Episode 73 | Why are so many equity investors bearish about property? | Roger Montgomery, Montgomery Investment Management

How can we apply the principles of value investing to the property market?

Roger is the Founder & Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment & financial market experience & he shares insights on value investing.

Here’s a snapshot of what you’ll learn from listening:

• How to identify the 3 phases to a boom in the market.

• Why a focus on the calibre of any asset is so important.

• How to apply the principles of value investing to a property purchase.

• What happens to prices when population growth in Australia is underestimated.

• Why access to credit & interest rates are the ultimate driver of asset price.

• When you know what something is worth, you know when you are paying too much!

• What is the impact on property prices with a slow down in construction?

We cover a lot of ground in this episode, we know you’ll enjoy listening!

GUEST WEBSITE:
https://rogermontgomery.com/

Related Episode:
https://www.theelephantintheroom.com.au/podcasts/069
Work with Veronica? info@gooddeeds.com.au
Work with Chris? hello@wealthful.com.au

EPISODE TRANSCRIPT:

Veronica: You're listening to the elephant in the room property podcast where big things that never get talked about. Actually get talked about. I'm Veronica Morgan, real estate agent, buyer's agent and cohost at Foxtel's location, location, location Australia and I’m Chris Bates, financial planner, mortgage broker and wealth coach. And together we're going to uncover who's really making the decisions when you buy a property,

Chris: Please stick around for this week's elephant rider boot camp and we have a cracking dumbo the week coming up!

Chris: Before we get started. Everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyers agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica: We often find that money market professionals have scant regard for property as an investment class. It's often seen to be an either or mentality. And today we're going to find out why this might be the case and we're also going to talk about interest rates because pretty much everybody is expecting to see cuts to official rates this year in what will this mean not only into the property market but in the macro sense. What does it say about the economy? In this episode we pick the brains of Roger Montgomery, founder, Chairman and Chief Investment Officer of Montgomery Investment Management. He's a renowned value investor with more than 25 years experience. Roger is an awarded presenter on the subject of investing and appears regularly on the ABC as well as Your Money's Trading Day Live and 2GB Radio. I was on there a couple of weeks ago, there you go. Roger also writes regular commentary for major financial publications and newspapers, so he's a bit serious. Thank you so much for joining us today Roger

Roger: Always a pleasure.

Chris: Thank you Roger. I um, just want to thank you. Just, I guess secondly is just for coming in and spending some time with you. I've read your stuff, I read your book. Um, and I really appreciate and value what you do. So thank you. Um, I guess for our listeners, you know, you're considered a value investor and a lot of them, um, our listeners probably wouldn't understand the different types of share strategies, I guess. Sure. Value versus growth or income and small cap and things like that. You please explain what is really a value investor and what's your philosophy regarding investing.

Roger: Okay. So perhaps a way to structure the answer to that question is to ask a question, what is any asset worth? Whether it's a business or a block of land or a property or shares, what's it worth? What's the answer that most people give you to that question? And the answer is, what someone else will give you for it.

Chris: Okay.

Roger: It's actually not right. That's the price. The price is what people will pay for something. But what something is intrinsically worth is very different. Uh, so take for example, many, many years ago, back in the Dotcom boom, uh, of 2000 or 1999, 2000, there was a company called NetJ.com, NetJ.com said in its prospectus that listed on the Nasdaq in the United States, the exchange over there or the technology exchange over there. Uh, and they said in their prospectus, NetJ.com conducts no substantial business activity of any description and NetJ.com Has no plans of conducting any substantial business activity of any description for the foreseeable future. So it was a remarkably consistent business model. It, it wasn't doing anything, it never done anything and it wasn't going to do anything. Um, the, the interesting, I guess the interesting scenario that transpired was uh, you could buy the shares at 50 cents in pre IPO, pre initial public offering.

Roger: And then it listed at $2 and by March of 2000, it was trading at $8 88. Wow. It's subsequently fell to zero and it went out of business and it ran out of money managers. We ran it, it ran out of the money. It was, it was only worth the cash in the bank. Um, but that was worth zero because it was being eroded by management fees and true to label it conducted no substantial business activity of any description. But here's the thing, was it ever worth $8 88, no was someone prepared to pay $8 88 yes. So the price is what people are prepared to pay, but value is what something's really worth. And our job as investors, and this is how I described value investing, our job is simply to pay a lower price than what something is worth. And if, and the great thing about the stock market and perhaps less so in the property market, but I'm sure it's true in the property market as well in the stock market because the, the, the acid is priced minute by minute.

Roger: People overreact to influences that aren't related to the underlying business. So Trump says something tweets something stock market goes down and the price of the reject shop falls but reject shop still selling the same amount of buckets today is, it's sold yesterday. And Myer still doing what it was doing. And Telstra's still selling as many plans on mobile phones as it were selling before. But the share price goes down because Trump tweeted something about China. So, so that's the group. That's what excites me about the stock market. People over react and act irrationally, frequently. Uh, and so if property was priced, I minute by minute, you'd get people selling to bedders, cause I think they're going down and they're going to buy three bedders tomorrow. But that doesn't happen.  And in fact the best way to invest in the stock market is to approach it the way you would property investing, to do it the same. The same way.

Chris: Yeah, I mean the whole dotcom thing was a bit of an interesting and a lot of pets companies, you know, if you reached out to lots of companies, that just wasn't the only one that ...

Roger: We're in one right now. By the way, we're in a tech bubble right now.

Chris: The Amazons and the apples of world.

Roger: They're making money. It's the ones that aren't making money. That's really interesting.

Roger: Amazon makes billions of dollars, but it reinvests and expenses that, um, and so people often say Amazon doesn't make a profit. We'll actually, it makes, I think it made $16 billion last year, but it just re-invested that in research and development and marketing.

Veronica: We talk about a tech bubble. Now tell us more about that then.

Roger: Well, I'll really want to get the property,

Veronica: but I'm curious about is one that,

Roger: So you're seeing, you're seeing a couple of things happen. Number one, you're seeing really ridiculous multiples being paid for businesses that promise growth and because interest rates are really low and we'll get back to interest rates again in Australia later on. Um, because interest rates have been cut to zero in the United States since the GFC and they've been falling for 37 years, then people have constantly been wanting to find other things to invest in. Back in the recession, we had to have, you might remember in the early nineties, 1991, um, uh, cash was king and it was all about having cash. And what's happened is interest rates have gone down. Cash becomes a liability. You don't want the cash anymore, you want to get rid of it. And so what we've seen is record process achieved in art all around the world in the highest price ever paid for a painting was last year. Collectible cars, the highest price ever paid for any car was last year.

Roger: Ralph Lauren was off at $110 million US dollars for one of his cars and he knocked it back. Um, uh, record process for low digit number plates, record prices for wine, you name it, regular process for property last year and the year before. You know, we've seen that and that's a function of cheaper interest rates. It's not because anyone is a genius at investing, it's these things have gone up. They've gone up because interest rates have gone down. So if everyone remembers that interest rates act like gravity on asset valuations through something called the present value formula, you can look that up. I won't. I tried to explain the arithmetic on a podcast. Do you know the pump test on us? And I'm having a good crack at it on my own podcast, but it's not easy. Um, uh, and so, so interest rates go down. The present value of future cash flows is higher.

Roger: So if I gave you $10 in 10 years time, that would be worth more today at a lower interest rate than if the interest rate was high. Because I can invest that cash and allow interest rate. I don't have to invest I can invest a lot more at a low interest rate to get the $10 in the future where if interest rates are high, I can invest a lot lower amount of money and I'll get $10 in the future. So that's true for property and people have to remember that that's the big influence. Um, and credit availability, which we'll come to later. Also, it affects property, um, because if it's easy to borrow money, uh, for anything, people do it. Now, back to your tech question or the tech bubble, a lot of the cash has flown, flowed into private equity. And in fact, if you look at the number of private equity firms that have that existed 10 years ago and the number today, it's an exponential curve that links the two numbers.

Roger: So it's a bit like real estate agents in Australia. You know, the population of Australia grows at about 1.3% per annum, uh, over the last decade. And the population of real estate agents in Australia has grown about 9% per annum. And we don't need 9% more real estate agents every year to serve a population that isn't growing very fast. It'ts falling it will be where are the, see that wherever you see a, um, a proliferation of a particular profession, uh, you know, very quickly expanding, you know, that there's something going on that isn't quite natural and it isn't sustainable. Uh, and so in private equity land, that's what we've seen. So people have said, you know what, I don't want cash. Uh, I'm gonna give it to these private equity investors. They've now got one point $7 trillion of uncalled capital and uncalled capitol. I might go into it in too much detail, but, but what you do is you pledge money to private equity and then they draw down on it from you.

Roger: And so there's all this money. What do you do with it? I mean, what do you do if you're a young private equity manager and you're just being given $1.7 trillion, you go and buy stuff, otherwise you have to give the money back. So you go and buy stuff. So you make investments. And what's hot stuff that's hot right now is software. Uh, and uh, and there was an article back in 2011, uh, written by a guy named Marc Andreessen. He is one of the founding investors in Facebook, in Linkedin, Twitter, Instagram, you name it. He's been there. He wrote an article in 2011 entitled for The Wall Street Journal entitled "Why software is Going to Eat the World". Uh, and that was the legitimate reason for buying software companies, what we call SAS company software as a service companies. But what the smart money does at the start, the dumb money does at the end.

Roger: And right now, a lot of dumb money has been flowing into these companies and Uber is probably the poster child that business exists because it doesn't charge enough for it service. Yeah. It doesn't make an economic return to its shareholders. It doesn't make a return on the investment that it's made. It's raised $24.7 billion since it started 10 years ago. And it's only got 2% penetration in the markets where it exists. It's said in its prospectus that, you know, it had a, something like a $16 trillion, uh, total addressable market, but that would be about 20% of global GDP. It's never going to be 20% of the globe. And we would rename Earth Uber if that was the case. So, so people have got really excited about, you know, a ride hailing services, but it doesn't make money. It loses money. And with the $24 billion it's been given, which by the way, was 2000% more money, 20 times more money than was given to Amazon before it listed.

Roger: And it doesn't make a profit. And so people getting excited about technology transforming the world. They always do. But do you know who wins? The consumer wins. So yeah. And, and, and, and so consumer consumers win from these services you take the car, for example, if you'd been around in the late hundred's when Karl Benz drove the first horseless carriage, you might've got really excited about how this could transform the world. In fact, it wasn't Karl that invented, um, transport, motorized transport. It was his wife, Berta. She stole the car and actually drove it to another town and then stopped in at a pharmacy and filled it up with alcohol and with medicine and went to another town. Then when she got back, they realized they were onto something pretty exciting. Now imagine you'd been there. Imagine you'd actually been there. She took the kids too, imagine you'd been there.

Roger: You would've thought, gosh, this is going to, I'm going to invest in this. From that date, there has been 1500 car manufacturers in the United States. Uh, none of them exist today and still make a profit. And the ones that do make a profit that do exist were bailed out by the private equity or the government. So consumers have won. The world was transformed by that technology, but investors didn't win. And that's why we're a little bit nervous about the prices we're seeing paid for these businesses. People have lost touch with reality, uh, and that it'll, it's hard to pick the winner. Um, none of no one's making any money out of any of these companies, um, other than the share price going up. And that's, that's winning from speculating not winning from investing

Chris: Well, it's funny cause the oh the um, yeah, last year with Bitcoin, right. The whole greater fool theory. You know, sometimes people believe that, you know, if society is believing you're kind of drinking the Koolaid, I guess you could invest in Uber knowing that we'll, like you did with Facebook and other kind of tech companies knowing that some idiot I guess is going to pay more for in the future. So yeah, you kind of can, that is an investment strategy that some people do employee, but it's not really something built unfound. You always got the risk of it getting found out, I guess.

Roger: Well, it's speculating. So you're betting on someone paying more and that happens a lot in property. Exactly. Yeah. You know, when, when the yields on property get to a level that are ridiculously low, um, you're going to make a negative return, which is what negative gearing is. Right? I describe it as a way to lose 50 lose a dollar to make 50 cents. And that's what negative gearing is. Right? So, so people are willing to lose money on the income side of the equation in the hope that they'll make money on the capital. And the only way they're gonna make money on the capital side is if someone's willing to pay more and yield less, you're getting an even lower return from the income from that property. Unless of course they have development experience or you know, there's an ability to strata the property and so on.

Roger: So, we were seeing that in the technology space. At the moment where there's a disengagement between reality and hope. And we can see, we know the private equity guys know it too, because they are lining up. There's a, uh, a larger number of UNICORNS being floated this year than ever before and 83% of them last year were unprofitable and 90% so far this year are unprofitable. So they're trying to get out they're trying to liquidate. The problem is that they won't be able to get as much money. We saw that with Uber. Uber last year was when it was being suggested that it would float at $120 billion valuation. It came on it $75 billion. Yeah, I'm still a ridiculous amount of money. And so now the private equity guys are going hey. The tap is being turned off and the reason the taps being turned off is the wealthy investors that would normally invest in these companies. When they come to float, they all piled in at the private equity end of the equation. They're already investors in these businesses. They're now trying to get out and who are they going to sell to? Moms and dads and the moms and dads are losing their appetite. In fact, they lost money on average last year buying new floats and that'll eventually provide what we call a negative feedback loop. And that'll get worse. And to index funds as well. Well, indexes, they're forced to buy some of these companies depending on their waiting.

Chris: Yeah. So I guess that's probably one of the risks for index fund is just generally, I think a lot of people have gone to index funds, a lot of listeners, a lot of younger people, you know, being kind of told that that's the better option. It's a way of being active, you know, lower fees. Yeah. But the reality is there's risks with index investing in, and I don't think it's factored in a lot of, yeah,

Roger: well, value investing has really failed over the last sort of five or six years because the winners have been people who've backed the loss, making companies the ones that are going to change the world. Uh, but time and time again throughout history, we see bubbles form and they bust and when they bust, people will realize oh value investing was really quite sensible. It looks stupid now because it doesn't work. The best thing to do is just to buy the thing going up the most or by the things that don't make money.

Veronica: Well it does come back to that idea of, you know, understanding the difference between speculation and investing. Correct. And also this idea of you're buying an asset and so what is the asset? What is the asset worth as you're saying versus what are you paying for it?

Roger: Look, you hit the nail on the head, that's exactly right. You know, that's, that's all it comes down to. So, you either treat the stock market as a place where you bet on things going up and down or you treat the stock market as a place where you can buy a piece of a business. If you approach it, the latter, you might not, you might miss out on some of the exciting runs that we've seen in the last year and a half, but in the long run you'll do a lot better.

Chris: Yeah. And I think he had property, it's exactly the same. You know, you can either come bet on a mining town or a rural and on some type of new development or infrastructure, well it may go up and may go down, but all you could just go buy a real scarce asset in the inner ring where they're not building anymore. It's not sexy, but you're not going to get amazing returns in short spaces. But when you come back in, you know, 30, 40 years time, it's still a scarce asset population. Yeah.

Roger: Population will be double 40 years. They always underestimate the, you know, the rate of population growth in Australia. Uh, and you've got to remember that, you know, there, if you've got a young audience, then you know, people don't think when they're young, they're going to be 40 years of age or 50 years of age. You get there a lot faster than you think, then you sort of look back and you wish you'd made some really sensible long term investments back then. And I think, you know, in the next six months, the opportunity to do just that at cheaper prices, you know, um, I think that window will close. And so now's the time to get serious.

Veronica: Yeah. But it's interesting because everybody, we're all shape, you know, we'll sit in their hands and were waiting or the bottom of the market.

Veronica: Oh, well if you wait for the bottom, the liquidity dries up and you miss out on buying because there's nothing available.

Veronica: That's what you want it. Yeah. Well I'm not a property investor, but I just know that's how liquidity works. Yeah. That's what it is, isn't it? I'm not going to get my price, so therefore I'm not going to list my property. Yes. If you don't list your property, you can't be bought by those people trying to buyat the bottom. Sorry.

Roger: I will say, I think I got really lucky. We just bought a magnificent house in Pymble on almost an acre. Um, it's an old, very old house its over 115 years old. Um, but we bought it the weekend before the election. Um, and, and I, and I know because I've brought some architects into quote on rebuilding the property. I bought the house and land for less than it would cost to replace the house, uh, which, and now th, the coalition has won. Now we're going to be selling our other house. So I look like a genius. But it was complete luck or divine intervention?

Chris: No, not initially. I had a coffee with a client just before here today in the same store. I mean he just bought a house in Redfern on, on a good street in Redfern. I can't say where it is, but he bought just before the election and um, he was upgrading so he's got another house to sell in Redfern and uh, he's going to sell it after the election. So it's kind of, he's going to win on both hands.

Veronica: It's funny the whole election thing because I know with the whole negative gearing ALP's negative gearing policy that we were banging on about for a long time and we all thought, everyone thought (the anti investor that policy very much). Anyway, let's not get into that because it's not happening. But the funny thing is that, oh, I gave a lot of talks on this and every time I'd say, so put your hand up if you think the coalition is going to win the election. Not one hand ever went up there was the one that almost went up and says, I don't think they are, but I hope they are. That was just, that was the closest I got to a hand going up. And so we all have this expectation and so I know myself, I said, right, if they get in then we're going to see a spike in prices. Yeah. Before the end of the year is because people are sheep. That's what's going to happen. So instead we've had a surprise, a surprise result, and now we are potentially going to see an increase in prices purely because of consumer sentiment.

Roger: It's what we call a relief rally in our indecently relief. Right. A relief that something bad that everyone thought was going to happen didn't happen. Yup. And so everyone scrambles to reposition themselves, um, because they have to reappraise the future. Um, just remember there's an election every three years investing when you're investing in property and when you're investing in shares your horizon as much longer than three years. Yeah. So I think a lot of, a lot of forests have been felled to write about the Australian election and really, yeah, there'll be another one in, in 36 months.

Chris: So big change though and you know, so there's a relief rally right now, but then there's macro kind of global pressures, which is kind of, we forget about a year in Australia cause the little island, um, you know, there's big picture things happening all over the world. What's your view on to kind of just some of these things that are playing out and how the Australian government might be wanting to play them and what sections they've got?

Roger: One of the biggest trends that that has influenced. There's it, there's a couple of things. There's, there's, there's liquidity or credit availability, which we'll get to. Interest rates is another one. And, and related to, I guess both of those things is, is, you know, buyer demand. Um, so a big influence, excuse me. You can just read it. Thanks. So a big, uh, yeah, a really prominent trend that emerged after the GFC was the advent of the Chinese buyer. Uh, and that, and that influence prices from Queenstown to Vancouver, Toronto, Hong Kong, Singapore, New York, London, Sydney and Melbourne, uh, and even Perth. Okay. What's happened though is, uh, the, the Chinese government has changed or restricted the amount of money that can be taken out of China. So remember I talked about credit availability or finance availability. And so a lot of them, a lot of the Chinese were able to take out the money for the deposit. And then what the Chinese government did is essentially they restricted, um, restricted the amount of outflows of foreign exchange outflows to $50,000 per family per year. Okay. Consequently, no one can satisfy the, uh, the, their obligation to settle on the properties that they bought and so we've seen the foreign investment review board, uh, applications for new and established housing fall from about $75 billion dollars in 2015, 16 to about $11 billion today. So that is a massive plunge, almost 90% plunge in applications to buy property from Chinese investors in Australia. And that takes out a huge proportion of the market in Australia. So that's one influence. The other one is interest rates.

Chris: While we are there on the Chinese. I think it is interesting thing of that $70 billion, a lot of that would have went into new property and that money's there to support our construction industry I guess. And so whilst we've got a $7 trillion property market, $6.5 now maybe, maybe only a small part of it is $60 to 60 billion, but that $60 is going l mainly to our construction industry, isn't it?

Roger: Yeah. What do you have to remember though? And this is something that a lot of people forget, is not, it's not you and I. If we're not buying or selling this weekend, we don't influence house prices. It's what we call in our industry. the marginal buyer and the marginal seller, they'll determine prices for everyone else. Yup. And so it's what people do this weekend. So if last weekend they were 50 Chinese buyers for a, you know, an upper north shore house on a 900 square meter block and this weekend there are none. Well that's going to affect what the marginal price is and therefore affect prices for everybody else. And that's been happening globally. So we've seen in London and all the cities that I listed earlier, we've seen prices fall. Yeah. Not just in Australia. So it's a global phenomenon. It's got nothing to do with population growth. You know, I can't tell you how many times when I argued in 2016 and 17 that property prices were going to fall. I can't tell you how many people, by the way people get really angry. Yes, don't they? They seem to, I don't understand why they don't play the ball and they play the player and they were telling me, Rog, what you don't understand is population growth. And I tried to remind people that since Captain Cook put that flag in the ground in Botany Bay, the population of Australia has been growing and yet we haven't been immune to periods where prices have fallen. And all around the world, the population has been growing. We were 3 billion when I was a kid. We're heading for 9 billion. And yet markets for property fall despite population growth.

Veronica: One of the levers

Roger: Yeah. Well the two levers, the two biggest by far going to be, and in the background that population is always growing, but the two leavers are always going to be credit availability and interest rates. And what happened in Australia and the reason why property was going to fall was because after David Murry's financial system inquiry in 2014 or 15, um, he basically that as a consequence of that financial system inquiry and the, and the requirement to make the banks unquestionably strong, um, APRA imposed a couple of restrictions on the bank's number one, uh, investor loan growth was limited to 10% and number two interest only mortgages couldn't be more than 30% of all mortgages written. Yup. And that completely changed the dynamic for credit availability. And it wasn't the Royal Commission that was just the icing on the cake or the final nail in the coffin. Um, and that really the banks over reacted arguably on that. And so then now loosening the screws, which is going to be good for property prices. Um, but yet after the financial system inquiry, that's when it really became tougher for banks to lend. But of course people were lying about what incomes they were earning and what expenses they had. And consequently the banks kept lending, but then the royal commission came out and that stopped it in its tracks.

Chris: And so now to this point where a lot of good things have happened in the last couple of weeks, you know, APRA have dropped their assessmen rates, an election win, talk of an interest rate cut even. That's good. You know, um, I guess an Skomo 5%. I mean these are all the things that ..

Veronica: when you say good, right, cause I think we have to be careful here. I think the pendulum was at one extreme, which was this money was far too easy to get, and that's actually bad for the proerty market because it

Roger: is bad for new buyers Yeah. Cause they're paying high prices. Yeah. Right.

Veronica: And it was bad for everyone though because in reality the whole market is over iinflated then because it's basically, it's unsustainable, exactly. So therefore we all want to stable property market. So therefore you know the pendulum has gone far the other way. So when we talk good, I think it's good because things are hopefully coming. The pendulum hopefully is coming towards the middle and that is good for all of us so that we've got activity within the market without being overinflated and unsustainable.

Roger: Well when you think about it this way, you put money in the bank, you earn 2% at the moment, about two and a half percent on a term deposit for 60 days. No risk of capital loss. You buy a property at an inflated price, you get a yield of one or 2% and the risk of capital loss. So on a risk, what we call in our industry are on a risk adjusted basis. That makes no sense. And the only reason you would do that is if you thought you were going to be a gun speculator and someone else who's going to pay more later.

Veronica: Well, no, you only do that because you don't know, the moms and dads, investors, and I hate to say the investors just don't know any better. They don't realize that there's risk in property and you know, this is fertile ground for spruikers as well. Feeding into that idea of just for the price of a cup of coffee, you too can be a property investor and you, your future will be secure its actually a lie in more cases than not.

Roger: Well it's a lack of understanding as you pointed out. It's a lack of understanding of the basic metrics of investing. Um, the lower the price you pay, the higher your return, the higher the price you pay, the lower your return. It's really that simple returns.

Veronica: But there's two different returns here, you know, you're talking about yield as in, as in.

Roger: So in talking about total return, oh, total return. If you buy something at a cheap price, you get a great yield and other people want that great yield, I guess what they'll be willing to pay more for the property.

Veronica: It's, finds it's own level doesn't it? But the problem is when you say like the lower the price that sort of makes people potentially think, oh well I need to buy a cheap property and

Roger: no, no, you need to buy, you need to buy good value. That's pricing, which is what I was talking about earlier. That's the difference between price and value. Yeah. It's like what you're saying just there as in our industry that would be someone saying, I'm going to buy 1 cent stock because that's cheap. Well actually it's going to go to one, 100th of a cent shortly and you will lose 90% of your money, uh, or 99% of your money. So it's not the, it's not the cheapness. It's the value. Yeah. That's important.

Chris: And short termism how does that kind of play into the markets? I guess? You know, you know when, when markets are booming, you know, people think we'll propertymarket went up 15% last year I should get in now it's going the other way. People don't want to get in, I guess it, you know, how does, so does that play into boom and bust cycles?

Roger: Three phases of a boom. So phase number one, a legitimate reason for rising prices to it for growth to be expected. So that's probably the best way to say it. A legitimate reason for growth to be expected. So in the case of that Marc Andreessen article, you know, software was going to transform ecommerce software, was going to transform the know going changing revenue models for businesses going from, you know, a transaction based to a subscription base. Uh, you know, you get recurring income streams. So there was a legitimate basis for the boom. And then what happens is additional money starts flowing and access to that particular theme increases through different structures. For example, it might be, you know, pooled investment vehicles in property, you know, you can buy industrial property to get her in a syndicate and, and, and you see, you mentioned spruikers earlier about don't mean that in a negative sense, but you get people spruiking pooled investment vehicles.

Roger: Yep. And so that gives access to more people. Then what happens in the third phase though, is that that second phase feeds on the theme and it pushes prices up and they're not necessarily extreme. But in the third phase, what happens is people remove all, sense all what's removed from the picture of relevance is, you know, the income from the property, enjoyment of its use, even as long run worth those things are no longer worried about or cared about. All that matters is that the price will go up next month and next week because it went up last month in the last one. Yep. And when you get to that point where people just need to buy because they fear missing out, then that's when you're at the, towards the end of the boom and ultra arguably in a bubble. Now you never can identify. People often say, well, there'll be a catalyst for it falling. There'll be a you know you'll see a reason that it'll decline. Often that's only evident after. Yes. Know it takes, you know, I, you know, I like to say that I've got the property market right and I've got the iron ore market right. A few years ago, but I don't get it all right. And I think I'm lucky when I get it right. Uh, I don't think it's because of genius on my part. It's just happenstance.

Veronia: Oh, that we've got a fool or forecast a report and we, we brought out our inaugural one this year. So All listeners, you can download it on the website. The elephant in the room.com.au. And it's all about that. You'll get it right. Sometimes it's really a big, doesn't mean you're a genius.

Roger: Cool. Well, you know, I always remember the quote, you know, "if you, if you want to forecast successfully, forecast often" and forget about them, don't forget it out the ones you got to know a numbers game. In all seriousness, that's why we, we anchor our, everything we say we anchor on, on value. Uh, and then you can see if you, if you know what something is worth, you can see when people are paying too much. Yep. Yeah. And people know it intrinsically, you know, they go to an auction for a property and they go, oh it wasn't worth that, you know, and you know, deep down, you know, and you might, you might think you're wrong because the price went up the following week or they sold it for a profit. Yeah. That just means the person who bought it was even a bigger idiot.

Roger: Um, and you know, look there, there are dynamics dynamics in individual suburbs. So it's really like individual stocks. You know, I can talk about the stock market being overvalued, but there'll always be things that are cheap. And it's the same thing in property. The property market a year ago or two years ago was way over the top. But you would have, if you looked hard enough and you found opportunities in your working diligently, you would have found things to buy the cheap and over the last couple of years you would have still made money. I've got a good friend of mine who writes for the fin review guy named Chris Joy. He is a brilliant property investor. Absolutely brilliant. And in the last two years when property generally has been going down, he's made money in property. Uh, and so if you're smart and you do the due diligence and you know, the due diligence to do better than I do in property, um, you know, you can still make money.

Veronica: It's very true. If I have done quite a few case studies on, I particularly like 2003 to 2007 for instance, case studies on two properties, similar price, same suburb. One went up, one went down. Why, you know, and, and studies are really useful because yeah, exactly. They proved the point. And, and the thing is, I'm actually collecting some data at the moment for properties that had sold in 2016 and an ensemble or the 2018 or 2019 some went up, some went down, very similar suburbs as well. And so really digging into to see not everything goes up. See, not everything goes down. And, um, and I think that that's a debate that's often missing or a conversation that's often missing. And I think the same in the share market. Everyone talks about the whole of it going up or down. They don't talk about the fact that you can actually buy in, you know, you can invest in certain companies, stocks, shares, whatever and leave it and do better than everything else or do worse than everything else.

Veronica: You know. And I think that that's that nuance and that understanding underneath that, you know, lift the bonnet and underneath it that people just don't want to have when it comes to property

Chris: and those don't really want to check their returns. Right. So let's say you've already made your investments. You know, I think a lot of self managed super fund investors, like there's a lot of property investors, they've never actually gone back and looked back in time. Well, I bought that in 2007. What will my other pro, the other properties are could have bought in 2007. And what could buy property could be worth today if I bought that? Um, and they've never going back in time. They're just like, well, I bought it now I'm just going to leave it for 20, 30 years. And I think share investors are obviously the same. You know, I think, um, you know, obviously there's a lot of risks right now with kind of high dividend stocks for example. You know, and with the franking credits and things like that, you know, they don't really care what it's worth as long as I get my dividends, you know, I think there's just a lot of, uh, you know, not really sound checking or their ideas.

Roger: Yeah. There's, people don't realize that, you know, they, they'll tell me, I bought this property 10 or 15 years ago at x and I've sold itfor X. I've done really well. I've doubled my money. That's sort of three and a half percent. It's not much more than bank interest. In fact, bank interest 15 years ago was about seven or 8%. So you're probably better off in the bank.

Veronica: They see a gain as being, I've done well and they use that word a lot, that, that phrase I've done really well inproperly. And I always say, how have you measured that?

Roger: Yeah, exactly. And a lot of people don't know how to calculate the return. On the, the additional investment that they've made while they've owned the property. You know, it is, it is a capital intensive asset and it requires updating, you know, people, it's amazing. You know, I've been told by professional property investors, guys who've done very, very well, um, renovating properties and they can add two or $300,000 to a property by just changing the sink and the taps and the door handles and people will just go, oh, I love this property and this is amazing. You know, and people who buy that property aren't realizing that they're going to get a low return out of it because those taps, you know, that's not enough.

Roger: It's not enough to see the value of the property is not what they paid.

Chris: You mentioned something really interesting about the rate of return, I think, you know, people don't understand the cost of, by the cost of sell, capital gains tax, the holding costs of the repairs. They forget about all these things. Yes. And what they could have done, with thier money, capital intensive, and even just paying off their mortgage and you know, other options and investing. How do you feel like, you know, because there's always an argument with shares and property that you can leverage more into property and leverage is what gives you that return of course. Do you, how do you think that really plays out and why it is to really affecting the property market so much.

Roger: Many people are going to find out that leverage also bites you in the bum. can I say that? They've already found that out and in fact we're probably closer to the bottom than we've ever, you know, then we have been in the last couple of years. So, so the answer that question that I can, I guess my answer to that is, um, I think the access to capital has overinflated. You know, the ease with which people can borrow money to buy a property, um, has, has caused the overinflation of that as an asset class. Uh, and people think that it's, you know, it's, it's a population growth or it's whatever. Really what's transformed property prices is that back in the 70s, you had to go to the bank with your cap in your, you know, under your arm begging and pleading for a loan. And if you've got the lender on a bad day, you didn't get it. And what happened since then is, you know, every sort of 25 year old with a Toyota Rav became a bank lender. Yeah. You know, became mortgage lender. And so people now knock on your door and say, do you want the money? And that's what transformed the asset class. The, and that's why I said I keep saying this over and over again, access to credit and interest rates is, is the ultimate driver of, of the asset price.

Veronica: because you and I don't know a lot intimately about, um, you know, overseas markets, but I do know that you can't borrow money as easily in a lot of other markets around the world as you can here. So, therefore you're looking at America for instance, and the, and the property market as compared to other asset classes is nowhere near is, high, you know, as large.

Roger: Yeah, we saw, we saw the, you know, they had a terrible property collapse, um, in not in the Great Depression. That was awful, particularly in Florida, um, where people had paid ridiculous process for swamp land, literally swamp land. Um, and you couldn't build on it, but you know, they would sell, they would make a 20% gain in a week back then. And then we had another massive property collapse in, um, in the United States in 2008, 2009. And to give you some sense of why that was inevitable, they, the banks were lending, um, you know, take, I'll give you a case study. One, one borrower, uh, a Mexican guy, uh, crossed the border every day to pick strawberries. Um, and, uh, and he was earning $14,000 US dollars a year. The bank, a bank lent him $700,000 to buy property on which he would pay no interest and make no repayments for the first three years, and then it would switch to a principal and interest loan and he would have to pay interest at 8% yeah. He was never going to make the first repayment. And we could see that was there was a, what we call 'em subprime loan. That was a subprime loan. Yeah. And that subprime loan, billions and billions and billions of dollars, hundreds of billions of dollars. Were going to be reset in 2008 so they were going to switch from that noninterest non-capital repayment period to repayments. And we could see that that was going to, we went to 70% cash at the time in our funds because we saw that it was that disaster coming.

Chris: Yeah. But was that the Mexicans doing that? What was the bank speculating ?

Roger: that it was availability of credit. People were knocking on the door and saying, do you want money? You can buy a house.

Roger: I was in Florida. I was driving from south South Beach to the Florida Keys in December of 2007 so the, the crash hadn't happened yet. And I remember, I remember, um, seeing a billboard and it said, buy one, get one free. It was for a house, I kid you not, it was for a house. You could buy a block of land, build a house on it, and they would, the developer would subdivide the block of land for you and build a second house for free on that block. And that was, uh, that was a huge billboard. I took a photograph of it is extraordinary.

Veronica: There's, there's a, you know, a good movie you want to watch movie on that The Big Short. Oh, I know it well. Yeah. Great. Great. Explains it. The book is better than the movie as much read the book. So I have to read the book of any words to maybe a for me because I couldn't quite wrap my head around it. It was like, ah, and, but funnily enough, I used to always say, look, won't happen in Australia because our financial situation with our financial institutions, yeah, no, no, no, we're highly regulated versus that, you know, we, we also got recourse lending, which they didn't have, you know.

Roger: Yeah. That's a, that is a fair distinction, but you've got to remember that if you borrow money in the United States, yes, you can leave the keys in the letterbox and walk away, but you'll never borrow money again until you pay that loan off. So you can't get access to capital. If you don't pay off your first loan, you credit the credit rating screwed. Yes, you can leave the keys and walk away. No problem. No one's going to chase you, but you won't get another loan.

Chris: So when you're desperate, you can do it. You can walk away.

Veronica: But you know what hazard a guess that the $14,000 a year earning Strawberrypicker isn't ever going to get, another lone anyway. So what does it matter you know, that's exactly right. Get to live in a house for free for three years.

Roger: throughout history. Look, you know, if I can share this, um, hopefully it's useful throughout history. You, you get, they cycles that emerged through human behavior where people all believe they're all going to be rich and everyone deserves to be rich and they're all going to, and you know, when that sentiment has taken hold, it's time to actually get out. Yeah, not get in. Um, and just, yeah, just remember that for the rest of your life. Uh, And, the time to buy is when commercial radio stations, they're lead news story is about the collapse in the property market or the collapse in the stock market because by the time it gets onto, you know, Nova or you know, a commercial radio station you know, it's passed, it's, it's gone, it's done. That story is over by the time it's on, on the new, on that news item. And particularly when it leads the news. Um, yeah. And just remember those two things and you'll do just fine.

Chris: Yeah. Cause I guess that's when the peak pessimism that, so there's the least amount of demand, right? Pick optimism on the other side, which is what we're talking about.

Veronica: It's best is to strike on the transition of the market. So, so where are those poor owners that actually have good quality property and they put it on the market and good faith. They thought that we're going to get their price and they get caught out in the vacuum and then suddenly the buyer's evacuate and it's like, right. So there's little left standing. That's the great time to pick up some great opportunities, but it doesn't last very long because then they all, they all finally decide to either take the property off the market or they sell. And then what is left is lower volume, which is what we got at the moment and a lower proportion of good property.

Roger: And then the volume is picking up now. Um, that's the first thing. Um, so there's an interesting dynamic that's happening in Australian property right now. Um, you know, they were only a couple of us who were writing articles in the Australian and the Fin Review saying, yeah, this is going to end badly. Uh, and now we're saying, you know, we're near the bottom. But there's a caveat, uh, and that caveat is, um, that we've seen a, there is a huge slowdown coming in construction activity in Australia. Now, why does this matter to anyone? Well, it's because the construction industry is the third largest employer in the country. 9.6% of the workforce, 37% of which is in residential construction. That's 3.5% of the workforce in Resi. Now I can tell you, house and land package developers and high rise developers, they're busy at the moment, but they building things that were ordered a year and two years ago.

Roger: What we now know is that building approvals have fallen about 40% in Australia from about 280,000 dwellings to 170,000 dwellings. Now you can't build anything until you get approval. So if, if you're getting 40%, if 40% fewer approvals, uh, of going through, that's a big slump in construction activity in the next six to 12 months.

Chris: And a lot of those haven't been sold. Right? Because try to get approval and to get financed, they might've only sold 30, 40%. Exactly. And then I think, well, that's enough. I can sell the other 70% while I'm building.

Roger: Yeah. So, so, so that's coming. That hasn't changed. In fact, I only spoke to her a builder last week, uh, who, who told me that they are their pipeline is down 50% by Christmas and they'll have to lay off staff if, and you're hearing this second hand from me, but I heard it from one of the biggest house and land package developers in New South Wales, if not the biggest, um, and they will be down that much.

Roger: I also know, you know, and another anecdote last year, you could not get a brick layer, uh, for love nor money. And if you could, they name their terms and those terms were a $1.82 a dollar $1.90 a brick laid. Yep. Now the builders are being inundated with brickies looking for work and they're offering to do it for $1.30 $1.40 a break. Yep. So you know, that, that dynamic, it's happening now. Now why is that a negative? It's a negative obviously because if you're third largest employment sector, uh, is, is going to see 50% less activity or 40% less activity that produces a negative feedback loop into retailing. They, Nick Scalies going to sell less furniture. Becon Lighting's going to sell less lighting. Jb Hi fi, less, less, um, led TVs. Uh, and, and the, the retail industry is the second largest employer in Australia, the first being Healthcare.

Roger: And so you got the second and third largest employers in, in Australia, um, in combination seeing declining activity. No wonder the Reserve Bank of Australia wants to cut rates and fast, but they don't want to do it until it's effective and it won't be effective unless APRA reduces that stress mortgage tests, right, which was 7% and the banks were putting on us to point 0.25% margin. If that brought down and the capital can flow again and credit can flow from the banks, then if the RBA lowers rates, it could have an effect. So I don't know. And nobody knows how affective to RBA rate cuts will be at re stimulating construction activity or demand for house and land packages, which ultimately then will stimulate demand for chippies and tradies. Uh, and then you know, things are on again and you know, things stabilize. Um, the government can offer tax cuts, the, you know, for any, if you don't like the liberal National Party, that's fine, but they are going to have a surplus, a budget surplus, which means they can afford helicopter money.

Roger: Helicopter money is where you fly. Helicopter over everyone. Just throw out the cash. We saw that during and we saw it, we saw it here in Australia with the, the school building revolution during the GFC that rescued our economy. It saved us from a recession and

Chris: they're trying to do that. I guess with the infrastructure, I guess we correct with low interest rates,

Roger: It employs less people, low infrastructure. Yep. So it won't save the brick layer because you don't lay bricks when you're building a road. You know, when you're building the Hume highway, there's no bricks city only so many jobs I can do anyway. Right. That's what I've already building. The roads are already building the train. Yeah. And how much more else can we do? So, so the, the future of property in the next 12 or 18 months is really dependent on the dynamic between the slowdown in construction activity and whether or not the RBA's tax cuts rescue that, sorry, not tax cuts, interest rate cuts, whether the RBA's interest rate cuts, rescue the construction sector.

Roger: And if they do, uh, then with we've seen a bottom in property that's done. If it doesn't, then we might get some for selling. And that forced selling could push property process down a bit more.

Veronica: Which is interesting though, because when you say also that we're going to have a, a shortage of supply and then that will then push prices up. Correct.

Roger: In three years time you'll have a shortage. Right. Because some of our, some of my friends are some of the biggest property developers in the country. In fact, the biggest privately owned property developer in the country, uh, has told me that the problem is council's not approving, um, subdivisions and not approving rezonings. Uh, and so that's going to restrict supply in three years' time. Um, so, so that will be fine. Um, all I'm saying is whether the prices fall a little bit further or not will be dependent on that, that short term dynamic.

Chris: Those two markets. So the construction industries, yeah, there's multiple levels to, but if we break it down to two, two in particular, the high rise unit market, which has predominantly been bought by investors and investors, A haven't got the borrowing capacity anymore. Sure. B, they're scared. They're worried that they're not going to get interest only loans just into infinity like they used to. Yep. Yep. And they've already seen big falls, so they're last. They're not confident to go into the market because they've actually figured out high rise apartments aren't good investment.

Veronica: The have got safety issues, OpalTower

Chris: and you go, yeah, that's that scaring people. Yeah. It's just quality of the assets

Chris: and they can see more cranes coming. And I can think most suppliers, it's hasn't hit yet. So yes. You know, they starting to figure it out, that may be probably doesn't always go up. So that market, I can't see investors just flooding back in there with their blinkers on. Just go, I'm just going to down. Yeah.

Roger: So, so we talk sometimes about a v shaped bottom, you know, that's where the property, the market falls or the share market falls and then it bounces very, very quickly. Uh, I don't think we're going to see any very quick bounce. Yep. Know it'll be slow and steady and it might accelerate down the track. Um, if supplies restricted but remembered by then, we don't know what interest rates are going to be doing. If interest rates a lot higher, that could slow any kind of recovery as well. So I just think slow and steady in terms of the, this, the recovery that we see this time around, not a, not a v shaped bottom

Veronica: We want that..that we really want it slow and steady. Absolutely.

Chris: But the developers only really make money like real money if they're selling it for high prices. So the developers made a lot of money in 2016, 15 when they're selling these two bedroom apartments for $1 million, but now they can only sell them for say, $700 or $750. The profit margin is not there. So they're going, well, I'm not just gonna Build. Yeah. And so then that we're going to be inevitable. They're gonna have to lay off staff cause they're not gonna build anyway.

Roger: So, so there'll be some developers that not only lay off staff but go broke. So yeah, if you look at, um, look at, sorry, ASIC filings in Melbourne for example. Um, we've seen a record number of developers go to the wall and be handed to receivers. Uh, and that's why you're also seeing some of the big property developers like Mirvac, um, uh, I think it's, it's Featherstone? It might be. There's another property developmer. They've, they've raised capital recently. Um, they've been around for a very long time. They know the cycle. They know that there are property developers who are going to be going to the wall and they building up their bank account or they war chest if you like, to uh, to invest money when everybody else is running for the hills. And so now's a really good time. So an answer to your question or two to sort of reinforce your point. When people are worried and scared, that's the time to be greedy. Yeah. I think Warren Buffet's saying, I think it was Warren Buffet who said he be greedy when everyone else is fear? Yeah. Yes, absolutely. Yeah. Be fearful when everyone else is being greedy. Yeah.

Chris: Yeah. Be greedy with the right assets? So I wouldn't be greedy going in buying these kind of high rise apartments. No. Don't iuyanything, you know, buy this stuff that's, you know, valuable. There's actually a good assets. I mean, the house and land packages are the other side. I mean, first time buyers, I think they're also understanding that these house and land packages aren't just great investments. You can't just go and buy greenfield new houses and then. And so, you know, if you, you've got to stimulate either the investors or the first time buyers and the first time buyers go well, that new estate that was $900,000 is only $700 now I might as well just buy one of those. I don't need to buy a new house and land package. Let's, because

Roger: yeah, what you're talking about is the fungibility of property, which is a word not many people fungibility it's transferable. Um, uh, if I can't afford that house and that apartment has fallen 40%, we'll, I'll buy the apartment. cause, the're fungible. Uh, they, they, they've valued the same to me. I can, not for everybody, but to the extent that they're fungible, that influences the process of all property. And so yeah, if a house hasn't fallen in price, and people often ask me, Roj, what you're talking about, I think you're right on, on, um, apartments, but I don't think you're right on freestanding houses. But if fewer people turn up to the auction for the house because they've all gone and bought the apartment because the apartment's fallen 30 or 40%. Yep. Then there's the house has to come down. And so, you know, it's that old, um, you know, Chinese proverb, I guess you drop a pebble in a pond and eventually the ripples effect the entire pond.

Chris: And that's, so what's, what's happened a lot is that, you know those areas, well I don't need to buy a house on land package because it's 50, 60kms. I still got $1 million borrowing capacities, but I can actually buy 15km's closer to the city now. So, you know, it drags the buyers, you know, the ripple effects ripple effect. Yeah. Back into the city.

Roger: Yeah. What I'm talking about, the ripple effect, I just mean that you can't have, um, you can't have one style of property doing well or not, or doing badly and it not having some influence on other properties because of that. Fungibility

Veronica: well that's what Frank Gilbert talked about backing. I kind of remember what episode it was in the 30s. Anyway, he said, you know, he's been a property forecaster. What did he calls himself a um, yeah, property forecaster with a long memory cause he's been doing it for 37 years or something. So yeah, he talks about that as well. Now, we're unfortnately we've run out of time. I reckon we can sort of get another hour out of this. This is really interesting stuff. Um, I really appreciate, we both really appreciate you coming and talking to us because the thing is that property, you know, this either or mentality of money market or equities versus property, I think it's all interrelated in many respects because as you even talked about with the construction industry and we're, we're, we're very bearish when it comes to new property in terms of buying as investment. But the reality is it's all part of one whole market isn't it? And everything is until interlinked and everything is a, there's a causal effects that happen through, you know, interest rates fall and, and the whole rollout of that. So I think this has been a really interesting chat to start to show, shed some light on some of those aspects and I really appreciate your insights.

Roger: Thank you. Nice to be with you. And that's for inviting me.

Chris: It's just want to throw in one quick question and we'll just drag it in there as well. When you spoke about, um, the RBA and rate cuts, yes you do. We didn't actually start with what you thought would have been enough. So, you know, the RBA do cut rates by half a percent and maybe even a percent. Do you actually think that that will have a huge impact in the psychology, the market and bring a lot of more buyers into the market? Or do you think that they'll have to do a lot more than that?

Roger: Look up the, the truth is, I don't know. Um, and the great thing about investing successfully as you don't need to know if you have your anchor as value, uh, and you think about always think about quality. So when we've been talking about blood in the streets or you know, the radio, you know, the lead article on the news being property prices falling, always remember the framework that you need is, is this a quality asset first and quality doesn't mean you think it's going to go up. Yes, fundamentally got to be, is it quality if it never goes up again, is it quality? And that's separate to the value question. And if you've got those two things, we don't need to forecast whether or not the RBA is successful or not because that's related to price, not so much value. As long as we've got that quality and value anchor, we'll be able to respond. If, if it is effective or ineffective, either way we'll know what to do.

Chris: Yeah. And no matter what happens long term, if it's quality asset and it's scarce or it's a great company and it's producing great profits, you're fine,

Roger: let me assure everyone who's listening. If you're in your 20s you will be 60 one day and that is 40 years from now. And I can almost guarantee it's a lot lower risk. Uh, in fact, I will guarantee that property prices will be higher, uh, in 40 years time than they are today. Particularly in, in inner city areas where, you know, there's a, there's a, there's restrictions on over, there will be restrictions on overdevelopment. Um, I can also tell you bank shares will be a lot higher than they are today too because there'll be lending a lot more money to facilitate that property. Boom,

Veronica: That such common sense. All of it. Thank you very much.

Chris: Every week hear incredible stories of the dumb things, property buyers do, dumb things that ended up costing a whole lot of money and or creating a whole lot of stress mistakes that can be avoided. Now, Roger didn't have a Dumbo for us cause he's an equities guy. But Veronica, you've got one for us?

Veronica: oh, I do. I do. In fact, this is um, fairly recent. People will talk about, you know, buying property and they're always looking for good opportunities and bargains, particularly in a buyer's market, but what leads to a bargain and or what, what gives a bargain and all the opportunity for bargain in quite often it's because the property itself is not so great. But we recently bought a property, I believe for a bargain. It was a great property for a client. And the reason we got it was because the owner, the person selling that property had bought another property before they sold. And, and that in itself is not the dumb thing, but they hadn't organized bridging finance as it turned out there on the cusp of retirement and couldn't get bridging finance. They bought with a three months settlement. Um, and they just assume that every buyer was going to be able to settle on their property within six weeks. So they got to a couple of days before their auction and it was, there was a lot of people on this. It should have been a really competitive auction, a good pro, you know, good auction, um, from their point of view. But there are a couple of days out and I think they finally fessed up to their agent and the situation and predicament that we're in, they'd had it pretty much every buyer asking for 12 weeks settlement cause every who their buyers needed to sell something. And we just saw the opportunity to buy that property at a lot less money, purely because my client could actually do a six week settlement where most other people couldn't. So that bargain didn't come about because of the market it came about because those owners had got themselves into a situation that really was avoidable. Um, they also hadn't actually got advice from the people that were working for them, probably their broker or if they had a broker. Um, they're certainly not their, their agent. They certainly didn't seek, um, from the vendors as to whether they could extend on those 12 weeks, they left everything to the last minute and then they were backed into a corner. So that's my property dunbo this week.

Veronica: We want to make your better elephant rider and this week's elephant ridertraining is we want to look at the concept of value investing and how it implies to property. I mean, we did talk about this quite a bit, uh, in this interview with Roger and, and he talked about value being what fundamentally something is actually worth versus what you pay for it. And now, certainly when people are focusing on the property market, they're often talking about I did well because I bought at a cheap price, or I did well because I screwed a deal, or it was a buyer's market or prices are falling. And so therefore I did well. But they're not sort of focusing so much on the actual caliber of the asset. So, and that was something that came through loud and clear in this conversation with Roger. Now the, the caliber of the asset is so important in property because really it's the icing on the cake.

Veronica: So many experts talk about location being the only thing you need to worry about. And it's very, very important. I mean, it's 80, 20 rule. Basically 80% of it is location. However, what is really gonna make the difference over time for a property investor is understanding the caliber of that asset within a location. And I'll just give you an example. You could buy say two, two apartments in one suburb. There was some suburbs that might have smaller blocks on bigger blocks of land. They're older, they're well built, they're owned predominantly by owner occupies. There's a lot of pride in the building and they're scarce cause it might only be six or eight or nine in the actual block. Now in the very same suburb, you might have a high rise and that is, you know, 20 stories for argument's sake, a lots and lots of apartments, all exactly the same.

Veronica: And some people think, oh, I'll go for new because it's brand new. And you know, you get to enjoy all of that. Whereas the older one may not have a new kitchen and bathroom in it. But fundamentally, what are you buying? You know you're buying a piece of land, you know at part of or percentage of your ownership is that is part of that land at the property sits on your buying a scarce asset or you're buying something that's lots of them. Are you buying something in a location in the part of that suburb that is more established that is closer to all the amenities and all that sort of thing? Or you're buying one that's maybe further out that doesn't have those things. So it's really important to think long term what is going to hold its value and be more appealing to future buyers than today, because that is essentially what you're buying. You're looking at buying that quality of asset that long term is going to be more appealing and have more buyers on it. Than another property that we'll have less buyers on it. So that's sort of a, it's a fairly simple way of explaining it I think. But that's the thing that when you're looking at property in terms of looking at value, that's the thing that you really need to be focusing on.

Veronica: Join us for our next episode where we interview the lot in this and we hope you can join us.

Chris: Don't forget, we're on all the social channels. We're on Facebook, we're on Linkedin, broad Twitter, or you can connect with us on the elephant in the room.com.au The links are all there for you.

Veronia: Please connect and send us a message we'd love to hear from you. The elephant in the room property podcast is recorded at the Sydney sound brewery. This week's podcast was recorded by John risk editorial by Gordy Fletcher.

Chris: Until next week, don't be done be a Dumbo

Veronica: now. Remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.