Here I bring you my first update for 2015, jam packed with my latest insights into the Perth sale market, rental market, impact of interest rates and my investment ideas. Watch the video here plus see the graphs and transcriptions below.
I have put a lot into this update, be sure to let me know your feedback and thoughts by posting a comment below.
Perth Property Market Graphs Discussed (Source: REIWA)
Here is the transcription
Good day there! Jarrad Mahon from Investors Edge Real Estate here. Thanks for joining me for my first Perth Property Market Update of 2015. I want take you through the Perth Sale Market, the Rental Market and Things to Consider on the Investment Side. So the title of this one is “Business As Usual”, that’s because we’ve had a holiday period and all signs are that we’re back on par with where we were in December. A very neutral market, I’m now going to take you through exactly what that looks like at the moment.
Perth Sale Market
With 12,588 properties for sale in January, the number on the market took a dip and tightens, that’s because a lot people are on holidays just waiting to put their properties on the market in February. And now we’re back in line with where we were in December. So we’ve got just over 13,000 properties for sale and that is peak of number for sale that we’ve had in the last 2 years. So we’re in a very definite neutral market now. Some areas are performing better than others and properties are generally selling in 4 to 6 weeks. The higher price points are taking longer and the lower price points are generally moving a bit faster.
With the number of properties sold per week, you can see that in January things were a bit quieter. We drop down to 650 sales per week and now we’re back in line with where we were trending for the 4 to 5 months ending last year. So around 800 sales per week and you can see way back last year, how we compared, we were actually getting around a thousand sales per week which was right up there with our peak. So we’ve come up a long way down in the activity since then. The market certainly has cooled, we’ve seen the effects of the slowing mining sector.
I wanted to take you through what I see happening with the interest rates and its effect on the market. You can see here, this is a long term graph showing our interest rate levels and we’re a bit lower than where the graph shows us in 2011 with our standard variable rates around 4 ½ % and that puts us in line with where they were at their lowest in 1959.
So we really do have a gift at the moment in terms of our low loan repayment levels and don’t expect that to continue forever. You can see that over time the interest rates had moved through cycles as our economy has and you can see way back in 1989, 1990 we were at 17%, so we’ve come a long way down since then. We generally have been trending down with minor up trends in between.
And all I’m saying on interest rates side is that, it’s such a great market for owning a property both investment and your home. But don’t count on these rates forever, look forward and future proof yourself, make sure that you can afford your home or investment property if rates do go back up another 1%, 2%, 3%.
I’m expecting at least one more interest rate drop over the next 6 months. It’s the RBA’s blunt tool for trying to stimulate the housing market and we need the housing market to keep going to offset the slowing mining sector.
However, my personal view is that the drops in interest rates are starting to have lesser and lesser impact on our market. Our market is being saturated and the real problem with affordability is not affording to keep a house, the problem is affording to buy it in the first place.
So I think that government needs to more look at stamp duty rates, I mean we just dropped the grant for first time buyers. And that’s counter to stimulating, so I think we would have a much bigger impact on the market if we change stamp duty rates or add other incentives to make the barrier of entry lower.
We still have to save a big deposit for most people, takes a long time to get your 20% if you want to avoid lenders mortgage insurance and especially when we’re making it tougher for the first time buyers, those are the areas we should be looking at. Interest rates in themselves are not getting many more buyers into the market!
Perth Rental Market
So going into the Perth Rental Market, where we’re now at is 6,248 properties on the market for rent and that’s the most we’ve had in the two years that I’ve been keeping this graph.
So, it has started to plateau off in the last 4 to 5 months and stabilize but in January we actually had slightly more than we have now so it has started to trend back down. But January was our peak of supply with 6,313.
We try to write a lot of our leases not to expire in December and January. Instead we try to keep them expiring in the other parts of the year and the reason for that is not as many tenants looking to change over rentals in that period. A lot people on holidays, a lot of people are distracted so now tenants are back looking in the market and it is business as usual on the rental side.
And I’m gonna be watching things very closely over the coming months just to see if that things continue to stabilize coz we’ve now have a median rent drop by further $10 per week and we had been sitting on $450 per week for 4 to 5 months. Now as a result of that extra supply in January the stats are certainly showing that drop to $440pw median rent.
So I hopefully will see that median rent come back up again in the coming months, I think it might just be of a statistical anomaly with the extra over supply of rentals in January. So nothing too much to worry about yet.
Looking at the rental vacancy rate, you can see that it peaked up in January as well at 4.2%, the highest percentage that we’ve recorded in 2 the years and now it’s pulled back by 0.1% to 4.1 % in February. So I’ll keep an eye on it to keep you updated in the coming months. But certainly from all reports from our leasing managers there’s a lot more activity now, things seem to be stabilizing.
Investing (Market Emotions)
So, Investing, I wanted to take you through a really great graph that I like. The market moves with emotions and everyone in the market goes through these emotions. And I love to look at this graph because the easiest time for us to get into the market is when the market’s starting to move up and everyone’s experiencing enthusiasm, acceleration, euphoria and that’s when we reach the peak of our market. These are the times when we shouldn’t be getting in necessarily.
Then on the other side we start going through the other range of negative emotions of unease and denial, not even accepting that things are coming back, pessimism and panic, capitulation, despair and then we move back around again, we start getting hope and that builds back up.
So the hardest thing as an investor is actually acting counter to the market. But that’s where we need to act, that’s when it’s gonna be easier when there’s not as much competition, we’re not over paying for properties. So we’re starting to get conditions more like that now.
I’d suggest that we’re a bit of the pessimism phase, we’re kind of switching between the two types of market and that would correspond with our neutral market where we’re not up or we’re not down but we’re there is pessimism when you speak to people about property.
So opportunities will start becoming more and you have got to be selective in this market. Some sellers still have their properties priced too high up here but then there are those sellers realistic meeting the market and getting sold. The numbers and overall returns are starting to stack up more and more.
So be selective and in any market, there will be suburbs that are performing and there will be suburbs that are going backward. We can help you choose the ones that are set to perform and they’re gonna have the infrastructure, the transition, the major buzz and demands that will keep prices going up even when others are going back the other way. So there is always counter forces going on in the market.
Instead of going through your own emotional cycle instead focus on buying property when you can act and investing for the long term not buying when the property market is hot.
Long Term Growth
I also wanted to take you through this long term annual growth rate chart because I often find myself getting stuck in short term thinking and trying to time the market perfectly, last week I drove past a property I sold 2 years ago. If only I just hung on to that property and rode out the down periods, because before I know it’s gone up by a further 10%, 15% and I’ve sold it.
So I don’t time the market perfectly every time either, I’m learning. My only regrets would come from selling properties when I could have held them and experienced more of these longer term growth.
So you can see that over 50 years the Perth market’s average 8.6% and that’s very similar to the last 10 year average and we’ve pretty much averaged this 8.8% over the course of the last 10, 20, 30, 40, 50 years. So, with population growth continuing I can’t see this changing but the market will continue to move through cycles. So if you’re investing for the long term, you don’t have to time the market perfectly and you can experience these kinds of growth hopefully moving forward.
Dual Income Property
I just want to also touch on Dual Income Property because it’s been really well received by our clients, I love it personally myself. I want to take you through an example. So, here on the screen you can see that under the one roof, we’ve got two rentable spaces. In this example, we’ve got two 2 x 1, so you can see bedroom 1, bedroom 2, living area at the back. We have a common entry, we have a double garage that we can either divide in half to keep a bit more private or just keep as a common garage. And then we’ve got a second independent space under the main roof here with that similar 1 and 2 bedrooms, back living area and have got their own alfresco.
So each person can come and go, have their own independent space with separately power meter each of them so we know how much power they use. This one’s an example for Caversham, so purchase price for this one would be $595,000 and that’s real quality build that is full turnkey. The last thing you want to do is be getting along and finding that your paving is not done, your landscape is not done and you have to spend a whole bunch of money after you’ve built and that’s a big hassle to organize things too.
So purchase price is $595,000 full turnkey and each 2 x 1 would likely rent for $360 per week so that would give us a total of $720 per week which is a very healthy 6.3%. Rental yields have now dropped to around 4 ½ % for similar 3 x 2 and 4 x 2’s inside this suburb.
That gives us a total annual rent of $36,000 allowed for two weeks vacancy in that. And then if we calculate our annual interest rate payments by say 4 ½ % interest, cost would be $26,755 for repayments and yes that can change over time.
But my point is that this kind of property will insulate you against changes. We haven’t included rates and property management fees, but just to give you an example, before tax that’s $9,245 in your pocket. And I’d rather have 4 or 5 of them which will add to your income, increase your borrowing power, and enable you to replace your income much sooner.
And it’s far better to have money in your pocket along the way than for it to be coming out, then you don’t have to sell in a bad market and you don’t have to time the market perfectly. You can hold it for a long run and experience that capital growth. So this doesn’t include depreciation tax saving which will give you around another $10,000 in your pocket after tax because it’s a brand new property.
We’re not going to have trouble attracting tenants because when you’re looking in an area like Caversham what else have tenants got to rent, they’ve got 4 x 2s which is a big family home at around $500pw, they’ve got 3 x 2’s on cottage blocks at around $420pw which is still higher priced than some tenants can afford. And then this fits in nicely at $360 per week when they’d have to pay $420- $430 for 3 x 2. So there’s nothing else for them to rent at this price, so we have no problems filling it quickly.
Finally, just want to give you a heads up on upcoming events; I’ll be emailing you out separately over the coming month. We’ve got a Brisbane property seminar that we’re running which will take us through exactly what’s happening in the market there, show you some property examples and we’ve searched long and hard to find property that stacks up over there. I’m not suggesting that you buy there over Perth but if you are going invest in another state, then Brisbane is certainly gonna be the market of choice for this year.
And then I’m running a seminar on Building Your Portfolio, we’re going to go through all the ins and outs of building house and land and also the dual income design so look out for that invite as well. Hope to see you at the seminar coming up and I hope you really enjoyed this update.
Do leave your comments below, I’d love to give you feedback and I will be happy to answer any questions.