Busting the biggest property and finance myths

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 and welcome to the Property Nerds podcast.

This is Arjun, your co-host, and I'm joined by Lee, my fellow host of the Property Nerds podcast. How are you, Lee? Hello, how are we? I'm good. Yeah, that's awesome.

Yeah, I'm good. All good this way. We've got episode two of the new season here today, and we're doing a lot of myth-busting, aren't we? We've got a few, I think, a few big myths to crack today from both property and finance point of view. Yeah, so we've got finance myths to bust, property myths to bust, and these are the ones that get pretty controversial.

So when we start going through them, look, if you want to fire back at us, you can drop us some emails at info at thepropertynerds. com. au. Be more than happy to take questions and perhaps even line up a second Q&A episode. We had some great feedback on our last Q&A that we did, so more than happy to keep the questions coming in, and we'll have another quick Q&A section.

But we've got property myths and finance myths. So how about we start with the property world? So I have got myth number one in front of me, look for population growth to find growth zones. It sounds pretty easy, doesn't it, Lee? Like, hey, great population growth must be growing, but it's not always the case, is it?

Well, yeah, it's an easy assumption. If there's more people adding each year on into the area and things like that, you think, oh, well, everything else is growing with that. Yeah, good point. And it's an easy assumption many make, but I want to go through what's been happening. So I've been rolling back the data, and if we should firstly just deep dive into population growth, we've got natural growth, more births than deaths, then migration, more people moving in and out.

Now, with migration, we've got two splits of that. One is overseas migration, which is fairly subdued at the moment. And then the second is our migration internally between different cities and so forth. So what we first wanted to point out was if we look at our capital markets, for an example, and we've got some data here from ABS, and what we're looking at is our greater capital city statistical areas. So the leading the pack in terms of population growth from, say, 2012 to 2020 was definitely Melbourne.

The greater Melbourne area achieved 20. 9% population growth during that time as per ABS. Now, interestingly enough, it did not finish first when it comes to capital growth from 2012 to 2020. During that same time period, it actually came in second. Looking at who came in second for population growth was 16.

6% in the greater Brisbane statistical area, and they did not come second on their growth charts either. Who came in second was Melbourne, but who came in first for growth was actually Sydney at 66. 1%. What's also interesting is we had some very, very low population growth areas, greater Hobart at 9. 7% during that time between 2012 to 2020.

And this is using the high to low metrics. And during that time period, capital growth was a whopping 50%. Now, that puts it in at third place for capital growth during the same eight-year measuring period, but actually puts it in second to last place with regards to population growth. So the correlation is definitely not clear when it comes to our greater capital statistical areas for population growth, because if it was, we'd see a perfect ranking of our first to eighth, and that's just not the case. Another example I can share is greater Darwin achieved 10.

6% population growth during that time period, outperformed Adelaide and Hobart for population growth, yet it moved backwards in its price growth during that time period, whereas Adelaide and Hobart outperformed. So it's a bit of a messy picture. So this is where it tells us that if population growth isn't really in isolation demonstrating the demand signals that we want to look at, what is it demonstrating? Is it demand or perhaps it's really supply? And it seems to me that population growth is actually more an indicator of existing higher supply rather than incoming higher demand.

And Junge, who's our research analyst here at InvestorKit, she produced some fantastic content regarding this. So if you'd like to check it out, you can jump on investikit. com. au. And her topic here is, is population growth as important as many think it is?

So hopefully you get a chance to check it out and you'll be able to see the data points and the images in practice of what I'm going through here today. Hope Island was the suburb that we decided to look into because it had some interesting change. It was a Gold Coast suburb where lots of new development happened during the sprawl of Gold Coast, essentially from 2012 to 2016. Hundreds of freestanding houses were built and sold, and its population growth was huge. So to give you some context, it moved from 8,000 up to close to 12,000.

That's over 30% from 2012 to 2016. So one of the strongest movements of population growth over time. But what that data really started to show us was, okay, assuming all this great population growth is happening, we should see some great capital growth happening. Now, it wasn't the case because you see house prices from Hope Island's review in 2012 had a median of 780,000. This is using APM domains data.

2016, their sale prices showed 783K median. So we're talking a huge population growth, but we're talking static price movements, little to no change in median prices. What's also interesting to this data here is that sales volumes grew rapidly. And sales volumes by some researchers is used as an indicator of demand. And this is where it can go wrong when you use that indicator as an isolated metric.

Sales volume rising seems to show that demand is rising as more people are buying. But in this case, it was rising in isolation with supply that came along with it. So in fact, there's actually just more supply that was selling more, not listings falling as volumes increased, which was faster buying across lower stock. That's the volumes that you want to see increase. So in this case, we saw good signs of population growth.

We saw popularity in an area, great new houses, great new areas, more people buying. It all seems like it's happy days when it comes to demand, yet the prices stayed static. So we've done this over many sections. And to give you another example in the opposite, let's actually take a look at a Gold Coast suburb as well. So we're looking at the same market now, and we're now trying to look at another suburb in that same market during the same time period.

So this shows that even within a market itself of the Gold Coast region, you can achieve great results by just varying different suburbs. Highland Park, we're diving into their Highland Park's population from 2012 to 2016, moved up by 0. 2%. So we're essentially calling it no growth. Over that five years, though, the median price climbed from $367,500 up to $465,000.

So this was a 27% roughly growth and capital growth from 2012 to 2016. Not boom numbers by any chance, but far greater than our Hope Island numbers displayed over the same time period. So we've got the same time period, polar opposites for population growth, and also polar opposites for capital growth. So that is myth busted, both from a capital city level that we displayed the Melbourne's versus price, the Sydney versus price, and the Hobart's Darwin's as an example, and also from an isolated level, which shows don't fall to the trap of looking at sales volumes alone. It actually can be a sign of higher supply if you don't look at it with other metrics.

The price movements over that time period in the same region of Gold Coast, varying suburbs, some with great population growth and some with other. So what's the outcome of this? It isn't as important as many people think it is. It's a metric in isolation, and it does not translate to capital growth in isolation. So what your key should be is population pressure, the behaviors, the movements, what is being done by the population, what is being displayed, what is the lower supply areas versus higher demand, and not looking at population growth.

So that's probably enough from me on the mic, and I hope that you can really take this myth home and shove it away. And next time the barbecue conversation comes up, population growth is actually a sign of greater supply rather than movement. It's population pressure that we're looking for. Lee, you've got an interesting myth to bust, probably my favorite, finance. Let's go talk through that.

Well, yeah, so we all know that the property game is as much as a finance game as anything. So the first myth I wanted to cover off today is, is that really your borrowing capacity? So quite often people will speak to their lender, broker, and they're told their borrowing capacity might be X amount, for example, maybe 500K. And then that client will then stick to that as a guideline in all instances, whether regardless of what kind of investment purchase price they might be looking at, et cetera. However, there are many aspects that could change or improve your borrowing capacity when you do purchase.

And a big one is where there is more capacity that could be generated when there is a varying rental yield towards the investment property you're looking to purchase. So we're talking like when you have a borrowing capacity done, you're saying that someone might go to a bank and you might now be able to up that by 100k, then that's probably looking at a 700k purchase price, if not more. Correct. So all of a sudden, this is now telling me that if you're simply walking in there and not understanding the variances between 3, 4, 5% yield, because the bank or a broker, they don't know what to input, right? They haven't found a property and it's just pre-built.

That's right. And that's why when you're looking at an investment purchase and you're going to a bank or broker, you don't need to know exactly. It gives a guideline though. If you have a goal or an idea of purchase price range, that will help influence your borrowing capacity. Because again, it determines potential rental yields that the lender could be using to influence your servicing.

So that then is a really good point because now you can say that 615 might not really be your max. And it's important for you to now tie in location as you think of finance. So this is where you bring the two worlds of property and finance together. Because now when you're thinking location, what if the place you're buying in just cannot get you 4% yield? You have to be open to various locations that will.

Same with the five. So it shows me that you do have more control in your borrowing capacity when you think of the locations that may fit it. And it can make a difference. The other thing you pointed out was interesting, policy. So notional rent, just for people out there, could you explain what that means?

Notional rent. So basically in the example, you're living at home with family. Most cases, sometimes not. But if you're living at home rent free, like you're living with family, you're under their roof, you have your own expenses to look after, but you're not having to cover rent for living there. The banks will then generally, I'm talking about your big four banks, will bring a notional rent that needs to be incorporated into servicing.

So even though you're not paying rent, we're going to use $650 per month, for example, as notional rent in your servicing. So it's kind of saying like, hey, I know you're not paying rent, but we're going to say that you are just because we've got to be conservative. So it's a good way to protect the consumer, but also it does say that your scenario is not as rosy as you think in the bank's eyes in a way. Sorry, dad, but I mean, if you told me to pay $450 or $600 to stay at home, I'd be like, why am I staying at home, man? I'm moving elsewhere.

But I guess that does a good final point because you mentioned the notional rent for policies, but you've also mentioned percentage of rental because now what you're saying is that bank A is going to take, if you're going a $500 per week rent, bank A, Westpac, CBA, NAB as an example of what you said, they're going to take, not $500, they're going to take $400 a week as your rental, whereas ANZ is going to assume that your rental is $450 a week at 90%. That's a pretty decent difference. It makes a big difference, definitely, for servicing. So it's two big wins for ANZ on that front with the notional plus the higher rental yield. Got it.

So now we're looking at servicing in this way. We've said it's not really your max because your rental number can change that. And then we've also now said policy can change it from bank to bank. But when that person now buys their property, and this is an interesting thing I see, that person has now settled that property. They've got it.

And they kind of feel like that was hard, that used up my max capacity. I now have to chill back and not buy any more until I find a new job or increase their income. But they couldn't be any further wrong, right? Like this is really where you start to go into the next phase of what's your borrowing capacity. Could you tell me about what happens now when they're thinking of that second property?

Yeah, so I dived into that. So on the scenario, that same client, 80K wage, 5K limit credit card, living at home with family, has settled on that first purchase of 615K, okay, with a 90% lend, which was that 553,000 loan amount. So if they were receiving, and in this case, let's assume they were receiving 4% rental yield on that first purchase, okay? And then now they're looking for purchase number two. So they would be looking at a 500K maximum purchase price with a 90% lend for purchase number two through ANZ as well in this scenario.

So one of your big four. And then that's a 450K loan amount at 90%. And that's 4% rental yield on this purchase price of 500K as well being used. Which I think, to be honest, so 4%, can you say that's the average kind of yield that you'll be looking at within, like general sense, is quite an average rental yield we might be looking at? When you're looking at those affordable properties, I'd say so.

I think when you start to dive into the purchase prices, say your Sydney or Melbourne's with bigger purchase prices, it's not the most common at those yields. They would fall down and the prices would go up. But this is amazing, right? You're saying here that someone's walked into their bank, first gone, okay, I've maxed my borrowing capacity at a 615K purchase. I can't buy anymore.

But really what you've done now is you've gone, A, with this rental yield, you can buy the first one and still have borrowing capacity left over. But B, because we're now going to a second property, you're going to add an extra amount of rental yield, a 4% yield once more. So now you've got two streams of rental income considered in your application and you can go out and buy another 500K property. Isn't this person's mind blown all of a sudden going from, I can now only buy one 600K property to I've got over 1. 1 million in holdings now and two properties and the bank's still fine with it?

I know, it's great. It's great. And again, this is all tied into the fact they've got the deposits to do so. But definitely, I mean, that's a big one. Yeah, so you're assuming you've got the cash to make the rest of it happen, but this is the borrowing side of it.

But what about, this is a big four number. What about when people think of like, okay, the big four said, no, now I'm up to property two or I can't find anything for 500K. Can I get more from another bank? How does that work? Yeah, and it happens.

I mean, client might say, look, 500 is not quite cutting it. Is there potential other options to look at? Definitely. So as brokers, we all know we have access to second or third tier type lenders. For example, you've got your Blue Stones, Pepper Money, ResiMac.

These type of lenders generally take into account actual loan repayments, so which is quite important, opposed to a 20% buffer, whichever added onto that first loan that would have settled. And then potentially lower assessment rate. And these will make a big difference for the client's ability to be able to service more debt, essentially. So I ran that scenario of purchase number two. So first purchase, 615K at 90% has settled.

We're still using that 4% rental yield on both the first initial purchase that settled. And now we're looking at 4% rental yield on a second purchase. And basically, opposed to being able to borrow 450K, they're now, again, able to borrow about 100K more again, which is about another 550K for the second purchase. So again, if that purchase price of 500K for the second one's not cutting it and they have deposit to take it further, potentially, we could be looking at a second or third tier lender to make it happen. Now that takes it up from a 1.

1 now to like a 1. 2 mil holdings just based on that other bank. Other than busting that myth of this is your borrowing capacity and that's it, what this shows to me is another thing. What you've displayed to me is the difference between a banker and broker and going to a bank where you can only be limited by one policy, one price, one value. And the other thing is, it's given me the importance of understanding finance strategy, not just thinking about doing a deal for a person for one loan and that person buys one property.

You're thinking ahead for the person to go, here's property one. If you have it with different rental numbers, this is what you can achieve. And if you go from property one to two with different rental numbers, that's what you can achieve. And now you're thinking of, hey, if lender A and B don't do it, this is what lender C can do. Obviously, each scenario is going to be different.

So for those listening into the numbers going, hey, my income's not that high or I don't live at home or I pay rent or have expenses that are more than person B, that's okay. This is just more concept in terms of how do you A, scale the portfolio, but B, just bust the myth that you're told that my borrowing capacity ends there. So thanks for sharing that, Lee. This takes me to myth number three. And with myth number three, we're jumping back into the property space and we're going to talk about old or new.

So the myth here that I often hear about is buying new is better than buying old. Big myth here. Let me take you through a few examples So the total value was still the same, but it was in a different way when you consider building versus land value. Property B, it was simply flipping it around where the land value was higher because there was greater land component and the building value was lower because it was an older property. And when you start applying five year later growth rates to these, remember, it's the land component that's growing.

So when you factor in the land value that is growing in the older portion, which is a greater land cost to it with the same makeup of purchase price, you do start to step ahead as the time goes on because the building value made up a larger component of total value that is reducing or I would say depreciating. Sure, you're getting some tax concessions for that depreciation, but you are going to eventually pay that depreciation back in the time of resale or anything like that. But on the other hand, you're having land values increase on a greater cost of land value, even though the purchase prices are the same. So when we applied similar growth rates and depreciation rates to both properties, we noticed that in a five year later scenario, the older property does tend to be valued more because it's got a greater land value that's rising in price or percentages versus the other. So that's something to take into account.

The building is at its highest cost. It's lowering in value. It can have supply come in and it also can have data that's not so reliable because it isn't a new suburb. It isn't established with lots of data. So that's the key parts for us in terms of raising that.

Now, I'm sure if you dive in in any market deep enough, you can find that new build example that's gone phenomenal and done really well. But the truth is the data to find it and having that understanding of what's reliably causing it is not as clear as people may suggest it is because we have studied new build markets with regards to infrastructure projects all around them, all the good stuff that we can talk about. And we did it comparing it to markets where there was the same, but it did grow so well. And we were unable to find the variances other than the assumption that just land in the overall city started rising in value and it all came as a blanket effect to everywhere. And the second assumption is that the rate of release.

So say if the rate of supply is large, but the rate of release is slow, the market can continue to catch up with that rate release and the staging of prices can come in and start increasing value. But knowing how that will perform and how often that will come out, it's a tough one because there isn't any reliable data other than understanding the local release and being there. So is it really the best data driven decision? And that's where we're trying to bust this myth and saying that it's not. So that's the new properties versus old conversation for me.

It's a rabbit hole of a conversation where we can go into maintenance and other things like that. But my thoughts here are if you think of reliable data, if you think of land value versus building value, and lastly, if you take the example raised of the Newport versus Redcliffe, median prices suggest that the Redcliffe outperforms substantially. So that's it for me on the property data front. I think we've got one more from you, Lee, in terms of finance myth busting. Yes.

So finance myth busting number two. So the myth is always going for the best rate. So interest rate is not the only thing to be looking at. It's definitely very enticing with all these great rates out in the market currently that's being advertised everywhere. So it's definitely a part to, you know, which lender that you may be looking at, but it's not the only thing.

So there's a couple of things. So number one, I would generally say to any customer of what chooses which lender we're looking at for your particular scenario and why is actually policy. So policy, each bank have their own different policies. And what this means is, you know, it could be the way that the lender may be looking at your income verification or how long you've been in your current employment for. This is one big factor in terms of one type of policy that's quite important because these policies can in turn impact your borrowing potential that you, you know, of what you might be able to borrow depending on what you're looking to do.

So policies, different policies that banks have may also be around, you know, whether they're able to give you lenders mortgage insurance waiver. So, you know, in some instances, if you're a medical professional or your other professionals like accountant, lawyer, there are lenders that will provide lenders mortgage insurance waiver for you. But each bank are actually different with their criteria again to be able to be eligible in addition to your profession to have that lenders mortgage insurance waiver. So again, which lender in your scenario is going to best verify your income in terms of the maximum income to use for servicing and turn as well, what policy benefits are you going to get if you are a professional, for example, are they going to give you a lenders mortgage insurance waiver? And even there are, for example, on that lenders mortgage insurance waiver topic is that there are your second, third tier lenders, you might be a nurse, for example, and many people might not be aware of this if you're just dealing with the big, big four lenders is that if you're a nurse, a registered nurse, you may actually also be able to borrow up to 85% with no lenders mortgage insurance as well, because there are a couple of tier two, tier three type lenders that are doing that as well.

So that's another factor. And then again, for another policy that definitely impacts, you know, your overall purchasing power, borrowing power is when you're looking to purchase a property, for example, an investment property, there are different lender policies around what you can actually borrow. So some lenders might say, okay, you can borrow up to 90% maximum loan to value ratio, but that 90% needs to be inclusive of lenders mortgage insurance that may be charged or calculated. And so that's obviously calculated and added on to the end of your loan and incorporated into your repayment. So that's generally at least 2% of that total borrowing you're taking.

So really, it's only maybe 88% of what you're borrowing going towards the purchase versus 2% for the lenders mortgage insurance. So other lenders, though, may actually say, well, you know, you know what, Lee, you can actually borrow 90% plus lenders mortgage insurance. And that can make a big difference depending on the deposit that you have in terms of what you're looking to do. You might be, you know, quite close to the needle or not right on the needle, but that 2% makes a world of difference for you because you were wanting to put that towards your, you know, your cost for stamp duty, solicitor fees and government fees, for example. So that's another example of where policy is quite important.

And not just that as well. So where you're buying, so postcode restrictions. Yeah. So some banks, you know, there are general rule of thumbs for certain postcodes that might be high density, for example, but there may be a lender that is more lenient for that particular postcode restriction and help you out. You may have already, you know, found a property in that postcode and you've been pre-approved with one of your lenders.

And for whatever reason, that lender is not accepting that postcode. Well, when it comes to you figuring out which lender you're going for, you're not going to say, well, I'm going to look for the best rate. No, you're going to say, I'm going to look for the lender that's going to accept that postcode. Yeah. So that's an example of where policy is really important.

Another thing on there is that also how repayments are looked at as well. Lee, just on that policy piece, that's pretty interesting because that 2% can catch people out, right? I mean, if someone's going, yeah, my bank told me I'm going to put a 10% deposit down. It's all great. And then they get to settle when they're like, oh, wait.

What about costs? I haven't even thought about costs. Mortgage insurance now is meant to be part of that 90% loan, not plus. So getting that right could be the difference between 2% and say on a 500K property is 10 grand. Just like that, you need to find out of nowhere.

And what about when it comes to like the lenders? I noticed one thing, this is me coming from the buying side, processing and speed and turnarounds. I mean, you know, we'll purchase well over 100 properties in a year for clients. And when we go through that journey, we all of a sudden have such varying results from certain brokers. Some brokers will go, hey, you're now approved three days in.

And I'm like, how good is this? We're approved. And then another broker will go, sorry, mate, the banks, I need another extension, two more weeks, one more week. I'm like, how could this vary so much? Could you talk more about that?

Definitely. I mean, that's a big part around which lender you're choosing as well. If you've got a property you're moving on, turnaround's crucial. It's a crucial thing. So, yeah, again, it varies lender to lender.

A great lender, for example, Macquarie, they're like giving same day approvals potentially. Wow. Which is crazy. So, you know, if you found something and you're going into a cooling off, it might be a short cooling off and you need to make a quick decision. And you shouldn't make those decisions without a pre-approval.

There's a good example, like same day approval.