Core housing fundamentals and common mistakes

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. Welcome to another episode of the Property Nerds podcast.

This is your host Arjun Paliwal here, and I'm very, very excited for today's session. But before we go into today's episode, it's a very exciting time of the year because this time last year, maybe a little bit earlier, around July, August, we released the first edition of our report, Housing Fundamentals Analysis in Australia. And there are a few interesting calls we made. The first call was that fundamentals were in fact very strong. Even in the midst of high rising interest rates, we called out 25 core housing fundamentals, of which we said 17 were either strong or very strong.

So the first thing you can do is understand that there were some that weren't strong, some were strong, and some were very strong. We weren't here being absolute bears or absolute bulls. We were here to give a balanced assessment. And in that assessment, we also then had a second part and third part. And in that second part, it was about core predictions, core predictions around price growth to be coming back, things around certain major markets to decline, and even predictions around which markets would be some of our best performers.

Then from there, we had our market pressure analysis highlighting those that were in high pressure, somewhat high, balanced, and then also low. Now reflecting on that, we've been able to go back into the archives, not only talk about that market pressure analysis and the predictions we made, but actually also talk about this new year ahead of us and the fundamentals in place. Now, spoiler alert, the fundamentals were that 16 of 25 fundamentals remained extremely strong or strong or very strong, right? And so that's one less than last year, but still a very high number and a very strong number in the overall scheme of things. And we released our updated market pressure analysis combined with an actual scoring of how we went.

Did we go okay? Did we not go okay? And there is some interesting data for you all to review. So if you'd like to understand how did we go in our predictions of market pressure, what fundamentals remain strong and very strong, what fundamentals go balanced and what shifted to the weaker side, getting a full understanding of the demand, supply, confidence across 25 macro housing fundamentals, that research paper is now out and free to download. It's the second edition of our housing fundamentals.

So please go do check that out. If you'd like to A, recap predictions and B, know where we are. Now on the topic of market analysis and fundamentals, I've got someone very special joining me on today's show. And as you guys all know who are tuning in, guests are a rare appearance on the Property Nerds podcast because we like to keep things extremely selective and also make sure we're on brand with the fellow nerds of the game, those who love property data just as much, if not more than we do. So you all can enjoy analysis and predictions and insights that are beyond just what we produce here at InvestorKit and the Property Nerds space and to make sure that you get differing views because it's not all about just my view or my thought.

It's about the different ways that exist in reviewing data. So I've got a very renowned property analyst joining us and I've got John Lindeman here. So John Lindeman is a very widely respected analyst and actually one of Australia's leading. He's got well over a decade of experience in property research and really has been someone who's been a go-to amongst many experts in the Australian housing market analysis space. Now he's regularly featured across Kevin Turner's Real Estate Talk.

He's featured across various Australian property investor magazines and the Property Observer going back in time as well. And he's someone who's actually one of the only with an innovation patent in the housing market space. So back in 2016, John was awarded an innovation patent for his invention of the housing market prediction solution, which has been a solution that focuses on the prediction of suburb level price growth, price decline, price steadiness years into the future. And so John here joins me on the show and he's someone who not only is a well-respected analyst, but puts his predictions out there. And just to name a few, the Hobart prediction he made in 2016 around Hobart, could that be the next hotspot?

It was a best performer in the years ahead. And for those who want to make sure they get their data right, it was a best performer pre-COVID boom. Many people think they hear a smaller city and they go, ooh, COVID boom did that. Well, that was pre-COVID boom that it was a strong performance. The next thing was John actually on the month of COVID, not a few months following, not a year following, the month of COVID said, hey, hold on a minute.

I know lockdowns are here, but it is not doom and gloom and I'll tell you why. And that was one of John's releases of information and that was also proven to be successful. And in more recent times, John's continued to pave the way with his predictions around suburb data and having consistently picking some of the higher performer ones. So it's a privilege here to have John on the show. John, welcome, my friend.

Thank you very much, Arjun, for that wonderful introduction. And it's wonderful to be here because I guess I'm the ultimate property nerd. I've been doing this for about 40 years, so I'm in the right place, I think. Absolutely. I'm sure everyone's excited to tune in, not only tune in, but rewind as well and really dig deep into this.

And I can't commend you enough on how much information you put out there, how free and open you are to sharing information and making sure people can have that opportunity to learn about what you see in the data space and some of the many fantastic research reports and releases that you do that goes into some of the markets across the country. But I thought it'd be great to start off with a background, John, for the audience that may not have heard of yourself or may not know about yourself. It'd be great to hear about, I guess, the passion for what you do, your background, and what mission you're on for property investors specifically across Australia. I'm happy to answer that. I started my investing journey probably well over 40 years ago, and I was really lucky because the first house I bought, it was a small terrace house in Hawthorne in Melbourne, that doubled in value over the next four years.

And I thought, wow, this is easy money. Property investing is the way to go. So I sold that one. We bought another one, and that market went nowhere at all over the next four years. Prices actually declined, and we lost money on it.

We had to sell, and we went backwards financially. And I thought, I've really got to figure out how the market works, what is going on here. So I read all the books I could find on property investing and went to boot camps and webinars, seminars, free events, paid boot camps. And I learned a lot, but nobody could actually tell me how the market worked and how investors could get the most benefit. So I finished my professional studies, and I went to work with the Bureau of Statistics, where I studied trend analysis, which is all about measuring trends of supply and demand.

And they were using this with commodities, gold, shares, and using trends to predict what was likely to happen. And I thought, well, why can't you do that with property? It's just another commodity, a little bit more complicated, but nevertheless, you should be able to figure out what the supply and demand indicators are and how to trend them. So I then left the ABS, and I went to work at Residex for five years. I was the head of research there, and that was when the GFC took place.

And a lot of the banks came to me and said, John, we're worried because we think prices might actually fall, which they hadn't done for a long, long time. How do we know whether or not that's going to happen? So I then looked at the market more closely and worked out what were the main indicators that you could use to figure out whether prices were likely to rise and fall and do that down to suburb level. And when I'd done that, I left Residex and set up my own company. That was 12 years ago.

So I've been in charge of property power partners for over 12 years, and that's purely what we do. We analyze the market and provide information, as you said, Arjun, services, reports, which provide predictive information for investors. And John, that rich level of experience from the ABS to the Residex and now even your own company for over a decade, I guess on that journey in making predictions and improving accuracy as time goes on, you would have also met many who failed to make many correct predictions, and they often still get another opportunity, another time to make a word, another time to say something, and their voice constantly comes onto the media. And I'm hinting at some of our beloved economists that are out there. Why do they constantly get it wrong, John?

Because this is something that they just continue to get wrong again and again. They look at the wrong numbers, and let's look at, for example, the last three years, what's actually happened. When I look at the market, how the market was performing before the pandemic, say in about early 2020, and then what happened, we had the fall in interest rates down to record lows, and it took about a year, and then suddenly the property market took off. The reason it took so long was because there was an excess of supply over demand, but once that was taken up, more people were going to the banks, the banks were willing to lend, And so when you think of the dynamic we're in today, where so much of the country's grown and people with the investor hat on like to avoid areas that have grown too much, typically, how do we bust that myth and say, well, this can still keep growing and it may do so? And maybe no, these parts of the myth, it's not a myth and it's actually true, because I think there's very few markets around the country now outside of maybe a few parts of regional Queensland, Perth, that have had a low 10-year cycle and they've all had some extraordinary growth.

How does all your experience from the many life cycles of investing you've seen in the past now come to this time? Because you're one of those few people where you can say, ah, I've seen this before. Yeah, I can remember distinctly 10 years of no price growth at all in Perth. That was from about the end of the mining boom period, 2013, or even earlier, 2012, that that market stalled. There were price falls and then the market went nowhere for nearly 10 years.

So I did a presentation over in Perth about a year ago and I said, guys, this market is about to boom. And they all sort of said, oh, you know, he's just an East Coaster, what does he know? But what I was doing was looking at the relationship between demand and supply. And in Perth for a long time, because there'd been no house price growth, there was very little new housing development, but the demand was still picking up every year. More people moving into Perth, more people wanting to own their own home.

So the demand kept increasing, but the supply was stagnant. And so you get to this point where what I call a tipping point, where the demand starts to exceed the supply. And when that happens, you start to get price growth occurring. It's what I predicted for Hobart in 2016, exactly the same fundamentals. There'd been no price growth there for over six years, but that relationship had changed.

And that's really what you look at. It's not past performance. It really doesn't matter if Adelaide's gone up 60% in the last year or Brisbane is now at record highs as well. What matters is what is that relationship of supply to demand? Because it could go up another 60% if that demand remains above the supply.

It's that simple. And you really don't look so much at past performance. It's not an indicator of future growth at all. Absolutely. This reminds me of March, April 2022.

We jumped on the weekend today show and people called me crazy. I got like 50 text messages afterwards when I went on the show and said, hey guys, Adelaide will have double digit growth in 2022. And this is after a few interest rate rises because I just couldn't see a shift of dynamics. I mean, supply was still 40% below pre-COVID averages. Rental vacancy was still below 1%.

Rents were rampantly rising. Construction was nowhere to be found. And then on top of that, sales volumes are still healthy. Vendor discounting was low. I was just trying to find a story to go against it.

Unemployment was low. Job ads are flying up. And I just was trying to look for something to say, please tell me I'm wrong here, but I couldn't. So you raise such a good point. It's about the fundamentals sticking, not just it has grown or it hasn't grown and therefore the picture has been and is continuing.

So John, from your side now, when you look at some of the core trends ahead, we've obviously now had stabilization of interest rates as one core macro trend and many are here to say, including myself, that I think we overshot interest rates and inflation's showing the data, it's coming up and catching up. However, now we move into this new phase ahead of us where some fundamentals, as you said, remain being low supply, being rampant population growth. What do you envision the next three years across many parts of Australia versus this last 12 months? Because this last 12 months, as you said, has been shaky for some, but this next three years, and I choose three just because it seems like a performance metric that everyone seems to want to be going well in. And why?

I guess I'd love to know your thoughts there. Well, I think the main dynamic at the moment is the number of people coming into Australia. In the last financial year, it was 525,000 people. That was a record. This financial year, it's going to be about 450.

And when you look at the federal budget projections, it's over 400 for the next three years, every year. That's a huge number of people and there just simply aren't enough properties for them to live in. But it's not just that. They all want to live in the same areas. So what we see in Melbourne, Sydney, and Brisbane, new arrivals, either renting units in inner urban areas or renting houses in the older, well-established suburbs that are not too expensive.

And they do that because they feel they might have ethnic reasons for living in certain areas or they feel more at home, or they might just be students wanting to live near universities or near work. Areas, the rent demand starts to escalate. And I can see that it's happening already. Massive shortage of properties, especially in those areas. So rents are starting to rise dramatically.

And when it gets to a point where the rental yield, that is the return you're getting from a property in rent, starts to become positive, then of course, more investors want to buy properties in those areas. And that causes price growth because they're competing to buy properties. So that's where I see these markets heading in these sort of older inner urban areas. A lot of rent demand, pressure on rents to rise. And of course, that means that as the yields go up, they're going to be more attractive and more investors will return to property and buy properties in those areas for the cashflow.

So I think that's going to be the main dynamic that will power our markets, especially the capital city markets for the next few years. And I think we'll see a return to price growth and quite strong price growth. In fact, I've been predicting in April last year, I said, I think we're on the cusp of another property market boom. And now you look at Perth's record levels, Adelaide's at record levels, Brisbane property prices have never been higher. It's well and truly on its way.

We've had six months of consecutive price growth. But when you look at rents, that's even more dramatic. So rents will be driving the next boom. And I think it's going to happen in those particular urban areas. But at the same time, don't forget what I've been saying about 55 plus aged people moving to regional markets.

So you've got the movement out from the upper socioeconomic areas in our capital cities to the regional markets at the same time. So there's a lot of growth opportunity if you look at the right areas. Yeah, John, in the whole rental space, it's interesting when you play around with a cashflow sheet and you dial up a few increases in rents, a few more stabilizations or potential declines of interest rates. And then you look at some cities that may be sleepers that might really start to come alive. And there was a barbecue, and I kid you not, it was an actual barbecue.

I'm not just using the analogy. It was a barbecue conversation I had with someone on Melbourne. And I noticed some interesting trends, right? There was the eastern suburbs of Melbourne where you're seeing sort of 650 to 950K properties. And your rental yields for many that don't remember in Melbourne times was sort of that 2.

5 to 3. 25. A, they're tracking towards 3. 5 to 3. 8 now.

So then I just did this thought. I said, hey, look, I'm not doing a deep dive here. I'm just having a chat. Just imagine if this would look attractive to someone in Melbourne. Rents go up at a similar pace for the next two, three years.

And suddenly the yield on purchase is now over 4%. Interest rates come down, not saying crazy COVID money cheap 1. 99 rates. I'm talking a stable 3. 5 to 4.

5% interest rate. And that's the end consumer rate. And then you're having the rates, water, insurance, depreciation, a bit of maintenance, property management, 20% deposits. And you're tracking to almost neutral cashflow now or practically neutral for a house in one of our, if not the largest city in the country under a million dollars. And to me, that is gonna catch people delayed and then people will catch onto that.

And that is exactly what you just spoke about, which was then people going investors, rents, tenants joining the party, them not wanting to pay rents more. And when could someone look back outside of the COVID cheap interest rate time and say, Melbourne's positive cashflow? It's not been like that, but it may become that in the next few years if these dynamics come into play, which is so interesting, right? It is. I mean, it's happened in the past.

We've seen long periods of time where rents have been much higher comparatively than what they are now. And usually when it's been periods of time when we've had high population growth, overseas arrivals, pushing up rents. And so I can see exactly the same thing occurring right now. But the other thing too, is that that will lead as rents keep rising and then people say after a few years, we want to buy our own property and interest rates are coming down. So you'll start to see more people wanting to buy properties, first-time buyers in the outer suburban areas.

If you look at Melbourne, like Melton, Cranbourne, Pakenham, those sorts of areas.