Episode 143 | Postcode Analysis: What properties are outperforming the market | Martin North, DFA | Insights from Digital Finance Analytics

Breaking down the negative impact of government grants and consumers being sold into the myth that all property performs well over time.
Martin North jumps into the deep end in this episode mythbusting common misconceptions of property, highlighting the terrible deals and properties people get sold into everyday. All property grows 7% every year, government grants are the best thing since sliced bread and believing that the cheap brand new property you just bought will help you ‘ride the market’... but then there is data.
Here’s what we covered:

• What is keeping property owners awake at night?

• How have spending habits changed during Covid?

• Are grants all that they are chalked up to be?

• Are developers increasing their margins once new grants come out?

• Breaking down the myth that once you're in the property market you can ride it out.

• Why are people being misled by the government grants and buying new property?

• What is more important, yield or growth?

• What demographic is currently buying?

• Why the sold data best determines post code future pricing.

• Why you should NEVER go the cheap route with property.

This weeks dumbo:

•  Purchasing property just before an industrial development is built across the road.

RELEVANT EPISODES:
Episode 123 | Martin North
Episode 135 | Eliza Owen
Episode 140 | Nicola Powell

GUEST LINKS:
DFA Blog - Household finance confidence index
DFA Episode on Price not disclosed data

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 August, 2020.

Veronica Morgan: When the property market goes through tough times, it's human nature for owners to get at least a little fearful and seek reassurance that things are okay in their neck of the woods. Nobody wants to feel like the value of their property has fallen. And we certainly don't want to feel foolish for having bought real estate in the first place today. Are we going to explore some of the questions that property owners have been asking at a postcode level?

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

Veronica Morgan: A few months back, we had a very interesting chat with Martin North from digital finance analytics. Martin's considered by many to be a property bear, but we found out despite all his dire warnings, he's actually a property realist. In fact, we shared a surprising amount of common ground. Now I was chatting with Martin a couple of weeks back, and he happened to mention that he's been offering one of his sessions. So I'm going to do that again. Now I was chatting. Now I was chatting with Martin a couple of weeks back, and he happened to mention that he's been offering one to one sessions to property owners who want to know about their specific postcode. These people are reaching out to him, quite possibly from a position of fear. And what I immediately wanted to know was what is keeping property owners awake at night in the current environment, we will be able to glean any clues as to what they'll do about their fees.

Veronica Morgan: So I invited him back to join us today to fill a scene. Welcome Martin,

Martin North: Hello there.

Veronica Morgan: Now Chris isn't with us today. So it's just you and me. And before we get into some of these postcode stuff, and I'm very keen to know, you know, really what is on the mind of property owners. I've been looking at most recent release and looking at the way household finance, confidence graphs, plummet in March or plummeted, I should say in March, but uptick in may not withstanding Victoria. I can't help, but wonder how much of this is actually perception and how much is reality.

Martin North: Hmm. I think it's very interesting, of course, perception is reality to an extent isn't it insofar that how people are feeling and how they perceive things to be will determine quite often what they actually go do. But the two things that I'm seeing. So I measure both confidence, which is a subjective measure and also objectively financial flow pressure. And I've seen a very strong correlation of those two things over the medium term. So it isn't just the virus related over the last few years. So essentially what happens is when people are uncertain about what's going on, they tend to be more conservative. They tend to be more cautious. They tend to want to get more information, to be able to make decisions, which is, which is a good thing. But obviously from a reserve bank lens, they want households to go spend, spend, spend, right?

Martin North: Because that is critical to support the old GDP number. Now we can debate whether GDP is a sensible way of measuring anything, but that's probably not another conversation. But the fact is that when people are uncertain, they may well spend less. Now of course, we've had a huge stimulus, you know, $100 million in last quarter. And some of that has gone into people's wallets to be able to spend. And some of it's been spent. So whether you're drawn down on super, whether you've had job keeper or job seeker, or whether you've had other mechanisms like your repayment holiday. So there has been some uptick in spending, but the underlying message that I'm seeing in terms of my data is that more households are getting more twitchy and more cautious. And frankly, the Victorian lockdown was really a significant negative force, not just in Victoria, but more broadly. And I'm seeing it now in my latest commercial data as well, particularly the SME data. So I think we're at a bit of a precipitous point at the moment and not surprisingly, then people are a bit cautious

Veronica Morgan: And it is rather interesting, you know, obviously Victoria going to lock down that does literally quite literally shut down the economy. Right. But it's like you say, it's the perception side of things as well. And some people are really worried about their own backyard and some people worry about the bigger picture. And, and I guess this is why it's quite interesting. You know, you were telling me about you offering these one-on-one on a postcode level, and I'm curious to know what insights or I guess, what has that told you further to your surveys that's going on in the minds and hearts of Australian property owners?

Martin North: Well, it's a really fascinating thing. Look, I started doing this because I started getting a lot of people reaching out for me and saying, I'm worried, you know, what's going on, I'd link to try and get better information because I don't necessarily trust what what is out there in the mainstream. I don't necessarily trust what's on the property portals these days, right. So what's really going on. So I started this a few weeks ago, which essentially was say, okay, look, I'll devote a bit of my time for digging into a postcard and we'll look at price trends and we'll look at a gross yields and we will look at what's on the market and on all the standard things, right. And then we'll have a conversation about a particular postcode and we can pull it apart and try and get a sense of what's happened, but also I'm overlaying my scenario.

Martin North: So I look forward as well and think about, well, what, what is the economy going to be doing? And so I look at things like mortgage stress and you know, migration, statistics and CPI, all of those things. And I can begin to work out, therefore, the implications for property going forward too. Right? So that's the basis of the, of, of the conversation. And then we have a chat and I've had a large number of people wanting this. And in fact, I've had to walk out on booked more than a month ahead, actually, in terms of all of the various slots that I have, because there's, this is such a popular conversation, but I'm learning a lot as well as hopefully providing some insights to individual households, but I can begin to put people into a few different buckets, right? So the first group is a first time buyers. I've had a lot of people who are very, very keen to get into the property market. And we're very excited by all this talk about stamp duty, being further abolished and you know, the state and federal government grants so that it makes it really attractive to go buy a home land package. You know, for example, in WWI, if you add the state and federal stimulus together, you can get $55,000 in your pocket. If you go and buy a Homeland package, and

Veronica Morgan: This is no surprise to me, I've been doing quite a bit of work on this myself at the moment. I'm horrified at how, you know, the perception first buyers. And tell me if this is what you're finding has been, this is money for me. I need to grab it. And it's like, no, it's not money for you.

Martin North: Okay.

Veronica Morgan: I do a little bit of analysis and worked out there in rural Victoria. If you sort of kept under, I think the $375,000 price Fritz threshold, you could assuming you didn't lose any money. The minute you settled, you could actually end up with 17 and a half percent equity or something like that. I think I'll wait to that on day one, which is great, assuming that you don't lose money because you've bought it a non scarce asset.

Martin North: Hmm. So, so look, here's the thing, right? So what happened in WWI with that $55,000? Well, the first thing that happened was that the Homeland package prices went up by guess what? $55,000 literally, before anybody could go buy them. Right. So yeah, absolutely. We saw we saw it. Yeah. We saw it so effectively. It's, it's a net sum game insofar that the developers put the prices up. So that's the first one, right? The second thing that's happened is that in the surrounding existing property has dropped because the supply demand disequilibrium that's been created by doing this basically means that a lot of other people are losing. And of course in WWI prices have slid down for quite a long, long time beforehand. And that's just another, another downward force. Third point is people are contracting for a price based on at that point of negotiation and conclusion, but what for six months, nine months, a year down the track when it's actually completed, right?

Martin North: And the forward projections, I have suggested that prices are going to continue to slide. So what they're doing is there locking in at an expense, expensive price point in the market on the expectation that the government's given them money. So it must be good. Unfortunately, not understanding that one prices are likely to slide from this point. So they're going to be locked in to like in a new car when you drive it away from the full cart, it drops in value almost immediately. So you could potentially could be risking some loss of equity that you've, you know, you've hard work learned equity to put into it. And three, there is still a lot of uncertainty about precisely when those Homeland packages will actually be delivered. Right? So because there's a construction cycle, that's also being disrupted by COVID and in our imports of struggling and prices of materials are also all over the place.

Martin North: So, you know, you stand by news and you talk to these first time buyers. He said, well, you know, I think I should go for this. And I said, well, you know, yeah, I'm not going to give you advice because that's not what I do, but I just want to put some data on the table. Right? So the data 0.1 prices went up before, you know, you committed to, there is a risk that prices may go up. They might go down. You're not sure. And three you know, you might actually find that when you've bought something, when you move from it being new to secondhand, then effectively you lose value. So in there's no prospect that I can see pretty much anywhere at the moment of prices accelerating dramatically from where they are. Right. And that's the critical point about first time buyers. Cause first time buyers up to this point have always said, okay, I know it's going to be a struggle to get into the market, but at least once I'm in, I'm going to be able to ride the market higher.

Martin North: Now what happens if that's no longer true, right. First point, second point incomes are now under pressure and jobs are under pressure. And so the other sort of line of argument that the first time buyers were sort of starting to understand was that there are more risks in committing now than previously because job prospects and job security and job income growth are all at risk, right? And if in fact we get unemployment rate of what, 10% or more at the end of this year, and maybe 7% in two years time, which is what the reserve bank is suggesting, right? You could actually end up with a financial pincer movement happening where effectively your own personal circumstances goes adverse at the point when you're committed to completing on the, so a lot of risks, how much upside? Not a lot. So let's just stand back. What you're doing is actually receiving certain amount of money from the government to help the construction sector. So it's a bribe, but your own personal situation may not be improved by capitalizing on it. And that was the sort of the tenor of the conversation that I had a number of times with people attracted by these home land packages.

Veronica Morgan: Did you find though, because you know, we had this sort of confidence bias in Australia about property and, and that, and there's a FOMO that kicks in as well, of course, because you know, those that don't have property fill out that there's some sort of lovely secret world out there they're missing out on. Do you, did you find that overwhelmingly those people were convinced by your argument or do you find still there's a proportion of people that, that don't care they're going to kick on and do whatever they want to do anyway,

Martin North: About half of the people in my surveys don't, and this is now back to the surveys rather than the one to ones from still believe that property doubles every seven years. Right? In fact, I made a post over the weekend because I got so cross about this, right? Because I've been looking at individual postcode data for lots and lots of different postcards. And there is none that I could find where you could actually pin a doubling of prices from 2013 to 2020. Right. There's no, this is completely untrue. It's a myth, right?

Veronica Morgan: Hang on. Wait, wait. So you're looking at postcode level of saying median prices is nowhere where the price has doubled in the last seven years. Correct? Because the weirdly enough, though, if you, and we talk about this before you go granular, I can give you plenty of examples of individual properties that have,

Martin North: Ah, well, that may will be, and then that's the point of right? So, but, but, and it depends then a high level. It, so, so all that, all I'm saying to people is don't automatically assume that every property in every postcode is going to Dublin every 70. Now there will, there will be, of course there will be some properties that will perform really well. And we, you know, it goes back to our standard conversation about really good properties versus not good properties, right. And picking and choosing and all those things. But, but the point of there is no mechanical process whereby if you buy a property, you are guaranteed in getting a doubling of your money in seven years, which is still what people think. Right. And I find that in the current environment, very, very concerning because there is still a very strong attitude.

Martin North: And it's not just amongst first time buyers. I'll talk about some of the other segments shortly in terms of their property. But there are still many people who still think the property is the way to go. Why? Because it's tangible because you can kick it, kick the tires on it, you can hold it and own it. And I understand that, right. But the fact is that not every property in every postcode is going to perform the same way and not every property is going to double in seven years. There will be some that will do well. That will be some that won't do well. And I have to say that if I look across my postcode map at the moment, there are more postcode signaling falls ahead rather than rise of the head. By the way, it's worse for units compared with houses, houses tend to hold their value better as we've discussed before.

Martin North: And that's because of scarcity value. And the fact that, you know, houses on good plots facing the right way with the right views will always come on a premium. But it's really fascinating. It's really fascinating watching this disconnect between if you like the psychology of people wanting to get into the market wants you to get property. There's still a very strong drive for many first time buyers to get into the market because their parents got the property and they did well. And everybody else around them is buying property. And they want to be on the same on the same bandwagon as it were. But when you actually come to peeling back that why, why, why, why? Right. There are two things that are happening. The first is there's a bit of a sense of security and you know, I want it because then I can control it.

Martin North: But the other is pure greed. It's about the assumption that you're going to make money. And the point I want to come back to is you may make money. We might, might not make money, but if you're buying property purely, purely, just because you think is a speculative investment and you're going to make money by doing it. I think that's the wrong motivation to buy property personally. But, you know, maybe I'm just old fashioned. So what's interesting is there's a really strong disconnect between the psychological and aspirational, you know, I think I want to buy right. And the financial, well, you know, I'm going to buy because I'm going to be able to double my money. Right. And my worry is that many first time buyers are still making a decision to buy more on the economics. And, you know, you've got to stand back and just think more broadly, right? Because frankly, this may not be the time to buy the right. The right thing might be just wait a bit and see how the property market migrates forward. And, and don't be misled by, you know, the government bazookas in terms of saying, you know, you must buy now because of course they want to support their friends in the construction sector. So but, but there's a really complex set of decisioning going on the many first time buyers I think are very confused at the moment.

Veronica Morgan: Yeah. And it's very interesting as well, because of course, you know, the elephant in the room is all about the psychology of, you know, why we do what we do and tapped into FOMO have tapped into that whole idea of you know, confidence, confidence bias, but also, or overconfidence bias, but also that idea about confirmation bias that we somehow believe that property goes up in value. And so then we seek information to support that, but you've got people actually seeking support or information that they, she doesn't support that when they contact you and they must know what they're getting.

Martin North: Well, I mean, I try to be objective, right? And I show them the trends from 2013 to 2020, that's an, a medium price. You know, for houses, units depend what we're talking about, right. People are very surprised by that. And it's because quite often they haven't seen that sort of data before. And what I do is I actually show a percentage change year on year on year. And it's fascinating how, if for many postcodes, there was a significant rise in, you know, 2014, 2015 in some cases, more than 20% up on average, but then quite often it dropped over the 17, 18, 19. And then there was a slight move up in 20, but not very much. And so if you look back over the last few years, it's quite a, you know, an interesting profile. And in fact, I'm beginning to think that these percentage change profiles are probably more powerful than actually the dollar numbers on the property because it shows the trajectory.

Martin North: Right. And then what I do is I overlay the next three years and say, well, based on my economic scenarios, here is a range of outcomes, but this is what I think is most likely based on what I see now. And that then allows me to be able to show you know, what may happen, price up price down over the next next few years. So those are very important indicators. Now, I'm not saying I'm predictive, cause it's not. It's just based on all the data and it will change again, but, but it's an important conversation. And so people are sort of beginning to wake up when I chat with them about the decision process that you have to go through to decide whether to buy or whether or not to buy and the research that you have to do to be able to get the information, to be able to make good decisions is way more complicated than many people start at the beginning of the conversation.

Veronica Morgan: It's absolutely true. But what is interesting too, that you say that in your surveys, 50% of people still believe that property goes up, you know, doubles in seven years. And and yet a lot of those people already own property, obviously they're not all first home buyers. So, and I guess I find it too. And I talked to people about their property. People said to me, they've done really well. And I said, have you measured that? And now they don't have benchmark for it. And I'm like, well, you know, not every property goes up the same rate. It's not, every property goes up. You know, it's important that you, you look at opportunity cost and all these other things. And I, and I guess when you're sitting in a property, you just feel a bit more safe and secure perhaps. And you just assume it's going up.

Martin North: What's interesting is, and let's talk about my other segments, right? So there's a segment there who let's call them down traders. So these are people who have citizens sit in a sudden the, for quite some time, seen it go up or maybe an investor who's got property and they've seen a up, so that they've have the view that they've got equity in their property. Right. So the first conversation point is, okay, how how'd, you know, you've got equity. And the answer is, well, you know, all prices in Sydney have gone up by X, right? That's tends to be the starting point for the conversation, right? So, or I know somebody down the road who last year sold for Y right. Now neither of those are very good benchmarks in terms of understanding what the value of the property might actually be.

Martin North: Right. and, and so problem, one, it's hard to get really good data at a granular level, unless you talk to a local agent who really gives you the honest answer, right? And many, many agents of course, are very keen to try and either encourage you to sell by telling you that you can make a huge amount, or I've seen quite a change. Now, some agents are actually underquoting. I think, relative to what the market probably is to try and get people to actually go transaction and make a sale, right? So there's a huge converge, a divergence in terms of, you know, trying to get a sounding of what our, what our true value is. And of course, the fact is nobody knows what the true value of property is until you actually put it on the market and see who comes along and who buys it.

Martin North: And the fact is that if you've got to you know, excited buyers on the day who have lots of money and are willing to pay, you might get a good price. Whereas if you actually have nobody turned up, then the value of property as well, in theory, something, but in practice zero, right? Because market discovery will tell you, and it's a very honest process, right? Market discovery tells you what the property is really worth. But, so I've got a lot of first, a lot of first time buyers, I don't want to pile into the market. I've got a lot of down traders who are saying, I think it's time for me to sell now to release equity, to be able to actually hold the value that I've got, because I do think prices are a lot of dislike. What do you think? And that's why the, well, here's my scenarios.

Martin North: And that's how I talk about atom. So, and what's fascinating. There is you then start talking about transaction costs and you talk about cost of carry costs, right. And all on all of those things and the enthusiasm about how much value I'm sitting on starts to dilute, Oh, I'm sorry to be a bit of a bearer of bad news, but, you know, reality, reality dawns, right. And yeah, you can probably, you know, achieve some equity release and you might, but then you've got to work out. We're going to do with that money once you released it. Right. Do you stick it in the stock market when the stock market is already very, very high or, you know, do you buy another property and you know, all of those questions come out. So again, what I want to highlight is that this down trading conversation is as equally complex and it's multifaceted, and there are many different considerations that people need to work around to be able to work out, whether it makes any sense at all. And I come back to this sort of the fundamental philosophical question about, so tell me again, why you want to do this. And in some cases it's just a fear of, well, you know, probably their also going to go out, down, I want to release equity. Right. But you've got to say that you've got to take the thinking a bit further. I think to be, to be honest, and that's quite again, a hard conversation to have,

Veronica Morgan: Oh, a hundred percent agree with that. It's, it's quite interesting. People seem to think it says sort of a single point in time and it's like, wow, they've got to do this now. And I was like, and then what, because, and it's like, the assumption is that I'll get rid of this and then it's going to be really easy for me to buy something good. And the, and this is the other thing about bargain hunting at the moment. It's Oh yeah. I'm sure there's some bargains out there, but do you really want to buy them? We just want the bargains. So what's your next group.

Veronica Morgan: Okay. So then we have to just touch on property investors, right. As, as a category, because it's quite interesting how quite a few property investors are waking up to the fact that the rental yields are actually continuing to decline, you know, gross, gross yields in some areas are around 2% up in Queensland and a bit higher in Tasmania, a bit higher, but you know, but net yields, if you actually think of all the maintenance costs and the other bits and pieces that you need to do to actually keep the property together are a negative. So I've actually now got about 60% of property investors in my analytic pool who are actually underwater on a cashflow perspective. Now, if you believe that value is going to be created through capital appreciation over the next two to three years, then you might hold in there.

Martin North: But what's interesting now is that many of those property investors have in their own bat of coming to the conclusion that that may not be the case. So there is a beginning to create a bit of a burning platform. And by the way, some of the banks are now beginning to lean quite heavily on some of these cross leveraged property investors who have multiple loans sometimes with interest and principal repayment holidays for the moment. But the banks are beginning to say, well, hang on a moment. You know, you might want to consider selling before you get into further difficulty. And I think that's Russell McCune a couple of weeks ago, cl NAB made the point. There will be some people who the best thing they can do is actually put the property in the market and get out before things get worse. Now he's talking from an experience back in the UK because he was there in the UK at the time of the global financial crisis. And I think that's a really important message. So, you know, first, first time buyers have issues down trays of issues, but probably investors. Boy, that's a really tough nut at the moment.

Veronica Morgan: Mm Hmm. And are you getting a sense of the type of stock that these investors own? The ones that are reaching out the ones that,

Veronica Morgan: Yeah. So it seems to be more units than houses at the moment. The units seem to be where the major cracks are appearing of. I can, sorry. Yeah. Partly of course, because of the construction is youth and particularly the high rise it seems to be particularly linked to the high rise sector where there are thousands and thousands and thousands of similar properties all effectively now looking as other could be coming on the market very soon. Plus of course there's still new stock being built and being brought onto the market too. And I did a show a couple of weeks ago, looking specifically at one of the areas on the, on the Parramatta river, which has been a very high rise, high density development area. And there are thousands and thousands of properties there on the market officially and unofficially many, many for sale signs.

Veronica Morgan: So they're going down the street, right? And you look at the dynamics there and you know, that that is an area where people are going to lose their shirts if they're not very, very careful. The other point I think I'd want to make is that the concept of property investment, right. Had two elements to it. The first is significant capital growth over the medium term. Right. And there was a time when that was true. So from the nineties to the 2015, 2017, that was true. But there were some reasons why we had that. The second was that with interest rates relatively low, but not rock bottom, negative gearing was actually quite valuable, right? But two things now, negative gearing because rates are so low, the offset you get is much lower. So therefore that financial is not so significant. And secondly, if you really truly believe that property prices will not rise over the next two to three to five years, and you continuing to say negative flow on a ongoing basis the investment makes no sense and probably investment is an investment. So on that basis, you should be making those decisions based on analytics, right? Not sentiment, but analytics,

Veronica Morgan: However, they were piled into the market due to sentiment let's face it. So, you know, there was no analytics or if there were analytics, they were marketing analytics. So,

Martin North: And that's the problem. So, so, so one of the things that she says she has people do is to actually do the work and actually understand what the true investment performance of their particular portfolio is. And I must say that some were frankly quite shocked when they actually put it all together and realize that they had to of course, pay entry costs, stamp duty, and those things to get in. They have cost of carry costs and everything else. And when you put it in together, that coughed quoted massive return from that property investment portfolio doesn't look so healthy. And if you actually then say, well, you know, look at people, who've made alternative investment strategies. In some cases they've done better than worse. And I'm not saying that property is good or bad. I'm just saying, you need to know you, you, you can't just set and forget this thing.

Martin North: You can't just assume magically, this is going to be a magic put in or go on growing and creating more and more wealth forever. We are past that. That was frankly, because of deregulation. That was because of low interest rates, cuts and interest rates and RBA bank policy. And it's interesting, of course, that generally the central bank and the regulators are encouraging people to borrow more even now to try to buy property, to try and support the economy, to try and the GDP up, but people need to understand that's the logic that's going on there, right? It is not about them recommending in other way, property as a good investment class. That's not what they're on about.

Veronica Morgan: No, exactly. And even the new South Wales treasury, it came out and talked about the increase of the, the raising of the cap for the first home buyer grant, obviously for buying new property. And he said, this is about the economy and jobs, you know, construction industry jobs. You know, there, wasn't a mention of first home buyers in there other than our first home buyers. We need you to buy this stuff because the investors aren't touching it at the minute.

Martin North: Yeah. I, I, I've called, I've called first time buyers, cannon fodder, right. Fuel to the fire. Exactly. And, and unfortunately they are because they are. So if you think about who's buying right, who's buying property at the moment. Well, we know that international investors are pretty much on the sidelines. We know that many property investors are saying, I can't, I can't see why I'd buy more property now. Right. we, we know that we've got the, the down trade is wanting to sell. So who are the two groups, the first group of first time buyers, the second group on my up traders. So these are people who've got a property and thinking, well, you know, I want to get a bigger property or I need to move locations right now. Now the conversation with the op traders is a really interesting one because quite often they're, you've got one property to sale and you're going to buy a property.

Martin North: And in a way we know if the market is moving, not differentially massively differently, it's still okay. Right. Because basically at what point ever, you, you bail out, you, you buy and now then people sometimes get a bit, a bit clever and say, well, maybe I should sell now. And then wait for property prices to drop and rent for a year and then buy again. And I said, well, you know, yeah, you, you might do that, but you understand that there is some risks and opportunities by doing that. Right. And it's not, it's not a lay down was there, but it is, it is fascinating how very often the, the down traders saying I needed to get out the up traders saying, well, I think I want to do something, but there's a huge gap, right? Between what the up trader is thinking of buying and what the down trader is offering. Right. Because there is a demographic shift going on that people, people, a demographic shift.

Veronica Morgan: So are you going, you're going to start talking about sort of the, the, you know, the 40 year old home, that's looking a bit sad and tired and that's actually not what upgrade is wanting to buy. Correct. Is funny though, isn't it, because there's this, and there's a lot of rhetoric out there in the marketplace about, you know, you gotta put some stamp duty incentives in to get to downsize, have to downsize. And I'm like, yeah. But I think that's the problem, the stock's wrong.

Martin North: Correct. That's exactly right. And what's fascinating about that conversation is that when you start unpicking, what up traders are wanting and why they wanting to transact. Right. And the sort of probably that they are actually aspiring to there's a huge mish-mash mismatch between that and all of the stock that the down traders, particularly those, you know, 55, 60, 65 plus have this, this is this is looking to me like a, a structural disconnect that we've got in the markets. It's not universal. You know, there, there are some areas so houses, you know, around the inner suburban areas always going to be in demands and they're always up traders that want to buy them. But if you come out to the Western parts of Sydney or some of the areas around Melbourne, there's a huge disconnect right. Between, between the property stock and the property aspirations. And one of the interesting observations that I note is the people who are up trading quite often want to move away from these sort of McMansions mansions, these big sort of new places on very small blocks and Hanker after bigger blocks. Hmm. Interesting.

Veronica Morgan: It's so that's so odd. You know, yeah. It's, I've actually got to do a case study. I've been threatening to do this. I, when I was filming the show, God, how many years back now? Maybe seven or eight years ago, we did an episode at point cook in West Western Melbourne. And, and I do get the heebie jeebies and places like that. I really do, but it took me a whole day of Ricky to sort of get over myself and go, right, okay. If these people really want to be here, I have to help them work out how to buy the best possible property in this area. And so, and I learned so much just in that day of really the different stages of land release and how they started really large and got smaller and smaller and smaller. And and so we ended up buying a property for them.

Veronica Morgan: That was in one of the first releases. It was so much bigger block of land. So the houses were further apart. And of course the guns are more established after a number of years, a lot of the early investors had moved out, sold to owner occupies. A whole flavor of the suburb was different managed to get one where the actual house design worked on that particular block. So it's an accident really. And they old and they actually sold for quite a good gain because we got also a discount because it was older and daggy compared to the new stuff. And I want to do a case that study looked at all those other newest, newer ones that we could have bought for the same sort of money and work out if any of those are traded, you know, what their situation is. My theory, my hypothesis going into this is that they would have done a lot less in terms of gain, if any, then our people, if you like, what you're hearing here, please share this episode with others, you feel would benefit.

Veronica Morgan: 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.edu. So back to your, your comment about, upgraders assuming they do want to buy in an area where that stock is available. The conditions for upgraders in a falling market are actually very good, right? Because it's all about transaction costs. However, psychology of it all is that people often find it a struggle to sell their property for less than they thought they were going to sell it for, even if they're paying less when they buy the next one. Have you been finding that?

Martin North: Yeah, absolutely. So that is there that goes back to the psychology again. Right? So people do, people don't want to give up any of the prospective value that they thought they had, right. And that's particularly true in a an op trading situation where what you're doing is effectively selling and then buying again. And you know, one of, one of the interesting observations is I try to talk to people about the difference between asking price and settlement price, right? Because those two things are not the same. And of course, all of the prices quoted in the poverty portals are aspirational asking prices or guide prices. Right. And I keep making the point that particularly in a falling market, that doesn't give you a good guide to what the actual transaction price is likely to be. You're likely to settle for lower. And I actually try to give some indications of the difference between the two, you know, which is often sort of seven or 9%, right. At the moment in some places. And what that means is that people actually do a sharp intake of breath thinking, well, hang on a moment, I've got to reset my expectations then in terms of one, what I'm going to get and, you know, the psychologic that's tough and to what I can then afford.

Veronica Morgan: Well, yes, the thing too is funny because we've interviewed people from REA and also to Maine and, and they both as, she's no, sorry, it's called logic. I think it was the last row. And talking about the discounting across discounting figures in domain of apparently released a new measure, which is, it's not so much the discount as in the sour price versus the asking original asking price, but it's actually sort of measuring the trajectory down the Hill which is sort of interesting as well. Cause it's like, while the property's on the market, they're measuring that. But with auctions, it's, it's completely different because it's quoted and the inferences you meant to get more than that. You know what I mean? So it's all quite confusing, this data and often point people to look at the sold sections of these portals, because that's assuming they haven't got price, not disclosed all over it. That's actually you find out the real sale price, not the asking price.

Martin North: Hmm. Well, that's exactly right. But of course, in a falling market, you find ever more prices not disclosed. Right. And what my observation is at the moment is that you can almost bet your bottom dollar, if it says price, not disclosed it's because prices were actually lower than they expected, by the way, it's the same with auctions, right? The auction, the number of options that are now actually being reported without a price is actually rising. And in fact, I've got some data from a few different sources that show that, you know, overall not disclosed has gone through the roof in the last few months.

Veronica Morgan: I was wondering if you had any access to that, because that is absolutely a, an indicator of how agents and owners are perceiving the market.

Martin North: Absolutely. Yeah. Yeah. Well, I want one of the people I work with a tire broker actually went over domain's data and pulled out all of the statistics for the last few years. And he's got this wonderful chart, which in fact I used on my show the other day, which showed how much has gone up in recent, in recent times. So, so there's a much higher proportion of prices that are not disclosed. Now there's an implication of that too, for the way the indices work, right? Because if the indices don't get hold of that data, what it means is that that transaction is out on the market and out of the data pool for at least three months until settlement actually happens. Right. And that means that the indices themselves could well be overstating the what's happening in the markets because that information is not available.

Veronica Morgan: Oh, very good point. You know, I don't like medians for a lot of reasons, but there's a good one. It, interestingly enough, float, like when you look at your, your graphs, right, your charts have three types of butters, three types of people. And when I'm talking about the charts, I'm talking about the ones on numb consumer confidence or household confidence, you've got basically it's renters, owner, occupiers, renters, owner, occupiers, and investors, but you also got renters mortgage holders and unencumbered, I think.

Martin North: Correct? Yes.

Veronica Morgan: It's quite easy to understand why those were the mortgage feel more stress than those that were debt free. But I imagine there's a lot to unpack in understanding why renters feel less confident financially then the other two groups.

Martin North: Yeah, well, there's, there's a bunch of drivers for that. The first is that many renters rent because they don't have the same financial reach to buy to start with. So they're there, they're in a situation where financially they are more, you know, more, more uncomfortable to start with. Secondly rent is often are more itinerant. So they perhaps move, move around more and, you know men that may be to do with the type of jobs they've got or just their personal circumstances. And the third thing is that they feel disempowered because of course they are subservient to the lease and to the landlord. And I've had quite a few people tell me stories, quite horrible stories recently, despite the official, yes, you'll be protected for the next few months. And you'll never, you know, you won't be asked to leave.

Martin North: Some people in rental situations have huge pressure on them because they weren't able to make the repayments on their own, on their rents. And we're sort of being encouraged quietly to just to move on or worse. This is the one I found the most shocking. Many renters are not clear whether the are just postponed or forgiven, right. So at the end of the six month or whatever the period is, are they suddenly going to get a bill for the last six months and say, no, you've got to pay that as well. Right. That's produced since you're producing. Yeah, correct. So, so all of those factors make, make it very unclear as to, you know, what's going on on that, that then comes back to a lack of competence now with, with, with property investors, they're very uncomfortable because of the lack of returns and the risk with the capital values and owner occupiers are worrying because of the fact that in many cases, the mortgage stress is rising to the other category that I, that I talk about.

Martin North: And those who've got a property or multiple properties and, you know, investments in the stock market. And now that particular group is a little more confident, not because of property, but because the stock market has performed very well. And you know, we've had one of the biggest returns in the last three months we might have, of course the people forget that we had a huge drop just prior to that. So let's not get over overexcited. But nevertheless, that tends to make them a little more positive, but all three, all three of those groups, renters, mortgaged, and in a HomeFree, as it were are all under the longterm average in terms of confidence. Right. And that tells you something about the broader economic environment that we're in, in Australia at the moment,

Veronica Morgan: No surprises there, but it does that the stock market, I find fascinating because you know, in the big argument Oh, but it's forward looking and I'm like, yeah, well, what does it know that nobody else knows? 

Martin North: No, the, the, the market is disconnected. It doesn't work on a four, four estimation basis. Right.

Veronica Morgan: Shocking. And you've got, you've got companies that have curved and shown a profit. And so, yeah.

Martin North: Well, if you want to talk about that for a second, there's two points. Firstly, a lot of the people who have come into the stock market in the last three months on new business they're clutching their government check and they've said all gone to the stock market and it's easy. I've made lots of money in the first, you know, three months, right? The second point there is that all of the government stimulus is around the world has created a lot of spare money. That's flowing into the markets too. So that's being driven higher. It is disconnected fundamentally from longterm value and longterm value of calculations and equations. You could argue, in fact, that capitalism is dead when it comes to the stock market at the moment, because it's basically a market that's manipulated by central banks and it's driven by all of those factors.

Martin North: Smart investors are actually much more cautious than those newbies, right. And the other point is that a lot of stocks around the world, particularly in the U S have been driven higher by companies issuing cheap bonds because money is very cheap and then buying share backs, buying shares back, right? So they haven't actually created any fundamental in their business. They've just reduced the numbers of shares and therefore have actually forced the price higher. And what that signals is that in the stock market, we have a lot of businesses around the world who are zombie companies, right? They are not actually going to create value longterm. They are doing it through financial manipulation and they're doing it on the back of naive investors. This is not a recipe for longterm success. One of the reasons why I'm still believing that the market has significant room to fall later, not immediately, but later. And when it does, that will be another nail in the coffin of wealth creation for many people.

Veronica Morgan: So, and all we doing is seeing behavior in the stock market, which we've seen the same behavior in the property market. Really, I mean like, do you just feel like going argue up buggy you all, you know, I try to try to point it out. I try to point out that it's dangerous, risky artists give up.

Martin North: Look, my, my, my view is, and I've been around, you know, in these markets for a long, long time and I've been, I've been a property investor and a share investor. And I I've, I've been through numbers of crashes of stocks and property and et cetera. And by the way, I've still lost that shares. I've still got probably so, you know, it's not that I don't know. Well, I do have a bit of cash cause I actually think cash is quite useful just as a mother. But the fact is that people go into it with this amazing really Rose, tinted view of investment. Right. And they get all of this stuff coming through from the mainstream media and from the, you know, if you go on the internet and they listen to all these people talking about this, get rich quick thing or this wonderful scheme they've got that there are so many people spruiking right.

Martin North: And all I'm saying is I want people to be realistic about what they can do and the returns that they can get and the risks that they take, there is no such thing as a risk reinvestment, whether it's property, whether it's gold, whether it's stocks or shares or bonds, you know, there are inherent risks attached to each of them. And I want people to just take it, take it a bit more slowly and do a bit more work right now. I know that's very you know, anti internet because everybody wants everything instant gratification and you know, the, the, the one line headline and then move on, right. Actually, sometimes you need to do the work. You need to actually think about these things a bit harder. And look, my training is a philosopher, right? And so I tend to want to go ask that next question and go below the waterline and really try and get to know what's going on.

Martin North: And yeah, many people will say I'm just horribly negative and you know, just don't just ignore me. I don't, that's fine. That's fine. But I don't care because I know I'm actually onto it an important element, which is that there is no such thing as instant money. There's no such thing as a get rich quick scheme that isn't going to be falling over at some point. And there are risks attached and people should be making decisions, not based on just gut or not just based on a headline, but based on doing the work, getting the information and understanding more about what's going on. And from that perspective, I think that you know, DFA has a significant role to go on playing. And for example, I'm going to actually start exposing some of this data that I've got to the postcode level so that people can get it more widely because I think it's an important alternative narrative to help people make better decisions.

Veronica Morgan: I think it's excellent stuff. I think you should put together little mini course, so people can actually go and do an assessment with their own postcard, postcard you know, all your data points and that'll save you a lot of time.

Martin North: Well, the interesting thing, I mean, I started doing the one to ones because I was interested to get some perspectives and also help people. But, but yeah, there is, there's a crying need for different information platforms, different tool sets. And so, yeah, we're thinking about, and I'm working with a technology part of it now to think about how we can make some of these available. So, you know, for example, could we provide a, a questionnaire that allows people to make a self assessment or the financial flow situation, for example, right. Umany people don't understand what a cash flow is, but it's quite straightforward to do, but once you've got that boy, that's really powerful. Or if I could provide information to postcode level, which I can do and show how the stress dynamic works and some fall indications on where prices might move, that could be quite valuable too.

Martin North: So yeah, hopefully over the next few weeks and months, you'll see more of that coming out of the system. We have all the data and now we're trying to work out the most effective way and the most appropriate way to share it bearing in mind, of course it's not financial advice and I can't go down that rabbit hole and there are various rules and regulations that start coming into play. When you start getting close to providing, you know, more rich information, so that there's a lot of hurdles to cross, but we're going to try and navigate those because this is about empowering individuals and households to make better financial decisions for their own future. Right. And that for me is the fundamental point about all of these conversations and all of that. I do. It's about empowering individuals. It's not about trying to trap them into a particular solution or, you know, provide them with you know, the old world-class this or that or the other, right. This is about helping individuals make better decisions for themselves

Veronica Morgan: Then, you know, hallelujah really, because that's exactly the point of this podcast. And also, I mean, as you know, I've been working with Megan Walls to build home buyer Academy for first home buyers, teaching them, you know, step by step, how to get there without falling into all these many, many, many pitfalls and big thing. We're just sort of halfway through actually with our beta group and that sort of Mark the middle point is to stop, reflect, review recalibrate, you know, don't just go headlong, you know, tick, tick, tick, tick, and then think about it afterwards. You know, this is slow down, get it right. And it's just so important. It is particularly with first home buyers, because the first one on the letter, you just, it's very unforgiving if you get that one wrong. So,

Martin North: You know, I've, I've said a few times and I'll say it again. It amazes me how people make more attempts to research a car when they buy a car than they do a property. You know, and if you think about the relative cost of the investment and the risks attach, it is remarkable, but it's partly because of this asymmetry asymmetry between the real estate sector and the real estate portals and all the information that they've got and all of the stuff that they throw through the media in terms of their articles and everything else, right. You're being bombarded all the time by this stuff. So it's much, much harder to really keep your head above water and take an objective view, which is why it's so much more important to empower people and help people to ask the right questions. And as you say, take a bit of time, take a second breath. You know, I, I sometimes say, there's no need to jump. You know, you're not going to miss out just by, you know, I'm taking it for a week or two to think it through in the courage environment. And by the way, there are always more properties.

Veronica Morgan: Well, this is the thing it's actually quite a standard, the amount of first home buyers who feel FOMO when they're buying a house and land package. And I'll go just, just for a moment, Mark, look online and see how many blocks of land are available. And then seeing how many ads are actually advertising an upcoming subdivision that you can, you can now put your name down on a waiting list. So there's no need for FOMO guys. Don't rush is a deal anyway. So do you have, after all these, cause we've been touching on Dumbos all the way through this conversation, but do you have this particular example of it, but a story of a property Dumbo forest?

Veronica Morgan: Yeah. So there is one person I'm not going to say who it was. One person told me of the biggest regret that they made, where they basically saw this plot. Right. And they were convinced that this was perfect for them. Right. And they basically went and purchased it, not realizing that on the other side of the road, there was planning permission for an industrial park. The two years later started being developed and that property is now worth a quarter of where it was. And the question I asked them was who did the search, you know, who actually did cause you should always do a search, right? You should always understand the area, understand the roads, understand what's opposite, et cetera. And basically there was a sort of a, a long silent, we didn't think, we didn't think, right. Well, hang on you, you must've had somebody involved in the convention process.

Martin North: What we are, we did, we did, we did most of it ourselves. And we, we basically had a non, you know, bit of online stuff. So basically what they, what they had done was to try and go for the really cheap road. Right. And the really cheap route in this particular case had ended up with absolute nightmare, a property that is not salable at the moment. And I just worry that that could be one elephant, but unfortunately elephant than maybe is being repeated again and again, and again was people try and cut corners and go for the cheap, you know, cheap conveyancing it's that, you know, there are so many risks for people who don't know what they're getting into.

Veronica Morgan: That's a horrible Dumbo. You know, there are so many risks and this is the thing that people don't even know what to check. What I really love to do. I'm going to I'll pop in the show notes, your your most, your blog links so that people can look at some of that data. But also if you can send me through the link to the video or the episode that you've got when you talked about the price, not disclose data, that'd be really useful to it. I'll pop that in the show notes.

Martin North: Yeah. Great. Okay. I'll send you, I'll send you a couple of links. Have very happy too. Lovely. Thank you very much. We want to make you a better elephant rider. This week's elephant rider training is

Veronica Morgan: One of the things we talked about with Martin was his interaction and understanding of pressure. Then investors are under at the moment, particularly if they've got themselves into a situation where their cashflow is really impacted, but also they really are staring down the barrel of no capital growth for the next foreseeable future, right, for the next few years. And they're gonna be under some pressure to want to offload that investment. And I guess one thing that I would want to talk about here is the importance to make sure that you don't bail out of a good asset. You know, markets go through cycles and there is going to be period of time, whether it be negative growth or flat growth or, or positive growth not every property will be impacted in the same way. Not every area is impacted in the same way.

Veronica Morgan: And for owners to actually panic and sell the wrong property is way worse than if they just stop for a minute. So when I talk about selling the wrong property, I'm saying that if a property owner and investor has numerous properties in their portfolio and they are under financial pressure, it's tempting to want to sell the property. That is easiest to sell first and also tempting to sell the property that has had the greatest amount of gain first, because we have this thing called the disposition effect. And that is where it hurts more to sell something where we only make a small gain or even a loss. Whereas that might be the asset that is the worst asset in our portfolio. The property that might make the loss or the property that it hasn't grown as much in value could be the very one you need to get rid of because of opportunity cost, as opposed to actually selling the asset that has done very well, or has the potential to do better over time than the others.

Veronica Morgan: So the bootcamp here is really about the importance of making sure you assess the caliber of each asset before you choose to sell any of them. So you can learn your financial burden. Sure. You can lighten your cashflow. You can actually get a bit of an injection of cash. That's fine by selling your better asset, but long term you'll be worse off. So I think it's an important thing to start the process by really looking at that, I will put a link to a blog in the notes that I wrote some time ago about selling the wrong asset and the dangers of it, the disposition effect, because I think it's a very important thing to think about, particularly in the current market.