them a little bit more active than not active ?

The pandemic was a really challenging period for investors . Lots of investors sold properties . Very few new investors came into the markets . It was a big shift . So fundamentally , what happened is a lot of first home buyers bought the property they were renting in . There was a big transfer from investors to first home buyers .

Now the big people that are really crimped by higher interest rates are first home buyers , who tend to borrow . Your standard first home buyer is borrowing ADLVR . They're really , really affected by interest rate increases . So it's no surprise that first home buyer activity has dropped off and investors have come back to filling that void .

It's also the case that investors tend to have higher wealth . There's a big divergence in how investors , what strategies investors have . Some want to maximize leverage , want to have as much negative gearing capacity as possible , but that's not all investors . A lot of investors are actually like , hey , property is a good investment .

I'm going to put real money in there and don't actually have a huge amount of leverage , so there's a wide divergence there , but broadly you can say that investors tend to be older and they tend to be wealthier and so , yeah , they've taken up more of the market as they're less affected by higher interest rates .

Because it was all right when everyone was just leaving , but it feels like we're now in that U-turn stage where people are thinking , okay , well , it's gone a fair way out and it's not close to the major hubs . Do you have a view on where that commuter belt might have stretched to ?

And also , is there a bunch of U-turn happening from a lot of these further out regional centers ?

So no matter where it was if it was a house close to the CBD or in a far-flung area people were willing to pay more for big four and five bedroom houses . Now there are more of those in peripheral suburbs .

So this is the key driver of the outperformance of that really peripheral belt of suburbs to the edges of cities , and you could almost map that the further a suburb was from the CBD , it would have performed better through the COVID period .

But if you look at all the data and again this is the fun thing of having all the data on every single property transaction all of that outperformance is about size of homes , not location . So people weren't . Despite the fact that people were doing this hybrid thing or working from home persistently , people weren't willing to pay more to be further from the CBD .

They were willing to pay more for bigger houses . But we did see people be willing to pay more to live in regional areas , particularly regional areas that were kind of one two hours away from major cities . So we're thinking like Jalong , mornington Peninsula for Melbourne , places like Wollongong and the Central Coast for Sydney .

Now we've seen that reverse a little bit , but we're still seeing regional areas all across the country up significantly more than capital cities since the pandemic period and since kind of 2015 . But that's not that unusual . We did see like capital cities outperform in the period before that .

If you map , one of the things that we kind of look at for this is the ratio between , say , house prices in regional Victoria relative to Melbourne house prices , and that kind of oscillates around a bit and we're not like drastically outside of the range that you'd consider normal . So what does this tell you ?

I think really there's just been a catch up in regional areas and there are more people that are willing to live in regional areas and take advantage of lifestyle . Obviously , relative affordability , those are the big things . So it does seem to be a real trend .

It's obviously regional areas haven't outperformed over the past year , so maybe we've seen this big , this one burst for regional areas and now they'll kind of stay at this level for prices .

Coming back to what is the intrinsic or deep value that you get in property , it's ultimately the land value and that's why land closer to the bigger economic centers has appreciated significantly over that time and obviously it's the productive use of that land that ultimately gets its land value from when you see this divergence between the sort of behavior of people

moving out there and we talk a lot about land to asset ratio , and so when the actual asset on top of the property sorry , the asset , the improvements on the land , start to get higher than that sort of 40% and you're starting to get that we tend to see a performance in our research or an under performance of those particular assets .

So the question I have for you is , given how rich the data you have , which is all the properties and all those sale prices , I mean ultimately , at some point in time that's falling into the land values . When we look at those inner city land values being at a premium to the mid city locations , to the fringe city , to then those regional areas .

Do you see that changing anytime soon , in terms of how the makeup of land values would change and what would be the catalyst for that change ?

So as cities get bigger , the gravity of the center of the city gets larger and so values go up more closer to the higher gravity areas than they do further away . It becomes more and more valuable to be close to kind of all of the action and all the people and where productivity is occurring and where jobs are happening .

When you live in medium to high density suburbs where there's lots of restaurants , lots of cafes , there's lots of people around , there's lots of stuff to do , you can see the appeal and from my perspective as a housing economist , this seems like unambiguously good . People can still choose .

People can still choose and ideally , we develop our cities so there's a big choice of different dwelling types , but we can accommodate more people and everyone gets the benefit of that . I think that's what I'm looking forward to our cities developing towards .

into townhouses or into multi sort of medium , low density to medium density , those individual lots that are still remaining because of that gravity effect that actually increases the value of that land .

So from an investor's point of view , don't be too worried about that population increase because it'll bring that Thai restaurant next to the Indian restaurant , next to the coffee shop and bring that attractiveness and that livability and those other small businesses and the employment opportunities and potentially the higher income that plays off that particular story as well

. So that's the fascination that I see in that sort of fundamental infield work that we get to do . As opposed to that doesn't necessarily show up in the median house prices of which we're reporting the results of the sales .

We're thinking 10 , 15 , 20 , 30 years time in terms of what's happening to that parcel of dirt and the reality is , as everyone else is spending around your pallet of dirt and you've just got a simple house on that .

From an investor's point of view , that's a great return for you because ultimately again , you've got more of the value in the land than you have in the improvements .

So you look at a house that's close to a park or house that's in a school zone compared with one that's not in a school zone , and some component of that difference in value turns out to be it is capitalized . People actually are willing to pay for these amenities and the housing . The kind of lived experience shows that up in the data .

It's a really fascinating part of it .

But how do you see the supply challenge being solved , and probably with an eye on the recent Labor Government announcement to provide incentives to actually fast-track some of the rubbish that people have to get through to actually ? Because everyone agrees on paper at supply but it's actually how we fulfill . It is the challenge .

So can you speak to that point from the economist's point of view and with an eye on last week's announcement ?

Planning , approval is hard , it takes many years , it's expensive . Locals object overwhelmingly to new development , although there are now these Yimbi movements that are saying , yes , we do want more housing , for all the reasons that we discussed . At the moment the places that are easy to build homes are peripheral suburbs for detached housing .

So throughout the pandemic period when we had things like homebuilder , we built a huge amount of homes in Sydney , kind of the southwest of the city to Melbourne , to the kind of northwest and west of the CBD , but very , very far away from the CBD . That's easy , right , we take farmland , we package it up and we sell new detached housing on that land .

The other one is industrial infill . So where there were factories close to CBDs we can knock those down and they inevitably become high density . These are the relatively easy things and if you look at a map about where development's happening , you see that it's very peripheral .

For houses it's in very small areas , basically because state governments say , okay , we're going to do this area . Now All developers go and just densify this one suburb that used to be industrial and I think the big challenge is that puts a huge amount of burden on those parts of the cities that are receiving that development .

It would be much fairer if we had fairer and more efficient in terms of everyone wants the benefits of density and people want as few of the costs of higher density as possible , and the kind of fairest way you can think of doing that is spreading that more widely .

Now that doesn't happen because it's really hard to do , say , residential upfields , so they're taking a large family block and splitting it up into three townhouses .

But I think the National Cabinet announcement and the thing that I was most pleased by is incentivizing states and saying because previously what's happened is hey , we're going to set a target at the state level for you to build a number of homes . We don't care how you do it , go away and make it happen .

And same thing those states then go to their councils and say , okay , we've allocated you a number of houses to build , we don't care how you do it . And councils say why would we do this ? We can absolutely say yes , we're going to fulfill our requirements and at the end say , oh well , they didn't meet our very stringent requirements for density , which ?

But if we get into this position . We're saying , okay , well , there's , if you can do this , we're going to pay you money . That's how economists think about you know . All incentives should work and yes , I'm going to get it from a very economist focused thing .

But if that trickles down to saying , hey , councils , you will get more money for services and parks and the things you want to build for your residents if you just approve more homes , that seems like the way to achieve this to me .

Rather than say it seems like common sense yeah like , rather than having these arguments and and forcing it on people by saying you have to do this and it's because the government says so . If it's more like hey , the council goes to its populace and says , hey , look , if we allow some more housing in our area , we can also have all of these services .

That will be great for everyone who lives there and and more people will live in the suburb to take advantage of those services . That to me seems like a win-win .

So I've got good feedback around the cabinet decision . Then , hey , as as we head towards wrapping up our time with you , you are at the in the privileged position to see an incredible amount of insights of data there at REA .

Is there any particular data that that you look at that is unique to you , that you think gives you a you know , a bit of an edge for being able to make your forecast , given that you are at the coal face of a lot of decisions that people are actually making ? Is there any particular stat or group of data that you like to go to ?

We have the biggest amount of data on the housing market and you can do just amazing things with it we have .

I think what we're looking to tap more and more is we can see where people are searching for homes and how they're interacting with homes , so we can see , like , how many people there are that are kind of in those late stages of the buying process and tracking them over time and seeing kind of where are they looking .

These are all really interesting things that I think of . The next kind of wave of understanding the property market is is , I think , what we've .

I think that's the next kind of stages I'm really excited to understand , because I think that's if we want to understand what's going to happen in the future .

I think we need to understand those where people are looking before they're there , and I think we're in a unique position to understand that , and they're the kind of exciting things that I'm that I'm kind of starting to look into .

That analysis , paul , so I'm really keen to to see when that's going to be released . In terms of my final question for you is probably a two-part question Comes down to interest rate outlook . I think we're close to the top , but I'm keen on your thoughts on that . And the second part of that is then the APRA buffer .

Right , I mean , obviously APRA is main responsibility is around the financial stability of the system and the risk that property presents to that financial stability of the system .

We're coming to a point where , ultimately , by having that restrictive setting in place around borrowing power , that that could have a counterproductive outcome for those people who may be forced to sell or difficult to refinance and I know we've got these new sort of creative placements that are going through .

But that's probably helping about one , maybe one from our analysis early . It's probably helping one in 10 borrowers that are stuck in potentially , you know , mortgage prison . So what are your thoughts on what APRA should be doing around .

You know reducing that buffer rate if we're quite confident now that we're in significantly contractory territory in terms of what we're seeing around consumer spending with your unemployment spike last week , so give us some feedback on the sort of broader economic story there .

I kind of , a few months ago , was expecting higher interest rates , given just how strong inflation was . But I'm kind of easing those expectations now In terms of the buffer rate . I think the buffer rate is actually a really interesting policy and one that I've talked about a lot .

Actually wrote an article about like where , where do I , how do I think the buffer should be set ? And if we had a whole program I guess I could run you through that . But broadly , I think it's not really APRA's place to be forecasting where interest rates are going to be in the future .

And if you're going to say , hey , apra , we think that the only way that mortgage rates are going to go from here is down , so therefore the buffer should be reduced , that puts that actually is asking APRA to do quite a lot , because they have to then be forecasting the economy or they have to be using , say , market expectations for the cash rate , which which

jump around enormously quickly . So it's actually like it seems really logical . But you're actually asking quite a lot of additional capability for APRA to be able to set that . I kind of view that why don't we just have a simple buffer ? That's just the same all the time , it's never going to change . Apra is committed to this and it's based on research .

Right Again comes back to can we do the research on this ?

And so I wrote an article and looked at what , what , what interest rate risks have households faced in the past , going back to kind of the 60s or 70s , and it seems like a three percentage point buffer , which is what we have now , covers like 98% of all the increases in rates that that households have experienced in the past .

So that to me seems like a good setting , like I wouldn't quibble if you wanted to make it two and a half percentage points . But I think fundamentally I think it should be based on research and should just be stable and constant throughout the cycle . I think a mortgage broker or a lender should be able to go okay , I know what this setting is .

The RBA is already changing rates with the cycle . You don't want buffer rates changing with the cycle as well , I think . That's just . I don't think you actually get that much more out of this additional complexity , although it would be helpful to borrowers at the moment . I think there are general benefits for just simplicity in a lot of these regulations .

So to your point if two and a half is it and we know that it is going to be it for a while , the markets will sort themselves out in terms of what that looks like .

I think to your point around being perfect , around risk mitigation at sort of , say , 95 to 98 , my judgment call on that is I'd probably prefer to be in that sort of 85 to 90% , because at the end of the day we want mobility and economic activity and we want all of those other benefits that you get from growing the pie , because that to me it does feel

like that 3% is just a bit too high in terms of that risk profiling . But I love the article and I love the research you did on that and the story you tell in that particular article . I think that's the great .

Is that the controlling wheel of some of the very best data that's available for us as property folks , because they get to see the behaviors of what people are doing to a very intimate level , given they're the highest clicked site in their lane ?

You know some of the critical thinking and some of the more difficult topics he is looking to challenge and get some further insights around the property market in this country .

Like there is obviously an affordability crisis in some aspects of the marketplace there's rental challenges going on but it's also looking at all of that data and seeing , you know , some of those critical drivers that are that are really evidence based in that data and the behavior of of what he's seeing on those platforms .

So , yep , you know , absolute privilege to have Paul on the show . I'll you know . Hopefully we can get him back one day into the future because , yeah , he's , he's data makes a lot of sense to me .

So I think our community is the beneficiary of him taking us off on that offer . So my life hack today , ben , is going through this little YouTube phase and trying to find a few little hacks in YouTube . And I don't know if anyone knows that that we have really upped our YouTube game at the property couch here , ben .

So if you go to our channel , our incredible team of Stigs here have now we used to be 95% audio . We now it starts as a video and then we strip the audio out and put that up on the podcast platform . And so do you know at the beginning , ben , how you and I bang on about footy and blah , blah , blah . That some people might ?

You know we get 50% of our audiences . Keep it up . 50% of our audiences . You make my ears bleed , can you stop ? So if you want to get to the bit where you want to share the video . There is a little function where you push share on the YouTube video and then it gives you a point . So you want it to start at a minute 30 and all for us .

It's probably what ? Three minutes 47 or something . I was just keeping my status up there , ben , by not admitting my faults too much , but so you wanted to send it to someone and let it start at three minutes 47 , you're able to do that . There's a little box that you can tick start at three 47 .

What it'll do is it'll create the embed code that will start it . So when the person clicks on the link , it'll go straight there at that point and kick it in .

So , given that I'm on a little YouTube learning optimization strategy and I've been sharing a few videos around , I discovered that and for some of you might go , oh there , and for others you might go , oh , that's pretty cool .

Now in Victoria , we know that , obviously through the Andrews government , there's been an increased level of land tax that's going to be charged as part of the COVID recovery levy , and so there's going to be more people than ever before in Victoria around I think 600,000 extra people who are going to have land tax for the first time .

So what's on your rates notice is going to be how they charge you for land tax . Now we also know that valuations occur usually once every couple of years when it comes to your rates notice .

So if you want to object to the valuation that you see on your rates notice , which is going to impact the level of tax that you pay , you only have and this is the big point in terms of the big message you only have two months to put your objection in from the time that you've received your rate notice . So you must act quickly .

If you do not put an objection in by that time , bad luck , unfortunately , bad luck . Now there are multiple grounds of which you can object to the valuation or the information on the rates notice .

So we're going to put in the show notes a link to basically the rating valuation objection portal and that will give you some information if your property is here in Victoria .

Obviously , the main one in which people can object to is on the grounds that the valuation assigned is either too high or too low , or the interest held in the property by various persons to the land have not been correctly apportioned . So , etc . Etc , etc .

Right , so I'm not going to read through all of them , but you'll see them all there in , effectively , the valuation of land act 1960 for Victoria . So there's a link to that in the in the first link that we put in the show description .

So it's just a really important message that , with higher land taxes potentially going to be apportioned across the nation , if you're not , if you don't believe your property is worth the value that is shown on that , you got to act quickly because if you don't act within that window , unfortunately your objection is going to fall on deaf ears .

Thank you to all of our contributors at the top in the tail , and also definitely for Paul Ryan for his wisdom and his insights and it won't be the last time that we get Paul on this podcast , mate , but until next week , buddy .

If you're new to our community , I want to encourage you to listen to our very first 20 episodes , as the concepts we share in EPS , one through 20 , are foundational principles , pillars and frameworks that you need to know for you to get the best value from our content week to week on our show . My little tip is to listen to it at one and a half speed .

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