3 is the magic number

This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Hello, hello.

This is Arjun here, and I'm here with my good wife. I'm going to say my good friend, but I just like, it's my wife. So, you know what? Let's keep that in there. Let's keep that in there.

Let's keep going. So, yeah, my good wife, Leigh Paliwal, and we've got a pretty cool episode here today because there's a number three. I just noticed the number three, right? I always use the number three, like in everything I do. Have you noticed that?

And me too. I feel like it's our lucky number. Yeah, I've claimed it as my lucky number as well. That's right. So, we're talking threes today because we've got three sets of insights beyond our typical finance updates and other data point updates that we've got for all our listeners today.

And I'm pretty pumped to go through that together with Lee. A lot of insights being produced by the InvestorKit Buyers Agency Research Team that we'll run through today. And also, a special shout out is that if you do hang around to the end of the episode, the team and I have been working together on a very, very unique resource. And it's actually all about how we categorize markets. Now, this is going to be the most important thing coming off the back of a huge boom where everything everywhere grew along really well.

So, what do I mean by categorize markets? It's like, how does the InvestorKit Research Team put cities in different buckets? Things that are earlier in their cycle, hot spotting in their cycle, maybe things that have grown, cooled down, and we think will grow again, what we refer to as second wind markets. So, we call them early adopters, hot spots, and second winds. And so, after years of trying to develop this resource in terms of how we can actually simply explain it to people, we finally come up with a one-pager that can actually simply explain this.

So, I'm keen as a first. It's nowhere on the internet, no website, nothing. I'm keen to give it away totally free so people can understand how we do this. All you have to do is drop Nikita, N-I-K-I-T-A. So, that's our office manager here at InvestorKit.

It's Nikita at investikit. com. au. Just drop her an email. And at the subject line, say market category or market categorization, anything, and she'll send that through.

Now, I just realized I said stay to the end to know what we're going to give away, and I was going to explain how to give away. And I just gave it all away. So, yeah, stop that. You don't need to stay to the end. I'm totally bad at this stuff.

So, stay to the end, and I was hopefully going to make it all secretive so I could tell you how to do it, and then you tune in to the end, and then maybe I send it out now, and this shows me who really listens. But that experiment is no longer legit. It's no longer on. I would just give it away. Just please do ask, and we will send this to you.

So, that's a market categorization report, one-pager. Yeah, correct. It's essentially how we strip markets into different buckets and decide on which cycle positioning they're in. We go through the indicators, the pros and cons, and things to look at, and it's a pretty cool document. It's also got some interactive charts there, so it helps.

So, yeah, anyone after that, thank you for firstly being our audience here, tuning in. And speaking of the audience, we actually are trending very close to 200,000 total downloads. Yeah, how exciting. It hasn't even been two years. It's pretty cool, hasn't it?

That's fantastic. It is amazing. So, I'm very grateful. So, it's good to know that there's valuable information that people are wanting to come back and listen to, which is exciting. I reckon it's all you, Lee.

No, no, no, not at all. I'm just the finance person. Don't justify this, but hey, so yeah, the threes. We talked about the threes. We've got three cool topics to jump into today.

But before we do, there's obviously lots going on in the finance world. And Lee, I'm keen to hear your thoughts on kind of how the world of finance is tracking, lending's tracking, and just run through some data that you're seeing. Yeah, so we're here in October, and last week there was the sixth cash rate increase that was announced. So, essentially over the past six months, RBA has increased the cash rate, and now it sits at 2. 61%, which has come all the way from 0.

1% six months ago. So, the first was a 0. 25% increase. The next four were 0. 5% increases.

So, we saw quite a rapid 2% increases in total in four months. And we've seen a little bit of a dial back, which is interesting, of a 0. 25% increase for October cash rate. And so, I guess that is interesting because does that possibly mean that the RBA believes we're near the end of the cash rate increase cycle? Obviously, more cash rate increase hikes could be certain.

With RBA revealing it expects an increase to continue for its interest rates for the further period ahead, but this could be an indicator that it's starting to slow down. Well, it makes sense to an extent, right? Because I guess there's two things that we think of. Number one is when we think of lending, assessment rates are naturally moving with the interest rate. That's right.

Every increase. Yeah, and that's why you're seeing on your world, Lee, a 25%, 20% borrowing capacity reduction. So, funnily enough, I actually saw a post of Tom Panos. Tom Panos did this, and he was talking about how people are losing borrowing capacity, which I know you've got some examples to run through. But on that note, with interest rates rising, it makes sense from the assessment rates.

They're now reaching those 7%, 7. 5%, 8% assessment rates. And we're sitting at 5% or 4. 5% to sort of 6. 5% consumer rates, which are at those peak of assessment rates of before.

So, any sort of increases beyond here is kind of saying, hey, two years ago or the last two to three years of mortgages weren't stress tested under these environments, which should be a sign for the RBA to consider that. We need to taper back a little bit. We need to taper back. And we've actually talked about that in a white paper, that this rate cycle would start to fade away. That was our Australian housing fundamentals.

And earlier this year, actually, at the start of this year, jumped onto the Weekend Today show, and we talked about the interest rate cycle possibly moving into a neutral and or contraction again in 2023. So, keep an eye out. That's sort of our thoughts here. We've still got three months to go for the year, but it'll be, I guess my opinion is that we'll be seeing it will taper back, like you said, for the beginning of next year. So, yeah, so that's where we're at.

Now, I like to, as you know, cover off the ABS lending indicators for housing finance. And so, the August 2022 numbers have come through. So, for total housing, this fell by 3. 4% to $27. 4 billion after a fall of 8.

5% in July. So, that's total housing finance, slight fall. And for owner-occupier housing, this fell by 2. 7% to $18. 5 billion in total.

This has remained, though, at 35. 8% higher than the pre-pandemic level seen in February 2020. So, I guess that's clearly showing that lending is toning down pretty quickly, which makes sense, right? You've got borrowing capacity changes, you've got interest rate changes. It's been rapid.

And sentiment changes. So, sentiment, interest rates, borrowing capacity should all make lending change. So, naturally, that should be occurring. But what was interesting is that it's still 35. 8% higher than pre-pandemic levels in 2020.

Clearly shows that 35%, 36% higher for owner-occupiers and 69% higher for investors than pre-pandemic levels. It's clear that it's still operating at high levels, but just not the same as, obviously, the peak growth rates, which is understandable considering monetary and sentiment changes. Exactly. Yeah. So, massive call out for the investor lending, like you said, nearly 70% higher.

What's happening on the refinance front? Because obviously, Lee, I know your team is super busy with refinances these days. And shout out to your team at Hills Finance. They've also been helping many clients of ours at InvestorKit with regards to refinancing and getting better interest rates. So, reach out to Lee at, not at InvestorKit, lee.

paliwal at hillsfinance. com. au. But Lee, what's happening on the external refinancing? Because interestingly, people are now more conscious of their budgets, right, with rate changes?

Definitely. And you mentioned about a 20% to 25% decrease, which I'll cover an example of, of how that actually looks like. In terms of ABS data information, total housing rose by, and this is for external refinance lending, total refinances, that increased by 5. 3%. And this is 9.

8% higher compared to a year ago. So, it's still on an upwards trend for external refinancing Just turn that into a percentage, so it's 0. 25. It's 2. 5% essentially decrease on your borrowing capacity.

Makes sense. Thank you so much. And so we talk about the number three at the start of the session, and I've actually remembered about where I came up with the whole idea of the three thing. So I remember either reading up somewhere or getting some public speaking support. And for anyone who's tuned into previous podcasts or heard about me saying things in threes, what happens is that- It happens for everything, by the way, even- Everything.

Everything. I mean, everything. What you're going to eat. Yeah. Big time.

So the whole three thing comes from, say someone asked me a question and they go, so Arjun, what are your thoughts on, or what do you think that, or how do you feel about? I kind of, if I haven't thought about it or studied the answer in detail, but I have some thoughts, but I need to recollect thoughts. Instead of all the ums and ahs and thinking, I say, well, I've got three ideas or three thoughts here. And then I put myself under mental pressure to come up with three things. And so as I'm going and saying it and recollecting thoughts, I'm also thinking about the next one.

And I also call you out when you get stumbled on number two, and I'm like, where's the third one? Yeah. Now you know so much about it, right? But I mean, this is a super helpful tip. So anyone out there who's thinking of any communication or public speaking or just improving that in terms of that, it's helped me a lot by coming up with the number three and just challenging yourself, throw it out there.

Someone goes, oh, what are your thoughts on this? Oh, well, my favorite thoughts, I've got three thoughts on this. And it just challenges you mentally to come up with an actual paragraph on talking points. And also, what is your best middle and worst case? That is something you regularly bring up.

This is very relatable to what you guys do in InvestorKit. What is the best middle and worst case scenarios, understanding what those three look like. So it's very transferable to many things. So you guys do blog posts quite regularly on the InvestorKit website, right? How often do these come through?

So these are very, very deep pieces of research that we release each week. And our data team and research team, so myself as the head of research, we've got Anas, our data scientist, Junge, our research analyst, and Larissa, our research associate. We all come together to create content like these research posts that I'm going to share. Obviously, the first document I talked about, which was our market categorization. Again, if you're after that, just remember to email Nikita at investikit.

com. au and pop the market categorization in the subject and she'll send you a copy. Just give us some patience of a day or two, because last time we had to give out, we had thousands and a lot of people actually reach out and ask for documents. So we'll happily- Well, there's 200 subscribers nearly, so we might be- No, 200,000 downloads. So almost 200,000 downloads.

Oh, wow. Not 200 subscribers. 200,000, I meant to say. Yeah. We'd be using a lot of hours.

I know we all have to start somewhere, but if we had 200 subscribers, we'd be using a lot of time to do all that. So from that perspective, yeah, we put out these weekly blogs and we have a keen community of over 10,000 just who follow us on emails. And we send out these blogs each week and I've got three in particular that I wanted to share some detailed data on today. Well, there's one that I'm firstly most excited about, and it's something that you've kind of come in, when you started off InvestorKit, you were really, really focusing on in terms of locations to buy in. And it's actually really, really interesting.

So over 85% of Australian population live within 50 kilometers of the coastline. And so obviously there's a very limited number of seaside cities because of that, right? And so Arjun, you and your team at InvestorKit, you dived into some data that actually shows that many Australian inland cities are actually the outperformers and still the outperformers in the property market. I think what year was it when you started buying in, for example, Ballarat? Yeah, so that was a- I guess- Well before COVID, right?

Ballarat, Bendigo, regional Tasmania, regional New South Wales parts. We didn't come into these cities for our clients at COVID because regional was cool. We saw these local economies and the data standing out well before COVID, 18, 17, 19. So definitely have some science around the whole inland, water view, sea scarcity, thinking that people have and can bust a few myths on this session. That's right.

And so that most recent blog post from you guys is the three outperforming inland cities, which have no water view or sea scarcity. That is, you've actually named the top three locations in there. So let's go through that. Yeah, so I guess this research firstly isn't to kind of rule out that you don't go to, don't buy in seaside cities or anything. That's a silly thought if anyone's reading this and thinking that.

The idea of this research is to respectfully challenge the thinking of, oh, by the beach, near the water, by the ocean, has it got views as these must have lists for buying to achieve capital growth. It's not the case at all. And so the highlight here is to basically say, hey, look, there are some inland cities that have really done well. And it's about dissecting the fact that they didn't have water views, seaside scarcity by the ocean or beaches. And yet they performed really well.

And this is something that we've time and time again found locations that do that. And they offer affordable options to buy property in. And so these three cities that stood out were Toowoomba, Ballarat and Orange. Now, these are talking about their recent performances. So it doesn't mean by any chance that, okay, by any means that we're saying that these are the must buy locations.

But this is proof and truly proving out to anyone out there that you don't need to be by the ocean to see capital growth. So that was kind of the first core concepts. Now, firstly, let's see where they are, right? Well, they're over 200 kilometers away from the New South Wales or Sydney coastline when you think of Orange as an example. But with Orange, just over the last two years, 60% house price growth has occurred.

Now, this is important because, yes, we can talk about a property boom occurring, but Orange has seen higher performance in many, many major cities over those two years. It's outperformed the likes of Sydney and Melbourne just in those two years by 60%. And even just over the recent five years, to be honest, they've outperformed many cities or most cities across the country. Now, with regards to Ballarat, Ballarat's also done phenomenally. It's the third largest city in Victoria and house prices have risen 45% over the last two years.

And even more than when you add the three, four, five years since when we first started purchasing in Ballarat. Some of greater Melbourne's seaside regions have moved around that sort of 30% over the two-year average. And some of the regional Vic seaside areas have moved on average of around 48% over the same two-year period. So Ballarat, as an example, inland has still done really, really well, even though it's nowhere near the beach or the ocean or anything like that. And it's things like this just to consider that you don't have to have all that to see capital growth.

Lastly, we had Toowoomba. So Toowoomba is also another, what, 150 plus kilometers away from the coastline. It's Australia's second largest inland city. I actually tried to purchase there many times personally for our portfolio this year, and we just kept missing out. So unfortunately, that was a miss there, but definitely- We ended up in Townsville.

Townsville and Bundaberg were the ones we ended up getting some properties in. But Toowoomba has been a great market. We obviously purchased there for many clients over the last couple of years, and they've performed extremely well. And even over the last six months, whilst we've been talking about price declines, borrowing capacity declines, and even declines in terms of house prices in some of our major areas, and interest rate rises, sorry, Toowoomba still averaged most suburbs 1% or more per month capital growth over the last six. That is genuinely a huge property boom still continuing.

So it just shows that people over the last six months who had been maybe confused or clouded with some of the thinking on interest rates, borrowing capacity changes, you're still seeing some great capital growth in Toowoomba. But it's not about the last six months. It's about showing that in history, we've seen many cases like these three cities of inland cities still outperforming. So yeah, that's kind of been a big key part. Yeah, and I guess the main question then is what is making these areas perform so well?

What are the key indicators? Yeah, it's a great question, Lee. So firstly, the local economy, and this is funny, when people think of local economies, they think of skyscrapers, they think of everyone in suit and ties and dresses and everything running around. Everything like that does not mean a local economy is strong. That is just a representation and a visual sense of what we think when we're having economy.

Just take a look at these three cities. We're going to talk about some of the projects, right Minimum yield levels, you know, things that you'd like to see from a rental growth that you're trying to target. Is the rent covering the repayments, that kind of stuff? Yeah, whether it is or isn't doesn't mean it has to, but it's more like you're planning and thinking around how this all happens and the potential of changing monetary environments like interest rates. So really the due diligence starts with your household finances, then goes towards banks and unforeseen circumstances.

Moving to the second, it's actually market due diligence. And this is where people forget, they think it's just about buying a house with certain things that it has versus it doesn't have. And that's due diligence. Market due diligence is around, is the local economy doing well? Does the property market have great growth potential based on certain indicators?

Is the rental demand high? It's unreal how many people don't think of that. The rental demand being high is one of the most important things because it shows you real demand. And then lastly, market due diligence is all about adding more certainty to the likeliness of property having capital growth in your portfolio. Which we all want.

That's what we're all after. So conduct that due diligence. A bit of cash flow or a bit of the rent to cover the loan repayments and costs, but definitely the capital growth at the end of the day. Exactly. Now, those are the two core parts of property market selection and finance.

But when we come to property purchasing, there's a whole range of due diligence here. And we actually finished one of our biggest due diligence projects recently. Now, that was very, very, very deep and intense. And it was done by our property acquisitions team. So AJ, who's been with me since InvestorKit first started, he's our head of acquisitions, has his Bachelor of Development, Valuation and Investment, being part of our acquisitions team, facilitating, reviewing, conducting due diligence on many purchases.

Imagine just all the different checks that you have to have that a typical buyer doesn't think of. These checks did not come out of thin air, right? They came out of a science, just like we do for growth analysis. We have a science applied to due diligence. Now, to simplify the science as much as possible.

There's more than three. Yeah, there's definitely more than three in this part. But to simplify the science as much as possible, Lee, it's all about what are the core things in property that will make a property take longer to sell or discount more? And they're usually quite connected. Because just imagine for a moment, you're out there looking to sell your home, and it takes far longer to sell than normal.

You usually respond in one of two ways. Either you're super stubborn, you reckon you can still get that money and you need a better agent to do it, and you just want to get on with life but not discount money. Or you do what most do, which is discount property. And this is why days on market is such a core analysis piece of our due diligence, and so is vendor discounting. So we start to look at those two trends if they show peak and volatility when these due diligence points are applied versus when they're not.

So let me just throw out a few. Floods, bushfire. No one wants to be in a flood zone or bush area. Flood impact is much more important. So large-scale new developments, distance to busy roads or on busy roads, train tracks nearby, major power lines and power stations.

Cemeteries, obviously. Cemeteries and industrial sites, land sizes, minimum versus larger blocks, structural issues, obviously, from post-piston building. These sorts of things all come together. Being on a road with a roundabout directly near your property, having a bus stop right in front of your house versus away from it. All these things are key things in review, and we were able to make a science out of this.

And by science, I mean... Literally. It's like ingredients to a cake, right? You can't bake a cake properly without the right ingredients. Definitely.

And the key thing is we just want to avoid resale scenarios where possible that have longer days on market and, in turn, higher chances of vendor discounting. The areas can still grow. Great. You've got your area selection right, but these little checks can be helpful. And so these areas, these things that I mentioned are proven things that can create heightened days on market.

And that was done through the science component, which I mentioned, which is hundreds and hundreds of properties on each due diligence item, creating control groups, creating group A of impact, group B having multiple impacts, group A having only that particular due diligence impact, hot periods of markets, cold periods of markets. So we're able to review this in multiple ways, and some of those things I mentioned will increase days on market and will increase chances of discounting. And so when you think you've got an awesome yield, whether it's you're purchasing with a buyer's agent or whether you're purchasing on your own, not all buyer's agents even apply this due diligence. So when you apply this due diligence to your journey, yes, it will take longer to find something. Yes, you'll see properties be purchased by others or miss out on some, and that's okay.

When it comes to your time to get something, you know that you've isolated anything that's going to increase your days on market, your chance of vendor discounting in the times where the market's good or bad in comparison to other properties in the same suburb. So that was the second component, which was due diligence, why it's important and what to cover. From a, I guess, from a finance point of view, clients coming in, they might be new investors or, you know, second-time investors, but they've never used the service of a buyer's agency like InvestorKit, for example. And a lot of people are drawn to the shiny new, you know, brand new build. And so we do come across a few clients who have, you know, gone down that route themselves and gone in for a new build, land and construction.

I'm interested to get your take on, because you mentioned one of the points from a due diligence point of view is large-scale new developments in surrounding areas. How does that actually impact the investor? Can you explain that point? Yeah, so we did lots of charting on buyers and if they did go and do purchases where areas had a large building approval percentage in pipeline, how would that correlate with changing prices across hot and cold markets at different thresholds of building approval percentage rates and days on market and vendor discounting? And what we found were that when we start to see higher and higher building approvals as a proportion of incoming stock, so I'll just simplify it even more.

If you have, you know, 100 homes and you have three properties being built or in approval stage, that's 3% of new pipeline over the next year or two because that 100 homes in the area are now having three new ones being built, which will take it to 103, right? And so we're looking at these percentages of incoming supply as well as, you know, the rate of completion from approval to completions or starts that we're looking at as well in the areas. And all of this stuff coming together, when we see large amounts of new supply kick in, it does start to change those other data points of days on market, vendor discounting, listing inventory, and then, of course, prices. So, yeah, it's just something to think of that a high-growth area with lots of building does not necessarily mean a high-price growth area. So it's a high-growth region but may not be high-price growth.

It has just too many unknown factors of which some areas you see pop off and they sell more and more and more at higher prices each stage that comes out. Then you see other areas that don't. And so that's just the unknown. There's too much risk in it as your supply percentages increase. And then the risk of, you know, vacancy rates as well, right, when it comes to from an investor standpoint.

Definitely, definitely a core thing. And so the last one is the third and final, number three, is all about regional cities. And this is quite important to bring up in today's deep dive of data because regional cities, why this is important is we are starting to see your sense of, you know, that feeling of normal that many people talk about. And with regional cities, many who were against all this or did not want to be believers of all this migration happening are starting to think, oh, well, are they out of trend? You know, are we seeing people come back?

Missed the shot kind of thing. Missed the shot. Regional cities, no, COVID's done now in some people's minds. And, you know, regional cities are coming out of trend for property purchase, right? They're not the hot shot that they were in during COVID.

Well, yes, obviously there's peak at times of movement, but that does not mean by any means that we're seeing change or losing the steam in regional Australia. Long story short, the core thing here is that JLL, this is a very good survey, by the way, JLL's Future of Work Survey 2022 shows that 45% of employers were not offering any form of hybrid working before COVID, whilst now that number has dropped to only 9%. So it starts at the top level employment. It's very clear that people are still offering this far more as an option. And the adoption rates, whilst maybe not at peak adoption rate in terms of COVID and when it first hit, the adoption rate can still grow over time and still play a core part, especially as more and more options are given.

The second thing is regional cities are more affordable to locals than capital cities. Now, very important to frame that correctly. Affordable does not just mean cheaper. We have always known regional cities to be cheaper. That's not the thing.