Hey there folks . Bryce here Just wanted to let you know that recently I was invited as a guest on the Real Talk podcast with Alice Piper and that's the realestatecomau podcast and we had a really interesting conversation regarding property investors and how the perception of property investors is a little misleading and how we're actually more like small business owners .
We had a really great conversation , enjoyed it immensely and we thought it would be , with their permission , to share the conversation that I had with Alice , and let's cut to it now .
Hello , welcome to Real Talk . In today's episode , we'll be focusing on property investors , or the current lack thereof . Before we dive into today's topic , please note that the information provided in this podcast is for general information purposes only , but with a professional financial advisor before making financial investments .
Property investors have been leaving the market at a record pace , with data suggesting some are even offloading their properties at a loss . But why and what does this mean for the rental market ? Let's have a listen to what some Aussies feel about the topic .
Taxes . Big part of it land tax . There needs to be a rental market . It's not a rental market where they only live .
Districtions on rented cruises , how expensive it is to run a property . The investors have to put a rent up because they can't afford to pay the costs . Not every landlord's rich . They're just trying to get ahead , trying to build a superannuation benefit or a retirement benefit so they can have something one day when they finish work .
Investors start to leave the market and there's going to be more of a shortage of houses available .
It's only going to get worse .
I believe it's never too late to invest in the market and get put in the door , because prices are always going to go up .
I've enlisted the help of prop track economist Paul Ryan , who's been studying the ups and downs of the property market for the last decade . An empower wealth founder and host of the popular property couch pod Kars Bryce Holdaway , who helps property investors find their next purchase .
I want to start by painting a picture of just how many property investors there are in Australia , because I think for a lot of us , when we imagine an investor , we imagine some greyhead landlord who sits in their mansion taking loads of pleasure from increasing their tenants' rent . Paul , what can you tell us about who the actual Aussie landlords are ?
I think the vision people have of a landlord is probably a little wrong . I think , on the starting point that we should start with is that 30% of households rent and the vast majority of those somewhere around 85% or more of those renters rent from a private landlord . Most private landlords have just one rental property .
They are the kind of prototypical mum and dad investor . Now , they aren't a strictly random subset of the population , but two thirds of landlords have a mortgage on their own current home . A common aspect of landlords in Australia is that they are people trying to build wealth .
Yeah , so I think that's really valuable . I mean , our data shows that four out of five Australian households own the own one property , so that's 20% of Australians own more than one property .
And if we look at it by age demographic those who are aged 36 to 45 , they own the most investment properties in Australia , at about almost 34% , followed by those aged 44 to 55 , who own just under 30% of Australia's investment properties . And it then skews even younger , with just over 20% of investment properties being owned by 26 to 35 year olds .
Bryce , your business is all about helping people build a property investment portfolio . Does this match up to what you're seeing day to day ?
Yeah , it does , because you've got capacity and intent . So at sort of the middle to later stages of your life you have more of a runway with your income , you have more runway with your equity , so it's easier to actually get into the property market than it is when you were younger . So we do have a demographic of clients that are younger and aspirational .
But generally speaking that demographic speaks to our client base .
Okay , and what are some of the main reasons people invest in property ?
The feedback we get is it's a controllable asset , right . So it's not a paper asset , it's tangible , people can touch and feel it and it's a very basic human need and it's kind of the only investment asset that's not dominated by investors .
I think that is something that I personally , as a property investor , find very appealing , and I think a lot of people do . There's no pen stroke changes to the asset class that can be easily made .
What do you mean by there's no pen stroke changes to the asset class ?
Well , if you think about a financial product or a financial derivative product , it's pretty easy to change the rules that affect a lot of people , whereas a tangible asset bricks and mortar , where people use it for a basic need .
Some governments are having a crack at changing it , but , generally speaking , it's that tangibility versus the intangibility is a large part of its appeal .
So if we break that down even further , investing in property is seen as safe .
Safe as bricks and mortar . Safe as ours is Safe as assets .
So , paul , I'd love you to talk to us about the investment market . So we are seeing data and we're hearing a lot in the media about the numbers dropping quite significantly . Do you think they're going to drop even further ?
So I think it's worth going back to the start of the pandemic . I think that's where we really started to see challenging conditions for investors . At the start of the pandemic , we saw borders closed . Obviously , a lot of people were forecasting a really deep recession .
People were concerned about not only rental income on their investment properties , but also their own job . We started to see since early 2020 , we've seen investors sell investment properties at higher rates .
Now , later on , throughout the pandemic , I think , as prices started to increase , partly due to lower interest rates , this became about investors unlocking equity in investment properties to facilitate , maybe , moves themselves or movements around into different asset classes , and that's continued .
We've really had this situation for three or so years now , where investors are selling properties at a higher rate and on the other side of the ledger , we had fewer investors coming into the market and we actually , on a national level , had the number of rental properties provided by private investors falling , by our estimates , throughout the pandemic .
Now that started to reverse , but it's reversed on the purchasing side , so we're starting to see more investors coming into the market now . For some investors , they still think that this is an asset class that they're looking to divest from , but on the other side we're seeing new investors coming into the market .
So , bryce , while we might be seeing a couple of investors come into the market , the data still does show that a significant portion of them are exiting the market , and at a greater pace than what we have seen in the past . What do you think is spurring this drop ?
I think it's been a run up that goes back a decade . So I don't think it's something that's happened overnight , because there's been a systematic interference with the market forces for property investors and it started back in 2014 when there was limits placed on banks on how many investor loans that they could make .
Right through to successive campaigns that Labor took changes to negative gearing which ultimately didn't get up . You had tenancy reform across the country . You've had the Queensland government decide that they want to place land tax not only on properties that you have in Queensland but on every other investment that you've got across the country .
We've got recently the Andrews Labor government saying well , in order to afford some of the costs that we've gone through in the pandemic , we're actually going to give you an extra land tax for property investors in Victoria .
So I feel like there's this big run up over a decade that have systematically taken the confidence out of the market for property investors and , in particular , there's certain states where , arguably , they have got a sign up that says it's not a great state for investing .
So I think some of the bigger picture long term thinkers are still coming into the market , because it's a wonderful opportunity in my view , because I'm a long term property investor , but I think for people who don't have that experience or get a little bit spooked by some of those interventions I'm seeing it as a long run up that people have taken to go hmm ,
I'd actually , as an investor , we love certainty and right now there's a whole bunch of uncertainty before we even start talking about the discussion around rental freezes .
So do you think for those new investors , do you think there's a bit of a sense of fright in the current market ?
Yeah , you want certainty , right ? You want to know what the rules of the game are . Let's just take the Queensland land tax example . What that said is , if you own properties and you've owned them for the last 10 years , 20 years , and your own real estate in Queensland , we're actually not only going to land tax in Queensland , but everywhere you've got .
So it's not even like you went into the investment fully knowing what was coming . It was actually not . A lot of these changes are grandfathered where they say from this point forward , eyes wide open .
You're going into the market knowing , but in that case that was a retrospective action that would have significantly impacted a lot of investors where they were levied with costs that just there was no cash flow to pay it . So I think over time , if you , if you remove certainty , investors will will vote with their feet and go elsewhere .
Okay , so I think this is a really nice lead into my next question for you , Bryce . What are some of the pitfalls of property investment Like ? What might people not realise ?
A lot of property investors know that they're buying an imperfect asset , so there's going to be maintenance and I guess you know at times , tendency challenges .
So for the flip side of what I said before about the tangibility is also a lot of hands on , a lot of months and months day to day maintenance that may be required , whereas if you bought a paper asset , like shares or whatever , it's kind of hands off . So I think that that is something that investors think about a lot .
I think , ultimately , the fact that it is more certain in terms of providing bricks and mortar and return for exchange for rent , I think that's . I think that's something that's appealing .
But I guess in this case we are seeing that investors are either moving out of the states that are potentially not suggesting you should come here , by going to maybe Perth or Adelaide , for example , or they move their money into what they consider safer assets , and the current case that might be cash , it might be bonds , it might be equities .
They'll really be thinking about that decision .
Yeah , I mean , property investment is definitely not a set and forget type of asset . A really smart way to do it is any overflow of rent that you have that goes into a maintenance account .
I mean , you never know when you're going to have to replace an oven or you never know when you're going to have to paint a fence or fix some lighting or something like that . Traditionally , investors look for two things when they invest in property they look for capital growth and they look for high rental yields .
Brass , can you explain what those two things are ?
I always say growth is what you get out of the market . Rent's what keeps you in the market right . Most property investors that we profile are chasing the increase in the value over time so that they can retire at the debt and have a passive income .
So growth is , if I buy it for let's call it $500,000 and over time I hold it and its value increases to a million , I've created half a million dollars in capital growth on paper , whereas the yield is essentially the amount of rental income that you get .
Multiply that by 52 , gives you a yearly rental and you divide that by your purchase price or the value , and that gives you a current rental yield .
Paul , from a rental yield perspective , is the market right now not as strong as what it was previously . Do you think that's what the issue is ?
So we have seen rental yields fall and that's been because we've seen the prices of homes increase faster than rents have increased . So we've seen the strict yield that you get on a rental property decrease . If we look at the moment , what we're seeing is really really strong rent increases for advertised rents .
So I think part of what Brass is seeing in terms of new investors coming to the market is that investors or potential investors can see that rental markets are very tight , they're going to stay very tight for some period of time , prices are going to increase and that , over the longer term , is going to make property investment more viable .
Here's more about . What does he have to say about property investing ?
I think , a number of the tax implications now that are being passed on to investors .
So , firstly , obviously , the increases in land tax , particularly in Melbourne , would definitely be a thing and I think with the rise in interest rates and then investors also hearing that there's potentially going to be these rent reforms when we can't capture it back in in rent would definitely be also another element .
Paul , the Australian rental market is quite dependent on landlords , you know , more so than a lot of other developed countries . How does the government entice landlords to help out with that rental supply ?
So Australian rent market is unusual internationally because almost all the rental stock is provided by households . There's very little corporate activity in the market , as you see in a lot of other countries . So what this means is that the government provides incentives to invest in property .
Well , really , it provides incentives to invest in any asset , but these typically can benefit property more than others . So there are two things in particular that people talk about . One is negative gearing , which means that a loss on your current income on a property .
So if you pay more mortgage interest payments than you receive in rent , you can claim that difference off your personal income tax . And the other one is a discount on the capital gains that are eventually hopefully made on the property .
So if you hold a property or any asset for a year as an investor and then sell it , you only pay capital gains on half of the profits made .
So those two combined have , over the past 30 years , made property investing in Australia very , very profitable , particularly because capital gains have been very , very high and that , combined with the discount , means that a lot of investors have made a lot of money .
So , bryce , why do you think negative gearing is such a touchy subject ?
Rather than seeing this people just taking from some people and at the expense of others and I guess the narrative around it's contributing to housing affordability issues .
I push back on as well , because I think it's largely around supply and if you take negative gearing and investors out of the property market , that becomes a world of pain for everyone , including the poor renter .
I'm really glad you touched on those stats because I think it's also important to note it's not just people who are cashing in on 10 investment properties . They are the average people on the average incomes , taking a risk and taking a punt on investing in a property that they hope will .
As you said , it's that long-term goal of this is a retirement plan 100% .
If you ever look at the list of all the property investors in this country , in the top 10 , there's a lot of them represented by medical professionals . So you think of high paying medical professionals , you go . Ha , there you go .
But then if you actually just keep going down the list and keep going down the list , you'll see teachers and nurses and just everyday people .
That's the bit that I find frustrating when the poor old property investor because if you think about all of the expenses that have just been imposed on , to all the costs , all the tenancy reforms , everything that the property investors got , they are passing on a very small percentage to the tenant , so a disproportionate percentage to the tenant .
That doesn't make the narrative so sure . Yes , as a small business owner , you pass on your costs . I understand that there's people that are in the community that are marginalised . We shouldn't take advantage of that . I don't condone slumlords . I don't think we need to encourage people to have four , five , ten properties .
I think if you can combine super with two or three investment properties , if you're that way inclined because you are taking on risk , you should have the opportunity to have a swing at that self-funded retirement , provided that we make sure that the marginalised people in the community are not being taken advantage of .
Paul , what's your take on negative gearing ?
Negative gearing is like a loss is still a loss and negative gearing allows that loss to be buffered . So basically the idea is that investors go through good years and bad years and the tax system kind of recognizes that by giving you some kind of credit on one asset class against other income . I don't think this is big beer in the housing affordability debate .
I mean when this was a political issue in the 2019 election and it was proposed to eliminate negative gearing on existing properties estimates at the time , where that this would lower home prices by something in the order of like 4% . I don't think this is the silver bullet to reducing housing or increasing housing affordability .
Okay . So if we just bring it back to investors who are leaving the market , as we've discussed , landlords generally have one or two investment properties , but they can also be servicing their own mortgage as well . That makes them very sensitive to rate rises , not just on their own mortgage that they're servicing , but on their one or two investment properties .
If there are interest rate rises all of a sudden , the rent is not covering what the mortgage repayment is . Let's just say , potentially three mortgages that they're now having to fork out extra for . Paul , do you think this is why we're seeing investors sell their properties ?
I think there'd certainly be some investors out there that are filling the pinch from higher interest rates . Without a doubt , we have seen over the past couple of months starting to see more investment properties be listed for sale . Interest rates undoubtedly for some of those investors will be part of the reason for that .
It's easier for an investor to sell an investor property than the home they currently live in . It's maybe not surprising that that might be the canary in the coal mine for financial pressures across the country . I think it's probably too early to say , but yeah , we're starting to see some indication that financial pressures are biting .
And Bryce , what are you seeing on the ground in relation to this ?
Yeah , we're seeing listings from investors starting to increase . I think I'm a bit concerned about that for a couple of reasons . Sometimes it's just the discomfort of having extra expenses . Right , I get it .
There's household pressures , but in this country , one of the superpowers that I think that we have as a nation is the fact that we're so appealing for people to want to come here , the fact that we can just open the borders and lots of people want to come . We're politically stable , we've got the amazing climate , we've got incredible food here .
We're sovereign . If you can actually hold the properties through this cycle , I think that you're going to be rewarded quite handsomely for the risk that you take . There's about 100,000 under supplied of housing in this country , so supply is the enemy of capital growth .
So if you're in the reverse situation where you're under supplied , that would suggest that the outlook's pretty good . If people are not able to see play the decades game , they're not able to lift their eyes for obvious pressures that are happening in their household , it kind of makes sense that they're going to go well .
We held on as long as we can , but now's the breaking point that we need to sell . The challenge for that is this too , shall pass . If you go and look through the last 30 years , there's been a whole range of , I guess , similar events along the journey where people could easily have used it as an excuse to get out .
But for those that held , the general trend is up not linear by any stretch of the imagination , but the general trend is up .
So if you are in a position where you're selling because it just feels uncomfortable , I would encourage the investor just to lean in and try and move through that , versus someone who is just under enormous mortgage stress and it just makes sense for them to move because the recycle costs that come .
When you later on realize that this has passed , next year we get some interest rate relief and all of a sudden you go , gee whiz , I should have probably should have kept that property . Well then you're back in the game . You're paying stamp duty to get back in and it would have cost you a hell of a lot more to go through that exercise .
So I'd encourage investors to lean in and make sure that if they are considering selling , it is an absolute , essential criteria that they do not just a slight level of discomfort , that they just want to go away .
Yeah , and if we just touch on what you said about the shortfall of housing that we're currently experiencing , when an investor sells and if they're selling at a loss it can go to an owner occupier and what that does is then it takes the property off the rental market and that adds even more pressures to our rental crisis that we're currently experiencing .
If we're seeing investors leaving the market , where are they going ? What are they investing their money into ?
To your earlier point , I think that there should be an enormous amount of incentives to get property investors to be buying right now . That's my view and right now , across the board , it feels like there's a lot of disincentives to get investors .
Because we are part of and I say we representing the property investors , we're part of the solution for the rental crisis , because if there's more property investors and there's more properties available for rent , the natural forces of supply and demand will actually work in the favour of the tenant . I'd be careful to pay too much attention to the rhetoric around .
If investors leave , it makes it going to be easier for renters . To your earlier question about where are they going , I think within property , anecdotally for us , they're going to the borderless investors . They're going right . It looks like there's a few signs up in Victoria that maybe you shouldn't be investing here .
There's been a sign up in Queensland that's scaring a few people off . I think they're going west and they're buying in states like South Australia and Western Australia and we're seeing that Affordability is wonderful .
The regime is nowhere near as onerous as we've been experiencing on the East Coast and then outside of property , I think people are just going wherever they're certain to . We touched on it before . They're going to cash or they're going to bonds or they're going to other investments where they can just go all right . There's enough volatility in the market .
I don't need any volatility in the regulatory regime . Wherever it's stable , I'll put my money there .
Paul , do we have any data about where people are going ?
It's really hard to get data on where people are shifting around their personal finances . So no , you kind of have to wait till the dust all settles and see where households are parking their money . And I think it is worth having the perspective here that we are seeing more investors .
I mean , we were seeing , I think , around 10,000 new investor loans a month before the pandemic . We saw an increase in kind of all property lending throughout the pandemic and over the past few months or so we've seen property investors actually come back at higher rates new property investor loans at higher rates than we saw before the pandemic .
So that's , I think , good perspective here that it isn't doom and gloom for the property investment industry . I mean , there's always been kind of bumps along the way and I think it's worth if we take a step back and think about what does happen to market balance if an investor sells their property .
They either sell to another investor and then that's a property that's still in the rental market , or they sell to a first-home buyer and then there's someone who's come out of the rental market . They've moved into home ownership , and we saw that hugely throughout the pandemic .
A big beneficiary of investors selling property throughout the pandemic was we had the biggest boom in first-home buyer activity since 2009 . So , on net , and we kind of know that first-home buyers and renters are similar household sizes . So really , as far as we can tell , household demand really isn't that changed by investor selling property .
Where it does matter is for future supply . Investors are a key pathway to getting more homes built . If you think about who can put down a deposit on an apartment that is not going to be built and delivered for two or three years , by and large that is an investor .
So we absolutely need a healthy investment market for this pathway of getting homes built , as Bryce said , in good locations close to infrastructure . So that's important , and so that's why I see this .
If we are having challenged conditions for investors , as we are at the moment , that is likely to affect the housing market in kind of five , 10 years in the future , more so than we are likely to see those effects in the next year . That's what I'm worried about .
Bryce , what would be your advice to somebody looking at property investment in the current market ?
My advice would be , to the best extent that you can , lift your eyes and play the decades game . So to give you an idea of what that means is , I recently spoke to someone . He told us a story where he bought a property in Ride in New South Wales for about $212,000 and sold it later for $550,000 , which is pretty good right .
Do you know how much later .
It was about four or five years later we're talking the 90s , right but then what he did is he recently had a look back at the data and it recently sold for 1.7 . His response was oh geez , that $212 to $550 felt pretty good , whereas now , if you still had the name on the title , it would be amazing .
So if you think of property investment , I think of it as a three decades game and if you think about the total dollar value that you get from an investment over those three decades , it's roughly about 14% in the first decade that you get of the dollar value , it's about 29% in the second decade and then 54 , 55% in the third decade .
If you can hold on for as long as you possibly can , the rewards are incredible in terms of the impact on your net wealth . So what I'd say to people right now is this two-shall pass . We have been here before . If you even go and look at recently at the interest rates , it's not that long ago that you actually see a cash rate of 4.1 .
What's been a challenge is the rate at which it's climbed . So it's still by the right property , correctly finance it and hold it for the long term . The challenge with money is that most people see money the way you see maths 2 plus 2 equals 4 , no matter where I grew up , what my demographic , what my income incentives are , 2 plus 2 equals 4 .
But money is not like that . Money is different , alice . What you want to do with your life is probably a lot different to what I want to do with my life , and the amount of risk that you're prepared to take is probably different to the amount of risk that I'm prepared to take .
So if we actually just go , you're training to be a marathon runner and I'm training to be a powerlifter , or vice versa . So for me , criticising your plan is just stupid , because we're playing different games and as long as we keep that in mind and we play the decades game , not the years game , I think a lot of people have a better experience .
And if we can hopefully convince a few politicians along the way to stop seeing us as big , rich , fat cats and we're just small business owners , I think that would help the narrative a lot . Whilst we've talked generally today about what I would consider my own view , which is play the long game , for some people that might not be possible .
For some people that might not be appropriate . So I guess in all ways people should always be taking advice around , having some form of plan that means that it's tailored to them , rather than getting some , which is my pet hate . The generic vanilla back of napkin advice that applies to everyone .
So , paul , is there a silver lining for investors at the moment ? Is there opportunity for people to invest in some high performing current markets ?
I think looking beyond the short term , as Bryce said , is really important for investors , particularly at the moment . With interest rates increasing quite quickly , it's hard to find a positively geared property on day one , so it's about weathering that short term and thinking about longer term returns in property investing Now .
Where we're seeing investors come into the market quite strongly at the moment is places in regional Victoria , places like Geelong , ballarat and West Melbourne . The other places we're seeing is Western Australia , so some outer parts of Perth and Outback Western Australia actually in the data .
Okay . So from today's chat I feel like it's not or it doesn't necessarily have to be doom and gloom in the investment market . It's about looking at it from a long term point of view , in terms of long term wealth and not necessarily immediate gains . Thank you , guys for chatting with me .
It's been pretty informative and eye opening and I hope it has been for our listeners too .
Yeah well , thanks for having me on . It's been fun . Thanks very much . Hey folks , bryce , here again . I just wanted to catch you real quick before you go .
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