Episode 135 | Corelogic report: Pain and Gain, March quarter 2020 | Eliza Owen, Corelogic

During the beginning of COVID what properties and areas had the greatest loss made sales
We can’t get enough of Corelogic's Head of Residential Research and author of Corelogic's recent Pain and Gain Report, Eliza Owen. The quarterly Pain and Gain report details how different properties, regions and cities are performing, including how many have made a profit or loss since the property last transacted. In this episode, we understand and interpret the data in Eliza’s report including the possible implication of the trends and how it will correlate to different buyer demographics.

Here’s what we covered:

• How far did property listing fall?

• How did low interest rates and mortgage pauses slow the need for homeowners to sell?

• Has Covid benefited the property market?

• What is the correlation between the unemployment rate and the arrears rate?

• Which areas had the biggest bounce back in May/June?

• Why do new properties and units have the greatest share of loss made sales?

• How have regional properties performed during this period?

• Why are investors having the majority of loss made sales?

• How the ACT housing market has held up.

• Why buying property regionally to benefit off structural changes is a poor property decision.

• What areas have had the greatest profitability?

• How has tightening of mortgage lending led to less customers falling into arrears?

This weeks Dumbo:

• Purchasing and renovating a property through a SMSF

This weeks elephant riding bootcamp

• What is vendor discount pricing

RELEVANT EPISODES:
Episode 81 | Eliza Owen
Episode 115 | Eliza Owen
Suburb Trends July 2020

GUEST LINKS:
Corelogic: Pain and Gain March quarter

HOST LINKS:
Looking for a Sydney Buyers Agent? www.gooddeeds.com.au
Work with Veronica: https://linktr.ee/veronicamorgan

Looking for a Mortgage Broker? www.wealthful.com.au
Work with Chris: hello@wealthful.com.au

Send in your questions to: questions@theelephantintheroom.com.au

EPISODE TRANSCRIPT: 
Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…
This episode was recorded in July, 2020.

Veronica Morgan:

Did you know that in the March quarter, 12.3% of properties sold in Australia did so at a loss, this adds up to almost a billion dollars. It's actually $908 million in losses. And this is only the tip of the iceberg.

Veronica Morgan:

Welcome to the elephant in the room. This is the podcast where we love to talk about the big things in property that never usually get talked about. I'm Veronica Morgan, real estate agent buyer's agent cohost of Foxtel's location, location, location, Australia, and author of auction ready.

Chris Bates:

And I'm Chris Bates mortgage broker. Before we get started, I need to let you know that nothing we say on here can be taken as personal advice. We always recommend you engage the services of a professional.

Veronica Morgan:

Don't forget that you can access the transcript for this episode on the website, as well as download our free full forecast report, which experts can you trust to get it right? The elephant in the room.com did I? You,

Veronica Morgan:

Eliza Owen has recently taken over the mantle of one of my favorite property reports, call logics quarterly pain and gain report. Eliza has joined us today to discuss the key findings in the most recent release, which looks at the March, 2020 quarter. Our lost making sales rising or falling has COVID-19 made an impact where, what, and who is likely to experience the greatest gain or pain. We've got questions about both city and regional locations, houses, and units, investors versus owner occupiers. Thank you, Eliza, for coming along today to talk about all of these elephants.

Eliza Owen:

Thanks for having me

Chris Bates:

Hi Eliza thank you for coming on again. The Conan situation really only started to kick off in the, you know, the, The end of the quarter, but we already did see quite an uplift in the loss making sales. Can you kind of explain a little bit about what was the cause behind this?

Eliza Owen:

Yeah, so I, cov it's been really interesting because a lot of the focus on data has gone from looking at things on a monthly basis or a quarterly basis and saying what's the day by day situation. So I literally put it out the loss, making sales by contract date in the March quarter ever since the onset of coronavirus it's, it's had that kind of really high frequency focus. So if we take the hundredth case of coronavirus being the weekending, the 14th of March, and that's when the abs kind of set that stage for a lot of their data only about 14% of loss making sales in the quarter were after that date. And, and, and from that date, the portion of loss making sales was about 11% to 12.3%

Eliza Owen:

In the rest of the quarter. So I think the reason we're seeing that was because the initial fallout from the pandemic was not an increase in loss, making sales. It was an enormous temporary drop in sales activity. We saw that in listings data as well by me to April new listings had fallen by about 48% because why, why would you sell in the middle of a pandemic? Right. and so April also saw really low sales volumes. And so I think what really was behind that is the fact that through this pandemic, a lot of homeowners have been helped by banks offering a pause on mortgage repayments. And also low cost debt was able to continue funding new and profitable sales, where, where properties were selling. And the demand was also helped by a record, low cash rate setting. So I think the institutional response had really kept some stability in the property market and maybe even improve some of it from that loss making sales perspective.

Veronica Morgan:

That's so fascinating. I love the fact that you sort of drew a line in the sand at March 14, which is pretty much where we've drawn line in the sand too. And we've been reviewing you know, doing our pricing research on properties, et cetera. But by putting a lid on listings and therefore transactions, would you say that covert potentially had a positive effect on the property market?

Eliza Owen:

So I guess it depends what, what you see as a positive effect from the pain and gain data. I think low listings levels definitely helped to stabilize the property market in many ways as well with the social distancing restrictions. You couldn't physically transact property agents, couldn't hold open inspections and get as many people through onsite auctions where we're postponed. So I don't know, it's almost much like it's a less extreme version of a suspended stock market trading period or something.

Eliza Owen:

But I think overall COVID has not really had a positive effect on demand for property and ultimately we can already see prices falling. And that's really because the, the nature of this downturn has had a massive impact on the labor market. We've seen that wages have fallen significantly and property values are falling. As a result, we know that for every 1% increase in the unemployment rate, historically, there's been an associated 80 basis point lift in the arrears rate as well. So while I think the initial institutional response has helped to keep things steady, we are going to continue to see prices falling, and we probably will see a bit of an uptick in in a rears as well. It's interesting you

Chris Bates:

Say that because he arrived that if you talk about actual demand a lot of that comes down to how many people are working and how much money are they earning. And then how, and then the overall sentiment, et cetera, will determine how many people are out there actually looking for property. And without doubt, like, you know, there's a huge increase in unemployment and there's huge reductions in contracting and bonuses. So, you know, there is a demand problem, but that is potentially offset. Like you said, where there's been a 50% decline in April, but I know that looking at your data, that listings did start coming back in, in may didn't they?

Eliza Owen:

Yeah. So we've seen a significant rise in listings over may and June, and I think vendors became a bit more confident in testing the market. But that also coincided with a really strong bounce back in consumer confidence getting ahead of the virus curve and some of the restrictions started to be lifted as well. Obviously that's changed now with things in Melbourne and Melbourne going back into a six week lockdown, but it was incredible to see how transaction activity sort of bounced back in the second quarter.

Veronica Morgan:

So obviously your June, 2020 pan and gain report will show the evidence of all of these, but so let's just go back to your most recent report because there's some really interesting stuff in there on a regional basis in particular. And it's quite interesting that a wall we could see the, the loss making sales percentage has actually gone up over the December quarter, correct Sydney and Hobart bucked, the national trend.

Eliza Owen:

Why do you think this has been the case? Well, for the past couple of years, I think the portion of loss making sales in Hobart, whether that portion is rising or falling, Hobart is just one of those cities that could go in either direction because the volume of sales that, that are loss making is so small that the change is probably more to do with, with randomness the industry. Got it. Yeah. I mean, I think profitability was always going to be very high in the Hobart market because of it's had such a strong growth period. Annualized capital growth in that dwelling market has been 7.7% a year for the past five years. In the December quarter, there were 14 loss making sales in March, there were 16 loss making sales. So, you know, I, I don't think the changes in their rate too much to be read into at the moment, but I think that might be tested once we see more sales volumes coming up against conditions around COVID-19 obviously Hobart has a high exposure to workforce segments that have had some of the biggest job losses over the COVID period.

Eliza Owen:

So namely food and accommodation services and arts and recreation, that's already having a massive impact on the rental market and that will translate to property values. So I think the Hobart, we could start to see a few more loss making sales over the coming quarter. Oh yeah. Sorry. Oh yeah. It was interesting that because the whole thing about affordability is that when you have more expensive property, obviously people say in hospitality, typically earning less income is lower incomes sort of price out of the property market. Right. But when you're in, in lower priced areas, then people working in hospitality, and I'm going to using that as an example, which typically earn less money, might have a better chance of actually buying property. So is that fair to say that sometimes there are different areas that might be more impacted as a consequence of these job losses because of the demographic and the, the basically consistency of yeah.

Eliza Owen:

People who actually own homes. Yeah. So I think what we're seeing at the moment, and this is backed up by a hurry daughter as well, is that people working in food and accommodation and arts and recreation most likely, or they're more likely to be renting than in any other workforce segment. Right? So in terms of the impact of COVID, there have been about 20% declines in payroll jobs across that hospitality and tourism kind of work segment. And when we talk about affordability, house prices are a component, but incomes are the other massive component. So even though house prices are falling, if incomes in that segment are falling more, I'd say we'd probably see a lot of people really struggle to live comfortably and, and, and be able to enter that ownership status out of the COVID pandemic. I think the people who really benefit are those who have been able to keep their jobs and keep a relatively steady income as prices have fallen.

Chris Bates:

Yeah. I think the interesting thing a lot with your report is it's always very clear that the units have a much greater portion of loss making sales and apartments and townhouses, which they're all in one group reminders, standing compared to say houses and attack detached showers, houses. Why do you think that's the case?

Eliza Owen:

I think for units, they are potentially more likely to be held by an investor. And another trend that we see across these reports is that investors tend to have a higher portion of loss making sales are versus owner occupiers. So the incidents of loss making sales among investors in the March quarter was about 17% compared to 10% in owner-occupied. Yeah. And I think that comes back to investors not having the actual utility of owning a home. So an owner occupier might be likely to, to hold a property for longer because they using it to live in another factor of units. And, and it depends where you are of course, across Australia, because unit markets can be incredibly different, but a lot of what we've seen over the past few years alongside that large investor participation in the market that we saw from about 2013 to 2017 was an uplift in unit construction.

Eliza Owen:

We saw this really unique phenomenon of unit approvals, outpacing house approvals at one point. And if we look at the stock under construction, across Victoria and new South Wales, even during this covert downturn, the amount of unit under constructions it looked to be about 20% above the 10 year average, the new South Wales and Victoria, so that high level of stock. And I think to an extent, a high level of investor participation, which incentivized a lot of that stock has sort of meant that units generally haven't performed as well in terms of price. And that's led to sort of a declining profitability as well. And some of the unit performance has been very stagnant depending on the region as well. So for inner city, Melbourne units, for example, they really haven't shown the same kind of capital growth performance as we've seen in detached housing stock in, in some of the suburbs that are further from the city center.

Veronica Morgan:

It's pretty heartbreaking, really the thing is, and that I just know what you said their lives are about the uplift and unit construction is continuing, even though there's been well publicized a slowdown in approvals, but currently what's being built in Sydney Melbourne. If you, if I'm repeating you correctly is 20% above the 10 year average, even in the face of the fact that we've had these loss, these losses, you said the inner city, Melbourne Mark has been well publicized has been stagnant for the last decade. In fact, there's been well-publicized data on losses on resales of those properties, but that's not sort of separated out in the pain and gain report. Is it from exists? So you haven't got sort of first time resales separated out from existing stock or established stock, have you? No. So at the moment, I'd say it's still a case of inference where we see that a relatively high portion of loss making sales for example, are taking place in in regions of Melbourne.

Eliza Owen:

And we can sort of attribute that high levels of recent construction and completion of units. So at this stage, there's no real big data approach to understanding the age or quality of the property that's transacting in this particular analysis. We do have an extensive construction database behind our core Dell data platform. And it's a matter of exploring ways that we can link a construction project to an address because while it's in construction or in planning, it's not technically an address just yet. So that's part of where the big data challenge comes from. But we do know that especially amid the coronavirus crisis, where in a city rents on apartments have been really effected that there's an increased pressure on people to sell across Melbourne. We know through metadata from our valuation platforms, that the difference between a contract price for an off the plan property and its valuation at settlement is seeing more and more divergence as well. So the portion of properties that were coming in at a lower value than the contract price across Melbourne was about 50% at, at March this year. And about 22% of those had a materially low evaluation of more than 10% in the than the contract price. So I think even from that valuation story, we can see that the conditions are kind of worsening, particularly in mid COVID.

Veronica Morgan:

It's a bit conflicted, isn't it? Because you guys are a data house and yet this putting all this together is expensive, right? Data is expensive and analysis is very expensive and who wants to pay for that pretty bad news story when the economy really relies upon good news stories around construction, it's, it's hard, isn't it? Well,

Eliza Owen:

Jake, I think it's a bit different because we, our major clients are the banking sector and they need to know, they want to know what, what the risk is in certain markets. So we don't really have an interest in just telling a good story. But it would be great to see how we could match that, you know, year of build or quality of the property to the actual record. I think it would definitely enhance this report and Veronica, I think you've got to come on and do a business

Veronica Morgan:

This case with me, see if we can get it happening. I mean, I just get so excited about the idea of more transparency around this, because it's, it's a, it's a truth, it's this true story that needs to be told, but it's a very complex and difficult story to tell because it's a moving target, isn't it, you know, once it sold the first time, then it becomes, and you know, at the moment all units are getting lumped into the same Micky bucket. I mean,

Chris Bates:

Isn't it, I mean, units, you've got townhouses Villa units, older style units, you've got art deco apartments you know, premium apartments, et cetera. And units is such a big, broad area. How is that one of the areas that potentially you're considering, you know, breaking up more older established stock townhouses and Villa units into different buckets, like is, yeah,

Eliza Owen:

It's, it's so diversified. And I think in the past, we sort of just rely on the idea that the stock might be relatively uniform in sub markets. So the kind of stock that you envision when you think of it in a city, Melbourne might be different when you think about suburbs in a raced or, or something like that. But there's definitely a lot of exciting work to be done in the data.

Veronica Morgan:

Well, it's funny, it's funny. You should say that actually, because I literally just finished off some research for client. We put together a property portfolio, them some for them some years ago, and we do a sort of review every few years and there's two townhouses in their portfolio in, in, in, in Sydney and trying to get the relativity around, working out how they performed versus the median. And I know it's imperfect and I don't like medians myself, but you've got to sort of find something to, to benchmark it against and yeah, you can't pull out that data cause it, they aren't units and they aren't houses. So you sort of got to come up with some strange amalgam that you use every time, a bit of fun, but, you know, and

Chris Bates:

Betting on the sort of stamp duty costs and the selling costs. Eliza, have you had any, like, you know, in the background, any sort of adding those in and saying just how much these numbers kind of proliferate, because I imagine, you know, just taking it an extra 6%, 2%, 4% for the stamp duty and 2% for the selling costs would make these numbers much larger. Yeah.

Eliza Owen:

It is something that I believe Veronica and I chatted last time about this report and it certainly did see upward sort of so more loss making sales when you do start to factor in those costs. The pain and gain analysis is basically just looking at the difference in the sale prices the between the two sort of contract dates,

Veronica Morgan:

Which is amazing, isn't it? Cause you think, I mean, even in the boom, it was over 9% every quarter, you know, that, that more than I presented property in Australia sold at a loss, even in the boom. Cause of course we all know that while we all need reminding sometimes that Perth and Darwin haven't been in a boom while Sydney, Melbourne we're in a boom and even parts of Brisbane we're suffering while other parts were doing okay. So while the two strongest markets were booming upwards, the 9% was selling at a loss, then you factor in the stamp duty. So even if it's 9% selling at a loss and also let's say 10%, let's round it off. And then you just put in a blanket amount for stamp duty and selling costs. What would that 10% translate to if you just looked at those two costs, Eliza?

Eliza Owen:

I think it was an uplift from about 9% of loss making sales to something like 13% when we looked at it last time. So basically we could factor that into, because we're able to determine the value difference between the two sales, if we just you know, put in some kind of cost around transactions and, and holding and things like that, then we could probably do a bit more deep work on, on that analysis.

Veronica Morgan:

So almost adds another 50%, doesn't it? And that's, and there's all these other costs. I mean, basically if someone renovated the property, that's not included, there's the actual holding costs aren't included. So you know, there's, and then there's all the properties that actually are, haven't been sold that would sell for less if they hit the market. So the true story is, is quite different, but let's go back to units for a bit because we noted that 42.2% of gold coast units sold at a loss and the highest volume of loss making unit sales was across rest of Queensland region. And so Queensland's a big state, but what does a rest of Queensland region cover?

Eliza Owen:

So just to clarify, it was actually in the region of the gold coast, it was about 12% of properties across the gold coast that had made a loss. Now the unit component was looking at the portion of loss, making unit sales across Queensland that were on the gold coast. And the reason that number sounds so high is because it's really a reflection of sales volumes. So about 50% of all unit resales measured in the March quarter took place on the gold coast. And so that's why we get that high representation now in terms of the rest of Queensland that basically refers to anything that isn't Brisbane. And it may seem like a weird way to categorize a region. It's a naming convention that comes from the abs Australian statistical geography standard, every state at that, what they call the greater capital city versus rest of state region is, is broken up in that way.

Eliza Owen:

And so the cool thing about CoreLogic data is we do analysis at the property level. We can basically aggregate our boundaries of analysis to align with any of those abs geographical regions. So the capital city versus rest of state is just sort of one geographical lens that we use to look at this data.

Veronica Morgan:

Right. So that's enormous. So yes. Thank you also for the very gentle way that you actually pointed out that I got my stats wrong. No, no, no. And, and I point this out because I'm pretty numerous, but I realized where I've made the mistake. So it's not saying that 42.2% of gold coast units sold a loss. It's saying that gold coast units represented 42% of the loss making sales across the regional rest of Queensland. That's right.

Eliza Owen:

No, no, not at all. It just comes back to the sheer volume of sales in units that happen across the gold coast. So yeah, I think there were about 3,003,000 resale records that we collected for the gold coast in that March quarter. Whereas I guess other areas Townsville, for example, or you know, central cream Queensland just wouldn't have as many units sales happening.

Chris Bates:

That's a good point that around gold coast, because it is such a, a market that is dominated by units and you know, tourism and Airbnb, et cetera. And I imagine the unit marketing gold coast right now is actually having a really quite tough time. Right. So you know, I imagine that also is going to increase in the next quarter.

Eliza Owen:

Yeah. I mean, since the start of the coronavirus pandemic between the start of the pandemic in June, we noted about a 10% uplift in rental listings across the gold coast region. And again, it does come back to that fall in demand that comes from exposure to accommodation and food and arts and recreation services where people have been losing their jobs and potentially having to move out of their rentals because they might not be able to service their rents and the additional supply because of new construction and also a loss in demand. I think the big one is coming from the closure of international borders where you'd have holiday makers coming to the gold coast. And we know that international migrants as well, about 80% of them rent when they first come to Australia. So a lot of those things have really impacted the rental market and that's had a big impact on the gold coast.

Chris Bates:

And do you expect any in the next quarter mixes, you've probably already seen a little bit of the data come through cause it's July already. You know, what are some of these areas where you think that there's going to be a massive uplift or do you think because of the low transaction numbers Because of COVID there's not going to be any great difference?

Eliza Owen:

Well, what was interesting is that we saw this drop in sales volumes of about a third over April, but then over may and June, they bounced back. And I think even as vendors tested the market and felt a bit more confident, we did see larger rates of discounting and that's reflected in price falls that we've seen across a lot of regions as well at the moment. The June quarter didn't really show a decline in values across the gold coast and sunshine coast. They were still up by about 1% compared to a mild decline across the Brisbane market. Regional areas have held up slightly better so far. And I think that's sort of because they tend to lag the capital city performance. There is also this question of, you know, domestic tourism, flourishing people being able to work remotely that may be adding some level of demand to regional and particularly lifestyle markets as well.

Eliza Owen:

It's an interesting point there because most of the coastal regions of Australia, so a relatively low level in loss making sales in the most in your report. And I guess given that recent rise in sea and tree changes, could we expect these areas to perform even better?

Eliza Owen:

Yeah. So I mean the high profitability across regional centers in in terms of the pain and gain analysis it's been a fairly consistent trend COVID or no COVID. So the past 20 years on average, the, the portion of loss making sales across Sydney has been higher than in Illawarra. And Newcastle and Sydney have tracked fairly closely. Jalong has consistently been more profitable than the Melbourne market. And it's slightly different dynamics where in Jalong, for example, loss, making sales only comprised 1.6% of sales in the March quarter, 80% of those were owner occupied properties compared with about 66% of sales across Melbourne being owner occupied. So there's a different dynamic where you've got owner occupied properties in regional areas that are being held for longer. I think in recent years, the normalization of Airbnb has increased profitability in coastal markets where there's a smaller portion of stock available for the longterm rental market, which may have supported growth.

Eliza Owen:

And as I said, there's also this aspect of cyclical patterns where at the moment we're still seeing mild growth in regional Australia over the June quarter compared to a 1% decline across the, the capital city markets. So I think there's a few different things going on there, but theoretically I think that the normalization of remote work, it's not something that's going to hurt regional Australia. And Chris, I know you've done a lot of research around this recently as well in terms of the working from home phenomenon and all of that sort of thing. One thing I would say is that I think that the nature of the economic shock that we're going through is so large that there will be a period of subdued demand, at least in the short term for regional areas. But, but yes, I think, I think that regional Australia in the longer term will be helped by this period where people have been forced to kind of experience working from home and for a lot of people that might be more appealing than the previous living close to work and commuting every day.

Veronica Morgan:

If you like what you're hearing here, please share this episode with others, you feel would benefit. And while you're at it, why not leave us an iTunes review five stars, please, every review helps make it easier for other people to find us and hear what our amazing guests have to say. We love hearing your questions and we're planning more listener Q and a episodes. Please send your questions in. You can send them via the website, which is the elephant in the room.com today. You or directly via email to questions@theelephantintheroom.com did I? You,

Veronica Morgan:

So you've mentioned earlier that the proportion of loss making sales by investors is obviously a lot higher than that of owner occupies. And there's a lot of reasons around that, but I guess then you could argue that when you start seeing a lot of investment activity in an area, that's a bit of a warning sign for what's about to come maybe in the next five to 10 years, would that be a fair boat or draw?

Eliza Owen:

I think that the presence of investors in a market might create a little more risk potentially. And, and we've certainly seen that where there were kind of boom and bust conditions around WWII markets around the mining. Boom. I think we saw it where there have been high levels of investment that have spurred a lot of construction in inner city, Melbourne, Sydney, and Brisbane. Of course, these risks are exacerbated by large economic shocks particularly one in a hundred year pandemics. So, you know, under normal circumstances that the risk associated may not be as high. But it, it also does depend on the market and how much concentration there is in the market, how much construction results from it. I mean, you look at Hobart and there'd be an uptick in investment activity over the past few years, but it's still a relatively tightly held market. The level of construction hasn't met the level of demand. And so that's an area where there's been quite consistent high rates of capital growth as well.

Chris Bates:

Yeah, it's so interesting around the pandemic, potentially lifting the veil on apartments even further, but it's kind of, they already had so many shocks at all the building issues, you know, last year the huge decline in investors leaving the market or the potential changes to negative gearing you know, just being on the news of, you know, the problems around apartments and even documents like this, just kind of showing it, and then you've got the pandemic, which completely dries up the demand, you know, no sort of the Airbnb problem with tourism, et cetera site, you know, a lot of people who have had these apartments thought, Oh, it's going to supply is going to dry up because the buildings, you know, going to stop building at some point and there's going to be all these first home buyers that are going to buy these apartments off me, but unfortunately they're still building, but the demand is just completely fallen off a cliff.

Veronica Morgan:

And on, on the other sort of end of that, where there was a lot of building and a lot of demand, and then it fell off a cliff was the mining sector. So, and over the March, 2020 quarter, each major mining region across Australia saw an increase in the portion of loss, making sales with at least 35% of property selling loss. So, and one shocking figure was 53.8% of investors in regional, WUA selling at a loss. So clearly part of the post mining boom fallout, but our investors finally giving up on a recovery.

Eliza Owen:

Yeah, I think that investors have gradually been withdrawing from various parts of the WEA market for a long time. It's and, and in a way that's sort of been reflected in a tightening of rental markets as well. Interestingly at the start of 2020, we did start to see this period where values across Perth. For example, hadn't fallen for about four months can consistently rental growth was quite strong and rental markets were tightening. And I think we were finally coming back into that upswing, of course the upswing has been somewhat interrupted by the onset of COVID-19. So I think that with a, we could start to see an improvement in the market just sickly, but it would take place. I think really when things get back to normal and it's really about getting ahead of the virus curve, allowing business to operate again. And, and it's, it's only those conditions, I think that are really going to facilitate a proper rebound across Western Australia

Chris Bates:

Giving up because I've had quite a few clients over the years that have had properties in Perth, Darwin mining, et cetera. And at some point, you know, it does even more this week where you've just, sometimes you've just got to take the loss because what it's doing is stopping you doing other things, whether it's upgrading your house, which is these client this week, for example or potentially not buying another property because it's using your servicing. And at some point, you know, just taking a small loss because there's no real end in sight is what the best thing to do is, so I do agree with you. I think a lot of them are, you know, been holding it for five, six, seven years. Still don't see any recovery. So why not just take the loss and let's give up.

Veronica Morgan:

And this is interesting part of the report as well, cause it does talk about the hold periods and, and S stands to reason longer somebody holds a property the less likely they're going to make a loss. However, you know, when you look at places like units in Darwin I think 68.6% of units sold for less than the previous sale price. And it's like, and that there's a chart in the report showing that the, of loss making sales in both cities, Darwin, and Perth steadily climbing over the past five years. And so you could in those areas, the longer you hold or the worse off you are. But the fact is, you know, real estate is a long game. And so there's a, there's a conflict in terms of the message there. People have to sort of get off that horrible roundabout and, and realize that it's not going to work for them. Um but certainly the, the report does point to that. Doesn't it Eliza that really, the longer you hold it, the less likely you're going to sell it a loss, but it doesn't always happen.

Eliza Owen:

Yeah, I think generally a longer hold periods are typically associated with higher sorts of gains. In the last couple of reports, I started doing some analysis on the median profit by hold period. So in this report, we, we did that same analysis. And over the March quarter, I found that you know, people holding around 46 years, the profit medium profit nationally was about a hundred thousand dollars, which, you know, is still quite good and speaks to the strong broad-based uplift that we started to see halfway through last year as well. But you know, compared to holding for say over 30 years where the median profit is about $600,000 across Australia it's certainly a matter of time in the market. There are regions of Australia where, you know, because of an extraordinary structural change to the market, whether it's a mining boom, whether it's, you know, extreme weather conditions in North Queensland or something like that, that those more broad ideas don't really hold.

Veronica Morgan:

Yes. Um tell us about Canberra because Canberra is sort of a little Island in the storm at the moment, isn't it?

Eliza Owen:

Yeah. The act market has performed relatively well, I would say it, it certainly saw an upswing over the past few years and was enjoying some of the growth that came from a success of cutting interest rates and changes to negative gearing and all of that sort of thing, or starting rather not no changes to negative gearing and capital gains can such concessions and the confidence that came with that around the election result last year. So the Canberra market has performed quite well. Importantly, it's also had less exposure to some of the more vulnerable with four segments that we've seen throughout COVID-19. So less exposure to the arts and accommodation services and food and recreation services as well. I guess the big thing to note with Canberra is that the house segment of the market has tended to show stronger growth rates and higher levels of profit profitability than the unit segment. Because again, units are at a place where we've seen higher levels of construction, in fact, in 2019, the act markets or record levels of a new unit supply. And so that's created a bit more of a divergence in the profitability between house sales and unit resales.

Chris Bates:

There's a lot of apartments getting built in, in Canberra. I was there last year and I was kind of flabbergasted of how many were going up all around the city and you're right. You've got the two different worlds that you've got. Only one is buying those apartments or even bought apartments there five, 10 years ago were getting impacted with all this new stock hitting the market. And then you've got only a limited amount of houses and in that conduct inner sort of area, but then there's lots of house and land packages getting built as well. So if you, you know, on the fringes, cause there's just so much land. So you just gotta be very careful when you break down a city, because like you're saying, you've got to then split it to units, apartments, new houses, et cetera, to really see where's doing well. And where's not,

Veronica Morgan:

It's actually quite fascinating. And that correlation of new construction and loss-making sales is I think it's the first time I've sort of heard it expressed the way you've expressed it there, Eliza Murray, we've sort of known her intrinsically, but this is the first time, I guess you've got that alignment in terms of where the data's pointing. It's just alarming. You know, I'm doing a lot of work with first home buyers at the moment and, and I am alarmed at some of the, the beliefs around property and there's still a lot of, a lot, the believe you can't lose. And there's, there's

Veronica Morgan:

All these incentives that have been put together to in particularly targeted towards first home buyers who are our most vulnerable buyers, really. And yet, as I said before, I feel conflicted because I want to go to economy as much as the next person, but it is the riskiest segment of the market. Now, Eliza in capital cities, what are the hallmarks of council regions that experienced the least lox loss-making sales?

Eliza Owen:

I think historically the areas that have seen higher levels of profitability have tended to be higher socioeconomic areas. So for example, in the March quarter, we saw North Sydney, 98% of resales had made a profit across the Northern beaches, about 96% of sales, we've made a profit. And I think that speaks to the fact that you have a lot of owner occupies in those markets. They're these sort of blue chip areas that have enjoyed longterm growth, given all the amenity and proximity to major work centers and all of that kind of thing. And, and I think, you know, that's reflected in areas of Melbourne and Adelaide Hills and other capital cities as well. I think what is interesting is that more recently, it, there has been these kind of spillover areas of growth. So we talked about you know, Jalong, for example the blue mountains obviously on the kind of periphery of the Sydney metropolitan that had a really high level of profit making sales in the March quarter at about 97%.

Eliza Owen:

And I think that comes back to the kind of recent growth that these areas have enjoyed as affordability in the capital cities has just become too unsustainable for a lot of people, especially now that we're seeing the largest generation in Australia, the millennial generation, they're moving through that typical first home buyer age. And so potentially you've got a real demographic demand surge that is supporting more demand in those spillover growth markets and, and more profitability for the people who've been holding there for a long time and starting to sell up as well.

Veronica Morgan:

It sounds, and maybe I'm jumping to conclusions here, but it does sound a little bit like the demographics in these areas is more skewed towards families and typically families tend to stay longer in the home and typically owner occupied. And so once again, they're sort of the little dials are pointing in the directions of those factors that point towards, you know, higher level of profit making sales. Would that be fair to say?

Eliza Owen:

Yeah, I think that's probably a factor as well, anywhere that, you know I guess comes back to that basic principle, particularly when it comes to the capital city markets of having a longer hold period and that generally being correlated with a higher level of profitability, but as we've discussed, there are certainly exceptions to that as well.

Veronica Morgan:

We also have to draw the distinction between profitability and in the context of this report versus actual profitability. Because, you know, just because it made made the, you know, the PO it gave a positive return in terms of nominal sell price doesn't necessarily mean that it actually made a good profit or it was a good investment. But certainly it's a, it's a good litmus test for sure.

Chris Bates:

I'd love to, as I say, if there's a a way of potentially having a small margin after costs on the profit making as well, because just because of like anchoring biases that we have let's say you bought an apartment for say 300,000. You don't want to sell that if you have to tell yourself that you've made a loss. So you know, if you have to sell it for under 300, you just won't take that offer. Right. But if you get an offer of say 303,000, you're more likely to take it just because you paid 300. And so I just think it'd be amazing just to throw that into it as well. If you just put a little bit about absolutely the amount, how much, how many properties actually sold just for a dollar or a thousand dollars you actually purchased it for, because, you know, we're so skewed to, to selling something just so we can tell people that we haven't made a loss and tell ourselves,

Eliza Owen:

Yeah, fascinating all or great topics for the next report.

Veronica Morgan:

This is all the psychology of it, the loss of version and the disposition of fate and all that sort of stuff, which I find so amazing. And I, and quite often I'll have a conversation with somebody about their, their property example. And they'll tell me all these sort of figures, and it's amazing how often those figures are actually incorrect because I've got access to RP data. I can go and check and I'm actually forgotten, or they get it wrong. And this happens enough to be a statistically significant in my view,

Chris Bates:

How would you say that too? Actually sometimes now what did you buy? Four Oh seven 60 and then you have a look and it was, you know, seven 90 or anything. Well, you know, the brain's kind of automatically we do that. We always try to think that we're making more money than we are. And I think property is one of those things where, you know, if you really want to know, what's, you know, if it's how much money you're making sets, you've really got to really know the numbers. Right. And you really got to track it. And then also add in opportunity cost. What would you have done, you know, that negative gearing costs was you paid off the mortgage. Yes. Okay. So you need to add in a cost of capital there as well. And not many people do that because then you actually go, actually, haven't actually made much money out of this, even if I don't sell it for 20 or 30% more than what I paid for. And that then makes it really yeah, it's quite confronting for a lot of investors. Cause they're already pretty frustrated with the returns. They're not getting,

Eliza Owen:

It's a horrible, horrible feeling. Now, Eliza, what do you expect to see in the June quarter data? I would expect that for the June quarter, as I mentioned earlier, we're probably going to say more sales given the strong rebound in sales volumes over may and June. So the results for the June quarter could see an increase in the portion of loss, making sales. And the, you know, I think, I think we are sort of seeing the extension of assistance for people who have lost income lost hours. We can see the institutions and major banks are already working with them to try and help them service their mortgage and potentially avoid defaulting or, or having to make a loss making sale. So it is hard to say given that that institutional intervention is probably going to, you know, help, help stabilize.

Eliza Owen:

But I think overall that we, we can't completely avoid the impact that this downtown is having on demand. I think there will be an uptake in, in loss making sales. I think a lot of it is, is probably going to be emanating more from those inner city apartment markets that we talked about that have high risks. So, and, and you know, now that I'll be factoring in all these different costs and stamp duty and all sorts of things it, it'll be interesting to get a view on on what that does for the metrics as well,

Chris Bates:

Intervention because you know, if you said to someone in February that we'd have a pandemic or maybe February would have been, some people would have believed you, but, you know, would you think that the banks would come in and offer six months sort of payment holidays? Well, no, I just didn't think it was possible that the banks could do that or would be willing to do that.

Eliza Owen:

Well, I guess the other thing is about 60% of bank lending is in residential mortgages. So they don't have an interest in seeing the property market decline significantly either. But because so much of their, their holdings are there as well. Yeah. And, and that's the thing,

Chris Bates:

Cause it's like, they've so inherently need to make sure that if they don't allow people to start selling their properties, because then he starts to create falls in prices, which then increases their defaults, which increases their bar bad loans, which increases their cost of capital. And it really is this kind of cascading effect, which, you know, all the banks are in on it, the government's in, you know, and so they're all going to do whatever they can to stop people, forcing people to sell. And that's why the payment holidays got extended for another four months because they were like, well, we still, don't still too much of a risk for us. So let's just give them an extra four months. But

Veronica Morgan:

Hi mommy though, you know, this is the thing it's capitalized it. Yes. Or, I mean, short term for them, they get they've experienced in cash cashflow losses, and there's going to be implications in the business, but at the end of the day, they're still gonna get their money. That's so true, Veronica. And I think that's what comes back to, you know, when we were talking about whether this pandemic has been good for the property market in terms of the institutional intervention in the short term. Yes. But, but that is the thing with this step being capitalized on a loan, it's going to reduce economic demand further down the line because ultimately people will own more money on their house. And the opportunity cost of that is that they're not spending that money in other areas of the economy. So it does create, or it's just one aspect, I guess, of how the effects of COVID-19 on the economy will be really long lasting.

Veronica Morgan:

And if you're going to, are you going to look to buy now, Eliza? I think when we first met, I gave you that question. He was like, you know, you're so knowledgeable about the property market you haven't bought, you know, and I'm hoping that you questioning, is it too big to fail the market? I mean, this has a bit of a personal question we can talk. Are you thinking as a first home buyer? Oh, you know, there could be some opportunity here. '.

Eliza Owen:

It's funny, you know, I I'm someone who is quite I do try and look at things critically and I I'm often one to sort of point out some of the limitations of government incentives and assistance for first home buyers, but I know more and more people who are taking advantage of those of those schemes and things. So for me, I'm still saving, I'm happy in my share house for now. But I think I'm just in a very fortunate position that I can just look to see where the market goes and if prices fall. And from my personal standpoint, that's going to make property more affordable for me. Yeah.

Chris Bates:

It's so funny. You say that you've seen, you're seeing people around you that are, you know, looking at the incentives and all the data out there shows that the government home builder created a huge influx of demand for new house and land packages, basically. And as a business we've sent a huge for the first in January sort of February, there was this 5% sort of deposit that the government offered for 10,000 people. And you know, we didn't say too much, but just in this last month, we've seen so many first time buyers come to us and looking for that 5%. And basically the 10,000 places are already gone. You know, these month, whereas the first quarter, the first, you know, six months, they didn't really run out that fast. And you know, my worry is that, you know, they, a lot of people are going and taking a 95% loan. And they're buying a house on land package so they can get the $25,000 and then they look at your data and you know, they're, they're potentially, if they make a loss making sale, they've got to, you know, 15, 20, 30% chance. And so they've lost everything. They've lost their 5% cause that's all they went in with.

Eliza Owen:

Yeah. A bit of risk around that, for sure. And I think it's important for people to understand what taking out that extra debt means. And I, I, I guess one of the mitigating or stabilizing factors is the nature of lending assessment and, and the way that we've seen more stringency around mortgage lending in the past couple of years. So basically when opera came in and started tightening things up and, and a lot of views and, and investigation into the nature of lending around the Royal commission as well. RBA analysis has actually shown that mortgages taken out in more recent years have been less susceptible to falling into a raise because of that more because of those more stringent lending conditions, basically,

Veronica Morgan:

Which is good because then less people are gonna get trapped in mortgage prisoner. I think as Martin nought calls it North it, but the problem is that are they as stringent in their assessment of what the mortgage has taken out on the property. And I would hazard not, not if they're allowed to buy a house and land package with a 5% deposit and get 25% extra, which I've been hearing lots of anecdotal stories about builders just basically working that into the contract pricing as well.

Eliza Owen:

And I thought that part of the policy was that they were going to be having builders justify any sort of increases as well. So I don't know what's happened there, but at that, that's just, I've heard stories of that as well. And it's devastating. I'm sure for people who are wanting to take advantage of this game, well,

Veronica Morgan:

It's awful because I mean, what it does, it just says very clearly actually the incentive is for the construction industry. It's not for first home buyers and, and that's actually what the incentive is for. It's just that it's trying to get first time buyers to wait. And I just think that that's, that's pretty horrible, but anyway, there's always going to be players like that, you know, in any industry

Veronica Morgan:

Right now, have you managed to bring a Dumbo along for us? Eliza?

Eliza Owen:

I forgot. I forgot about the Dunbar. Maybe. No, I'm sorry. I can't think of anything. That's all right, Chris, if you go to Dumbo,

Chris Bates:

I'm just trying to think of something recent where I can kind of, okay.

Veronica Morgan:

I've got a Dumbo, actually, this came up in the Facebook live Q and a for home buyer Academy, couple of Wednesday nights ago, a bit of a classic one. One of the people commented that they had a situation that came across where a vendor, so property, a person selling a property had to do so because they'd made a bad decision and purchase that property in their self managed super fund subsequently they got a da approval and we're thinking that they could actually renovate and extend the property, but then, then discovered that that's not compliant under SMS if rules potentially in trouble with the ATO absolute nightmare, they would definitely have to sell. So what do you got to say about that crease?

Chris Bates:

It's funny, we've actually had a recently, quite a few clients ask us around SMSF rules and, you know, buying their own residential properties. Which is interesting because there's lots of rules around. SMSF borrowing what you can and can't do if you do buy a property. And a lot of people just to think it's exactly the same as if you're buying it personally and it's completely different and a lot more you know, like you can't renovate you can't, unless it's paid off and you have to use cash in the fund. So you just be very careful around self managed, super funds, especially around the lending side, because you know, a lot of the way that you do that is through a re limited recourse, borrowing arrangement, et cetera. And the rules around that can potentially change at any point in time. And secondly, none of the banks really want to lend for SMSF loans. There's only a handful left. So you just gotta be seriously careful around trying to gear up your super fund to buy a property and not knowing what you're doing, because it's very easy to become unstuck and the penalties in superhero enormous, you know, you can potentially lose half your fund, not to say that would happen, but that's potentially the penalty.

Veronica Morgan:

Yeah. So pretty good Dumbo that one. Well, Eliza, thank you so much for joining us. I'm going to put you on the spot now and ask you, will you come back when the June, 2020 report is released and we'll do the same thing?

Eliza Owen:

Sounds good. Yeah. And why are you laughing? I'm like, what are they gonna ask me this time? But it's good. It's good. We really value your thorough reading of the report. I love chatting to you both to get ideas of how we can improve the analysis. So hopefully next time I come back, I'll have some new insights to add onto what we, what we usually report. Wonderful. We're so excited

Veronica Morgan:

To be waiting for that one. I hate to say that I'm waiting to hear how many people lose money. I'm really not, but I do love the report. So thank you so much again for joining us Eliza or see you next time.

Chris Bates:

Thank you. We want to make you a bit of elephant rider and this week's elephant rider training is

Veronica Morgan:

I just want to pick up on something that Eliza had mentioned almost in passing about discounting. So vendor indoor discounting and what that means. So vendor discounting is basically a measure of the sale price of listed properties when the price has been dropped prior to selling it, or just in the process of marketing the property. So the inference is that when there's more discounting, I at greater percentage from the initial asking price to the final asking price, that that is a sign of a falling market or a buyer's market. And obviously the lesser amount of discounting that points to being a sellers market or when there's more competition amongst buyers. And it stands to reason, but there is another thing that I thought I'd just point out around discounting because in a market where vendors don't have to sell, they won't discount if they can't get their price.

Veronica Morgan:

So just take the property off the market and in a market where vendors have to sell, they will discount to meet the market in order to sell. So it's just something to bear in mind as well, that there can be times when prices are under pressure and he's still a buyer's market, but there's not a lot of indoor discounting. And that does come down to the fact, you will have less stock on the market, and that will actually sustain prices because transactions need to occur for prices to either go up or down. But it is just another aspect to consider when you're looking at vendor discounting.

Chris Bates:

And how do you think actually the strategy around agents potentially plays into that as well? You know, are they really discounting because they need to discount or they discounting sometimes to just to create more demand?

Veronica Morgan:

Well, the thing there's a bit of a saying in real estate circles that every property will sell at the right price and the artists are working out what that price is. And if you nail that price early on, then buyers will recognize it. That's fair market value. And you might even get more than your asking price. But if your vendor says, well, no, I'm not selling at that price. I'm holding out for X more than that. Then you're forced to actually have to put a higher asking price on it because the vendor won't let you price it to sell. So there's, there's quite a lot involved in pricing a property. And it's, you know, there's properties that sit on the market for quite some time and get a smell about them, you know, bias, start to thing what's wrong with them. And quite often, these, the simple fact is that they're just been overpriced in the first place.

Veronica Morgan:

Now this doesn't necessarily occur in auction oriented areas or can when clearance rates really fall for a lot. It's typically more something that's an issue in private treaty dominated area. So areas that where there's very little property goes to sale by our auction, but you know, it's not an, it's not an exact measure because so much of it also did is determined by the confidence of indoors to get their high price in the first place. So, you know, there's all these sort of underlying factors that go into whether or not a property is going to beat need to be discounted before it sells.

Veronica Morgan:

Do you want us for our next episode, we're talking with Owen rescue, he's the founder of Rusk Australia. We're talking about shares and how they compare with property, but not the same way we've talked about before. We've got a bit of a millennial edge here, but we're also looking deeper into the DIY space back to all the old elephant characteristics, all the all behavioral biases that we talk about. Very interesting conversation. Please join us.