Episode 177 | Australia’s Economic Recovery | Carlos Cacho, Jarden Group

How is Australia faring in the global economy and will factor flow back onto the Australian property market?
We’ve noticed that our audience enjoys episodes featuring economists such as Warren Hogan’s episode 158, Saul Eslake’s episode 152 and the multitude of various well-known voices within this space. Pens and paper in our hand, we chat with Carlos Cacho, Chief Economist of Jarden Group Australia, prior to his position, Carlos served as Chief Economist of UBS Australia.
Within our chat, we cover a variety of topics covering the future of Australia, property price movements and the current lending space, taking into consideration the Government doubling down on First Home Loan Deposit Scheme grants and their propensity to incentivise the purchasing of new property over established.
How will Australia fare in the global economy, will this recovery be short-lived as other nations take control of their internal struggles against the pandemic?

GUEST LINKS:
https://www.linkedin.com/in/carlosscacho/
https://www.linkedin.com/company/jarden/mycompany/
https://www.jardengroup.com.au/our-people/carlos-cacho/

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 May, 2021.

Veronica Morgan: The strength of our economy has been a big surprise for most of us. As we move through the COVID experience on our bubble island, governments, printing money and borrowing is becoming cheaper and easier resulting in rising asset prices. How long can we expect the situation to continue? Are there headwinds? We need to be aware of how are we fairing in a global sense?

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 co-host 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 in 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 fall or forecast report, which experts can you trust to get it right? The elephant in the room.com did I? You,

Veronica Morgan: No property discussion is complete without considering the interconnectedness of our economy locally, nationally, and globally. And this is probably the reason we get such great feedback from you listeners. When we into your economists. And today we've invited a new guest elephant rider, Carlos Cacho chief economist of Jarden group Australia, leading investment advisory group, specializing in the competitive energy, renewables and agriculture markets, as well as developing and arranging to trading and future strategies. And prior to Jarden, Carlos spent three years as Australian economist at UBS Australia. And before that five years at colonial first state global asset management. So thank you so much, Carlos, for joining us today. We're very, very keen to hear your insights.

Carlos Cacho: Thanks for having me, Veronica and Chris I'm keen to be here.

Chris Bates: Great to chat. I guess 2021 is a bit different at 2020, but I mean, has Australia's recovery thing in your view and what areas are sort of doing really strong and I guess things that are sluggish, but how are you also comparing on a global sort of standard in terms of our sort of recovery this year?

Carlos Cacho: That's a great question. Chris said, I think, I think it's fair to say the recovery has surprised pretty much everyone, whether it's professional economists, the RBA, the government, we're doing a lot better than anyone expected. We would be doing even just a few short months ago. If you look back to February, when the RBA released their forecast, they expected unemployment was only going to get down to five and a half percent by the middle of next year.

Carlos Cacho: We're now basically at five and a half percent already. So we're running more than 12 months ahead of the RBAs expectations from just a couple of months ago. So it's, it's been really, really strong already in the first quarter. We think the size of the economy is going to get back to where it was before COVID, which is a very fast recovery. If you consider the size of the weakness we had last year and very fast also compared to prior recessions on a global scale, we're also doing pretty well. So while the U S economy is also expected to get back to where it was pre COVID in the March quarter for their unemployment rate is still much hot. They still have 8 million more people out of work than they did before COVID hit. We've actually got more people in jobs now than we had in February last year. So we'd have already more than recovered all of the jobs that were lost in those first couple of months of COVID. So that's been probably the biggest driver of the recovery is just the fact that we didn't lose as many jobs as we feared. And we've seen them all come back very quickly. And as you, as you know you know, if people have jobs they're going to be spending and they're going also going to be looking to buy houses,

Veronica Morgan: It's, I mean, I've heard lots of theories on this. You know, one being basically you're locked into 25 million people into it, onto an island, and they've got to spend money, you know, locally, not, not done on their overseas holidays and obviously the changing patterns of what we're spending money on. Where does this put sort of conventional economic theory? I mean, it does, it are the new textbooks. I

Carlos Cacho: Think it's in a way it's kind of going back to the old Keynesian theory, that kind of government of government support, it's kind of you know, the way some people have been talking about it is it's almost kind of rewriting the rule book and saying, well, actually, no, having a recession is almost more of a political decision than an economic decision. What the government has shown in this last year is that if you introduce the right policies, and if you spend enough money, you can largely offset the effect of a quite strong kind of external shock to the economic system. Now, obviously that's not going to work in all cases. This COVID recession is very different to what we saw in the GFC or in the nineties recession in Australia. It's really very much kind of in the external shock as opposed to something that's been developed from inside the economy.

Chris Bates: But it is showing us that if you introduce the right policies, if you spend enough money, if you're willing to increase the debt and deficits significantly, you can really reduce the economic damage and you can really supercharge the recovery. I guess that's the key thing though, isn't it? The debt that we've taken on to get the recovery back to where we are today. So the numbers all look great, but there's a sort of debt hanging over that we've got to pay off. I mean, how big is that actually going to be? And how long do you think there's going to be some time where that's going to impact your future growth, right? Like getting 50 grand of credit card debt and you can't spend that money in the future plus you've to pay the interest. So how big is that sort of debt hanging over, going to look?

Carlos Cacho: Yeah, look, absolutely. There's, there's a lot of debt that the Australian government has taken on to fund this fund, this recovery, but it's incredibly cheap for them to borrow. If you look at where the 10 year government bond yield is at the moment, it's around 1.7, 1.8%. So they're paying a really very low rate to borrow for, for a long time. If you look at it where it was during the depths of the crisis, it got down to below 1%. So in that situation, when you're borrowing for so cheaply for so long, it's really, you know, it's much more worthwhile to take on that debt than it is to try and bring a sturdy and kind of muddle through. So we'll have a lot of debt. Our gross debt is going to be over $1 trillion at the federal level, over one and a half trillion dollars at the kind of total national level.

Carlos Cacho: Once you include the states. So yes, there's a lot of debt, but it's still relatively low compared to the rest of the world. If you look at Japan, U S most of Europe, a lot of those governments have debt in excess of a hundred percent of GDP. We're now only going to be getting up to around 50% of the federal level and closer to 75% in total. So we're still relatively low compared to the rest of the developed world. And the affordability of that debt has never been better. So as the parliamentary budget office recently came out with, you know, there's, there's, didn't really see too much of a negative impact, even from these continued deficits for the next couple of years, just because it's so cheap to borrow,

Veronica Morgan: I can't help, but draw a comparison between, you know, the federal government borrowing lots and lots of money and individuals borrowing lots and lots of money to buy a home or investment property with, with sort of the intention, never to pay that debt off. You know, that they're relying on individuals buying property might be relying on capital growth, so that then when they do sell it, then they pay the debt off. Then, you know, is that, I dunno, I'm not an economist clearly, but in some sort of similar ways or parallel, it can be drawn between that and the way governments are actually borrowing money in

Carlos Cacho: A way. Yeah, I think so, Veronica, you know, if you look at how individuals are now behaving towards mortgages and debt, I think it definitely has changed in the last few years. It used to be that we borrowed to buy a house with the intention that one day we'd own it outright, and we worked really hard to pay it off as quickly as possible. And then we kind of had the security of knowing that no matter what happened, we always had that roof over our heads. Now the attitude of a lot of buyers is I'm going to borrow as much as I can afford to repay today. And my end game is that hopefully I can sell it down the line for a big capital gain and downsize if I need to, if I can't repay it, I think there's a lot of in my conversations with a lot of people in industry, you know, be it mortgage brokers, real estate agents.

Carlos Cacho: They're already telling me that there's, there's been this massive shift in how and how people kind of look at debt and how they think about it. And in a way it's assigned for the government, you know, the government government essentially in the modern world is never really being intended to be repaid. The government talks about trying to, you know, pay down a debt. But if you look at an, all the large developed economies, all we really do is we try to, we try to grow the economy faster than we grow the debt. So as a share of the economy, it's getting smaller, but really there's never any intention that the federal government is going to be able to repay a trillion dollars of debt in any kind of fast or, you know, reasonable period of time

Veronica Morgan: Could argue. I guess that, you know, if the Australian, if we're at say 50% of GDP and other countries are a hundred percent or even more GDP, then you know, we've got, we've got a fair amount of free space there for another catastrophe.

Carlos Cacho: Yeah. Look, we're, we're still in a relatively good place where obviously a lot more indebted than we were 18 months ago, but we still have relative to the rest of the world. We still have a fair bit of runway. You could say, I guess the key difference to think about we're from, you know, comparing the household to the government is the fact that essentially the government is taking out a, you know, if you think about it kind of like an unlimited year, year mortgage, there's no limit on the government's earning potential. There's no, you know, it's not like they get the government gets to 60 years old and retires that obviously as a household, you have to think about that risk that at some stage you're not going to be able to work. And the debt you have at, at that stage, you may have to sell assets to pay off if, if you still have a mortgage. So it is a, it is a bit of a different calculation in that sense that there is a finite working life for a, for a household while there's not for a government, which

Veronica Morgan: Brings us back to employment, though. You said that we've actually got more employment now versus before COVID, does that take into account under employment?

Carlos Cacho: Yeah. Surprisingly underemployment is actually lower than it was before. COVID, that's been, I think a big surprise to me and other economists, as well as the fact that not only have we recovered all the jobs that we lost, but we've actually seen a tightening in the, in the underemployment rate, which pre COVID was probably one of the things that left less us being a little bit more concerned about the outlook that even though unemployment was falling, you still had a lot of people who wanted to work more hours and couldn't in terms of what's driving that. I think it's a combination of things. It's, you know, it's the fact that we don't have the, the normal pool of labor coming into Australia. Normally we've got two to 300,000 net migrants coming into Australia a year at the moment. That's actually negative because we've got people who've been here studying or working who are, who are leaving and going back home, which is more than offsetting the Australians coming back. And so that actually means there's the pool of labor is not growing as quickly as it normally would. And I think that, and that's mean businesses are having to take on more staff, give people more hours and that's leading to shortages in some areas.

Veronica Morgan: Hmm. Does that challenge the belief then the immigration is good for the economy?

Carlos Cacho: Look, I don't, I don't think it challenges. The belief in immigration is good for the economy in a lot of ways, but having a higher labor supply does mean it is to get the unemployment rate down. And that's just you know, the reality is when you have immigration, people are coming here, they are, they're working, they're earning money, they're paying taxes, they're spending, they grow the economy, but it also means that the unemployment rate is going to be higher than it would otherwise be. And wages are probably going to be a little bit lower than they would otherwise be. So there are some negatives and some positives, depending on how you look at it, the.

Chris Bates: War on the debt conversation. I mean, you've got, governments have taken a lot of dead on consumers are taking a lot of housing detonate here taking on a lot of consumer sort of short term debt. You could answer that question for me, but what about the corporates? I mean, to get the unemployment rate down, they've got to invest in staff and they could fund that out of future cash flows, which may or may not be confident, but they could also take on debt to fund this and other spending our investment, et cetera, how corporate Australia sort of attitude to debt changing.

Carlos Cacho: That's that's a really good, great question, Chris. And it's, it's really the missing piece of the puzzle at the moment. Business investments been pretty anemic in Australia for quite a long time, and that's still the case at the beginning of COVID. We saw a big draw down in business credits. So we saw businesses taking on a lot of debt and that was largely just businesses being conservative, looking at the outlook and saying, I don't know what's going to happen.

Carlos Cacho: I'm not sure if I'm still going to have access to this in a month or two. So I'm going to be prudent and I'm just gonna draw down my facilities, drawn debt, draw down what, whatever loans I have available and keep it in cash just in case then what we saw over the next few months after that is a lot of the businesses. When the outlook turned it to me, not be so negative, they were paid that. And we haven't really seen any increase in, in business debt since then, in fact business credit growth. So the total value of outstanding business debt is minus 2.6% year on year at the moment. So it's been actually declining. However, the outlook is looking a lot more positive. So yesterday, which was that the 10th of May, we got the national Australia bank business survey, which is a big survey of national businesses about how trading conditions are, what their confidence is. And the confidence measure in that survey was the highest since 1994. Wow. That's a really positive sign for business investment. If businesses are optimistic about the future, they're more likely to go out and to borrow and invest. So our expectation is that we should see business investment pick up ahead and business borrowing pickup, but we just haven't seen it yet. I guess

Veronica Morgan: A lot of businesses that pocket a job keeper, haven't they? So, you know, the buildup of buffer, at least maybe they don't need to invest or borrow to invest when that's the case.

Carlos Cacho: Some of that too, you know, we've seen the cashflow boost to businesses from programs like job keeper from the other, the business payments, the government brought in with the stimulus, as well as things like the accelerated depreciation, which gives them that extra tax back. If they, if they buy assets has meant that there's businesses that have had a big boost to their cashflow and they haven't necessarily needed to borrow as much as they might normally need to. I guess the conversation is once the businesses potentially do do that, that's going to be, you know, the other fire, I guess, the other piston for the economy, that's probably been holding us back. Certainly I think that's really what the IBA and what the government want to see is they want to see businesses start investing and really to drive it. The next leg of the recovery.

Carlos Cacho: This, this first leg has been driven by all the fiscal stimulus, which has flown very quickly into the housing market, but we haven't really seen the business pickup kind of pick up the next step. And that's really going to be the key for this year is how quickly and how much is business investment pick up. If it does pick up strongly like the leading indicators like confidence suggests, and that's going to put us in a really good position to get back to kind of the trajectory we were on pre COVID and hopefully improve on that because, you know, we, we forget about it now, but the economy really wasn't in a great place before, before COVID came along, the RBA had already cut rates twice. You don't cut rates when the economy is looking great. So really hopefully business pickup in business investment can help us get out of the rut that we already beforehand.

Veronica Morgan: So does that mean that potentially rates shorter than the three easy RBA said, that'd be okay. Helpful.

Carlos Cacho: Yeah. Look, it's entirely possible. The RBA in a speech last week actually reiterated that they guidance is all about the state of the economy. It's all about where the unemployment and inflation rates go. So they don't expect they're going to achieve their, and for their inflation target of two to 3% until sometime in 2024. But if they achieve that sooner, when if unemployment comes down faster than they expect, then they could be hiking rates potentially in 2023. And in fact, if you look at expectations that are priced into financial markets, the market's expecting a rate hike more and late 20, 23, rather than in 2024.

Chris Bates: I think consumers have got a lot of cash and say, you want clots, who've got lots of money in offset accounts that, you know, low rates have created an opportunity for them. You know, people are a bit more pessimistic or a bit more conservative around their employment.

Carlos Cacho: So they're like, well, I'm not, I can't spend money on holidays or, you know, big consumer goods, et cetera. How big is this sort of cash Paul sitting there with the consumers, I guess, and how are they going to get to have the confidence to go and spend that money on mass? Pretty big. It's certainly we've had a big run-up in consumer deposits at a bank. So if you just look at deposits at banks, household deposits are up by about 130, $140 billion since December last year, sorry, December, 2019. So we've had a big increase now and that's up about 14%, oh, sorry. 12% year on year. So it's been a pretty solid increase. There is a lot of cash sitting there on top of that. As you mentioned, there's also been a big increase in offset and redraw accounts. So the IBA put out a great chart in their financial stability review in April showing just how much that it increases.

Carlos Cacho: So pre COVID we were probably seeing on average, I think households were two years ahead and repayments. I think now it's jumped almost closer to three. So there are a lot of households with a lot of, a lot of cash on the sidelines, whether it be in deposit accounts or whether it be sitting up against a mortgage.

Chris Bates: And their property prices are rising. Right. So yeah, the wealth effect. Do you think that is that we actually saying the wealth effect play out yet? Or is there something that you could see play out? Is there a lag, I guess, and how long till we could say consumers start to spend their property price growth?

Carlos Cacho: Well, so last year, what we saw is we saw a big boost to household incomes because of all the government stimulus. So despite being in a recession, we actually saw household income go up because there were just such huge flows into households from those programs like jobs and job keeper, job seeker, with the COVID supplement, the one-off payments, the government gave to households. And so a lot of that flowed into spending on goods. So we saw household goods, things like furniture, fridges, you know, desks, laptops, all of us setting up for work from home, really you know, despite well above normal levels, that there was a real boon for the retail space. Now we're seeing that somewhat normalized. But what we're seeing is I guess the second wave of that, which is now everyone's spending more on services. So some people are going out there going out to dinner, more traveling, domestic holidays. I can tell you my wife and I are, you know, recently booked a trip to north Queensland over the winter to escape, to escape the cold and finding accommodation is actually, you know, really tough. Obviously everyone is without being able to go to Bali or Thailand or somewhere else. We're all stuck here. We're all, we're all heading up north for the, for the war.

Carlos Cacho: So we are definitely seeing signs that consumers are spending spending that cash in terms of what really drives them to continue that. I think it's it's a combination of factors, it's confidence, which is around record levels. So that's a, that's a tick. And it's also that yeah, the, the wealth effects, house prices going up, people feeling more wealthy feeling like they can treat themselves, they can splurge, you know, unfortunately there's been some issues that have stood in the way of that. One of the most correlated areas of consumption to wealth effect is spending on cars. Now there's a global full of cars because of the shortage of computer chips. And so even though there's strong demand for new cars and used cars, we actually haven't seen dealers be able to keep up to that. If you're, if you're not familiar know, talking to people who are looking to buy a car at the moment, in some cases you're waiting two, three, four, five months to take delivery.

Carlos Cacho: Whereas normally you'd probably be able to, you know, maybe get an, an a couple of weeks at worst. So that's one thing that's actually standing in the way of consumers spending their money, these supply chain issues we've seen as a result of COVID. I mean, she gave me, I bought a shot. I mean, I may be shot for a year. I mean, the government's optimistic that there may have been next year, but I mean, let's say they don't open up for a couple of years or three years. Is this really going to impact our economy? Or do you think that, you know, like Veronica was saying that we'll spend the money on local tourism or spend our money on local services and we'll be fine, I guess I think overall we'll be okay, but it's not an even an even outcome. If you look at the tourism sector as a whole Australians actually spend more overseas than international tourists spent here in 2019 before COVID hit Australian spent about $60 billion on international travel international tourist spend about $40 billion a year.

Carlos Cacho: So in a purely, just looking at tourism, that's a net gain of $20 billion a year. The problem is that Australian tourists and international tourists don't necessarily go to the same places. So yeah, exactly. Regional new south Wales is booming because we're all, everyone in Sydney is heading up to the south and north coast is going to the blue mountains, et cetera. But you know, tourism in Sydney is, is still struggling a bit the operators here because you know, you're not necessarily going to do a bridge climb or go into a souvenir shop as a local. So that's one of the issues. The other one is that there's a lot of there's other parts of the economy that rely on international travel. That's not tourism. So education is the biggest one education prior to COVID was our third largest export. And we've basically seen that the tap turned off that students are still, who were still in the country are still continuing their studies, but they're gradually leaving or completing their studies.

Carlos Cacho: And while there are some students who are taking up distance options, it's certainly not the same economic benefit as people actually moving to Australia to study that three or four year degree renting out apartments in at university is going out and spending, and also working, you know, often kind of some of these jobs in cafes and hospitality, which is the sector really struggling to find employees at the moment. So that's probably the area where, where you're looking at, there's going to be more impacted by the closed borders is education. And also those areas that they love, the labor market that are particularly reliant on those international students for workers,

Veronica Morgan: Markets that have been created through the border closures. I expect. Do you think that, I mean, I guess a, can you highlight any and B, would they be sustainable? Are they sort of temporary

Carlos Cacho: Or the, the new changes, I guess it's, it's a combination of border closures and COVID and work from home. And as, as you are both, I'm sure, well aware, you know, we've kinda got this, this trend of the sea change that's I think really you had a file it under it with people looking to, to move close to Sydney, but a little bit further out than they might've normally looked at doing pre COVID. And I think that's probably something that can continues. I think people looking to those nearby regional areas as I kind of urban adjacent areas probably continues. And I think tourism to those areas also remains fairly solid. I guess the question is, you know, how, how long till the, till the world starts looking a bit more normal is really going to be the determinant there. You know, if it's in 12 months, time, everyone's vaccinated and it's all fine and the borders can be fine open.

Carlos Cacho: I suspect there's going to be a lot of Australians who are jumping on a plane and truck trying to get over to Europe or the U S or, or Southeast Asia, if it's a slower grind and only some countries are opening up and it's kind of limited, and you might have to go into quarantine when you get home, then you know, we'll probably see some of that boost to domestic tourism continue for a little bit longer. I mean, what's your view on Aussies returning home?

Chris Bates: I mean, I've spoken to friends in London and other parts of the world, and a lot of them do want to come back. It's just the complexities of trying to get that sorted is hard and there's only limited spots. So do you foresee a lot of Ozzies moving home and that will boost our migration numbers and, you know, basically catch up the population growth that we've lost.

Carlos Cacho: I think we are seeing quite a few minutes as you suggest, you know, it is, it is a challenge, whether it's even just getting on a flight or in a lot of cases, getting a job, you know, if you're a foot high flying executive working in finance or something else in the UK or the U S it's not necessarily easy to find a comparable job in Australia, I think where people have been able to find those employment opportunities here, they've been quite happy to move back. I know in my own organization, we've had a lot of senior leaders join us from the, from London, from Hong Kong, from New York. And, you know, it's really been, I think COVID has been the opportunity for them where they've, you know, they've really enjoyed and loved working overseas, but the opportunity to come back home to a good role and the lure of more or less COVID free life in Sydney versus life in London, on New York at the moment is, has made it much more attractive.

Carlos Cacho: So it's been a good opportunity, I think for for Australia to get back some of our lost talent, because generally we often see some of our best labor move overseas was there's just greater opportunities there. I do think that will continue a bit. I also suspect once borders do reopen, we're going to say strong levels of skilled migration return. I think this has made Australia a relatively attract, a more attractive place. The key thing is going to be, I guess, you know, when that happens, the government's talking about now not till 2022, that borders reopened the big challenge. I think politically is it's very hard to bring back or to, to bring in skilled migrants if you still have Australians waiting for the, for the flight time. And so you really need to clear that backlog of residents and citizens who want to come back before you can start opening the door to new Margaret.

Veronica Morgan: I wonder. I mean, just, you know, can you replicate on a global scale? What sort of happening on a local scale? And I'll give you an example, say, quite a lot of people apparently are moving to Brisbane where they have had bigger roles in, in Melbourne or Sydney, you know, more high paid roles. And because of work from home, the ability to work remotely, they say, you know what, I don't even need to be in the same city anymore. Obviously they're in the same time zone for most of the year or for half of the year, but they're only an hour difference the rest of the year, but it will people actually start to say, well, actually I can keep my job in London. I just will live in Australia and sort of work out hours. Or do you think that that will happen?

Carlos Cacho: Yeah. In some cases you may, you may see things like that that happened. I mean, I think certainly in the you know, in the tech companies, we're seeing talk of home being permanent and allowing people to work where they want. If you look at the, in the U S there's definitely the same kind of regional shifts that are happening in Australia going on. I think I saw recently the fastest growing housing market in the U S was some small Lakeside hat town in the Midwest where you know, you basically had a lot of people leaving the big cities and moving to these regional communities, because one, they could work from home. And two, they had a lot more freedom, a lot more outdoor space, and they just got a lot more for their money. So I think you do see some of those shifts continue.

Carlos Cacho: I think there will be a push from businesses and also from, from governments and cities to bring people back into the CBD. Obviously you don't want to lose that vibrancy and people going into the city to work also supports a lot of jobs, but I think we've definitely see a shift that we're not going to go back to the old way. We're not going to go back to everyone working a nine to five in the CBD. There's going to be the new normal will be a bit of a hybrid balance where a few days a week you might work from home a few days a week, you're in the office. And if you're particularly skilled and good at your role, and you've got a good relationship with your company, then you can probably work from anywhere if you aren't, if you want to. So I think there will be some opportunities for that, but it's probably a bit more select.

Veronica Morgan: Yeah, I guess if that was more, I mean, because in Brisbane, for instance, that's led to an increase in house prices. So that there's a real globalization of that. Then obviously that brings more hiring comes into cities that may not have had them before. So, but if you say it's more selective than it's not certainly going to be a widespread movement to push prices up even further, perhaps,

Chris Bates: I mean, anecdotally, we've got a client who was earning a lot of money in the U S in trading basically, and can move back to Australia just around COVID and got kids and works. We don't want to lose you. And they basically allowed him to continue and salary hasn't changed, et cetera. So, you know, his hours are a bit different because he's, you know, he's working to us hours and, you know, maybe a bit early nights and early mornings sometimes. But yeah, that's sort of an example where the talent, you know, they don't want to lose eight good people if they want to go home, potentially they'll keep paying. And Carlos, I guess there was a huge opportunity for the Australian government to go down the renewable section, which I know you guys do with consulting around, but, you know, what's your sort of view on the government's attitude to actually embrace that opportunity. But when it doesn't make a lot of sense to electrify everything and all the other things, so we being optimistic to see some massive change to government's view on those things. Or we just, yeah, we've got to wait along with, for longer. I.

Carlos Cacho: Think what has been pre-announced from the budget looks like, you know, it is a positive change. We're seeing some investment for carbon capture and storage for hydrogen, for renewables, but it's probably, you know, a little bit, a little bit smaller than I think a lot of people would like to see. And that probably you'd argue in need to see. I think what's really driving the change is not the government, but it's just the technology and it's, and it's businesses. Businesses are much more, you know, getting pressure from investors, but also from their own boards wanting to be more environmentally responsible and active on climate change.

Carlos Cacho: And they're really leading the way here. And I said, technology, the fact that, you know, it's now cheaper to install renewable energy than it is to build a new coal fired power plant. So the sector is just not investing in those old technologies the way they would have previously. The other thing that's really gonna, I think drag us to the rest of the world is what's going on globally in Europe and the U S they're both talking about the idea of potentially bringing in carbon import taxes, where essentially they would tax higher emissions countries imports on the basis of how much extra carbon they produce and something like that, which the government is fighting or arguing against and would have a big impact on, you know, I guess, you know, dragging businesses towards the lower emissions, whether or not there is a, is a policy response to support that

Veronica Morgan: The government is so reactive on this. It's like, you know, they haven't wanted to do anything for so long and it's like, they've been forced to because everyone else is just taking medicine in their own hands. And I love it as in business and, and you know, other countries, I mean, it was, it was mortifying. I mean, if we're going some dumb tangent here, but you know, Scott Morrison's presentation to Biden's forum thing, it was modifying how embarrassing, you know, getting up and saying, we don't need a target. We'll just, you know, muddle our own way. Anyway, let's not divert. And let's all go down that path.

Veronica Morgan: 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.edu or directly via email. Two questions@theelephantintheroom.com. Did I, you,

Veronica Morgan: I'm curious Talk to a lot of agents and you, you get out there and actually talk to people on the ground and gauge what's happening in the property market. What are, you've been hearing a few

Carlos Cacho: Different things, depending on where you, where you look starting in Sydney. I think what I'm hearing is particularly in the, in the east and the inner ring, it feels like things have reached a bit of a peak or a plateau where up until March, you saw just that rampant crazy price grow to the extent that even the agents were surprised and were shocked by it, you know, 20% in six months, that sort of stuff. And then now kind of saying that, look, it's bringing you more supply online. You had people who were sitting on their hands were a bit unsure about trading in this sort of market, the risk of, you know, you sell and not being able to buy. And the price growth we saw was just so much. So they said, you know what, screw it, let's sell. And we'll figure it, figure the rest out later, we've made so much money on this house.

Carlos Cacho: We just want to take advantage of that timing. And now it feels like things have reached a bit of a plateau where they're, where they're slowing still very solid housing market. But I think, you know, that supply coming on board and people may be reassessing where the prices are, has led to a bit of a leveling out of the momentum in the west. I think you're still seeing a bit more uplift coming and that's being driven by still that kind of, I guess, that COVID shift where people are, you know, maybe reassessing where they want to live. They might've been living in a, in a city apartment. I never realized, you know, what, if I'm working from home two days a week that commute into the city for an hour plus isn't so bad and we can actually get a nice family home out in the Western suburbs.

Carlos Cacho: So you are still seeing some, some support there along in Melbourne and Brisbane. I think we're still seeing the strong recovery in prices or a strong kind of lift in prices, continuing, particularly in Melbourne, given the lockdowns kind of delayed the recovery there. The other interesting shift in there is that I think the lockdowns really scared or shifted perceptions of a lot of people. And they're seeing really strong shifting to the nearby lifestyle areas. So areas like the Mornington peninsula reportedly absolutely on fire, you know, you're seeing people sell up in inner ring suburbs and move to those lifestyle areas where it's still close enough to the city, if you need to be there, but you're outside of that ring of steel. And, you know, if restrictions were to come in again and you're free to go about your business. And then in Perth, I think the market there is absolutely booming. Just

Veronica Morgan: Funny on that with Victorians, a lot of people that I've been speaking to saying that, you know, when you are restricted to be able to move within a five kilometer radius of your home, then where you live, becomes so much more important. And I think that's probably leading to that. If you're not, if you don't have a good park for them 500, five kilometers or a beach or, or whatever it is that it's outdoors and, and is pleasant to be in, then you've, they felt very, very hamstrung and, and contained versus those that lived in those, in those areas where there's quite a greater outdoor areas. And, and I think that that's so fascinating to think that that's then leading to more of a Exodus there, if, because of that.

Carlos Cacho: Yeah, I think you're absolutely right there. I think that it being stuck within five Ks for months on end has really led people to, I think, reassess where they want to be and what kind of amenity they want around them, as well as that working from home shift where, you know, if previously, you only really got to enjoy your neighborhood on the weekend. Now, if you can enjoy an extra two days a week, you might decide that you want those extra, you know, you know, you're willing to pay up a bit more to be near Parkland or near the beach, or just somewhere where you've got a bit more green space around you. Perth is probably the strongest one we're seeing at the moment talking to developers and agents there. You know, it's a combination of mining is absolutely booming. They've handled, COVID quite well.

Carlos Cacho: You've got massive subsidies from the federal and state government, which are covering in some cases, you know, 25, 30% of the cost of a new house. And you're just saying after, you know, the better part of a decade and the doldrums, you're seeing the Perth property market really take off very strongly. And that's, you know, a big shift from where, from the story that we've seen for the last 10 years, where there was always talk of PIR, finally entering recovery, but they just didn't, didn't manage to get there now with iron or over $200 a time. You're just seeing a lot of flow into both individuals, but also the government's coffers. So that's probably going to continue in the near term. So

Veronica Morgan: Clearly that's still quite vulnerable though. Right? Well, I

Carlos Cacho: Think that in terms of the exposure to commodities look, it, there still are, but the thing is the risk of iron or falling back down to 20 or $30, a ton is very, very low from here. The risk of it falling back to, you know, 150 or $120 a ton. That's pretty real. But even at those levels, that's a massive positive compared to where we were over the better part of the last decade. So I guess it's all about the risks around it. And I think, yes, there's some downside risk, but even in that downside scenario, it's still looking pretty good. I also think the thing is that they've kind of been under building for a long time. They, we saw this big spike in construction around the mining boom, and then there was a huge glut of supply in the market, particularly for apartments and house and land on the suburbs in the country, out of suburbs.

Carlos Cacho: And what we've seen now is we've seen a lot of that rapidly taken up. We've seen people as soon as home builder was announced, you saw a flood of people rushing out to the suburbs and buying blocks of land that developers in some cases had had sitting around for sale for years.

Chris Bates: Absolutely. I mean, that's you know, finally, we've got a bit of demand out to those sorts of areas. I've got clients with places in Perth that bought them now five, 10 years ago, and they're still on the water, but they've been waiting for some type of demand shifts because the supplies just been sort of weighing on the market there, you said, you've been speaking to some developers as well, that we don't really talk too much to them, but you know, what are they sort of saying in terms of pre-sales, especially from investors,

Carlos Cacho: It's, it's very much a, a bifurcated market between houses and apartments on the housing side, they're still seeing pretty strong demand even after home builder expired. So you're kind of seeing that buoyancy in the housing, in the new housing market continue, even without the subsidies for investors, they are definitely seeing inquiries pick up and they are seeing some purchases, particularly for products like townhouses, where it's a little bit more affordable than a house, but better than an apartment from it. No given the outlook. So they are definitely seeing more interest there, which is a change from what we've seen, where they're still struggling is, is apartments. You know, there are some projects which are going ahead and are seeing good take-up, but certainly few and far between compared to what we saw over that 20, 15 to 2017 period where developers would sell off, you know, a whole parcel of two or 300 apartments in the space of a few hours. So that's really the part of the market that's still missing in action in terms of new housing,

Veronica Morgan: How short are people's memories?

Carlos Cacho: I think in some cases they can be quite short. I think we look back at the aftermath of the last housing boom, and the issues around valuations coming in below settlement price, building quality issues, vulnerable cladding, et cetera. And I think there was a, there was a realization from Australians that are actually buying off the plan apartments. Isn't, aren't actually a great investment. If, if they didn't know that already, I know that you two are big advocates against against off the plan apartments. And I think in general you know, there are a lot of issues there, but I think what's starting to override that is affordability and FOMO. We're seeing price growth to such an extent that people are being priced out of the house market. So in some cases, apartments and new new apartments might be the only, you know, the only option for them. And they've got that. We've got that real strong fear of missing out, coming into the market. Again, the kind of decline that we saw in 2016 that led a lot of people down that off the plan path, because it gave you an opportunity to, to buy something that you couldn't afford just yet, but that you would be able to afford in a year's time when settlement there's

Veronica Morgan: Also that lack of competition. And that becomes appealing to buyers when they're missing out over and over again. And they just go, Hey, I just want to buy something it's easy. Oh, that's it. Great. Thanks. There's five of them. Choose from. Excellent. I have that one. And then the relief of just sort of the, you know, the, the search and the agony of it all being over with that's immediate, but then the rural problem then begins.

Chris Bates: Yeah, absolutely. I think that's going to drive a lot of investment lending. It's not really true investment lending. Someone's got a house and you know, they've paid that mortgage off and they've got lots of equity and they got great cashflow and they say, well, why don't we buy an investment property for our future? A lot of that investment then I think will come from people who would have been home buyers that got frustrated with the journey prices have run on them. They're not willing to compromise on location or the type of property that I want. And they say, well, let's just buy an investment property instead of a house. And you know, the last couple of weeks, I did talk a few people out of that where that fear and that frustration of missing is led them to, well, I'll just buy an investment property and it's really dangerous because they take their Sydney rose glasses on, and then look for someone who's going to advise them on investment properties.

Carlos Cacho: And, you know, we know that there's no shortage of people willing to sell the dream, I guess. Absolutely. I think, you know, in my conversations with, with real estate agents, I'm hearing that there's been a real shift in the type of investor they're seeing now. It's not the traditional property investor. It's, it's very much those higher net worth households who have quite a bit of equity built up in their, in their family home. And then looking to unlock some of that and take advantage of the, of the rise in property prices. Either because they're happy where they are and they, and they don't need to move that they just want to, I guess, you know, ride the ride the boom, or because they've they just can't afford to move where they want to. And they want to try and take advantage of the, the current environment. Some housing measures were already Nath regarding the budget. What's what are they, I guess? And what's your view on them?

Veronica Morgan: So I guess what we should say is, are we're actually recording this the day before the budget is released

Carlos Cacho: The morning of the budget. So we won't

Veronica Morgan: Be releasing this episode until a couple of weeks time. So this is going to be quite interesting to see how good your crystal ball is.

Carlos Cacho: Well, whether the government assets become the tradition, the government has leaked a lot of a lot policies ahead of the budget. So we know a few things that are going to be coming out on housing tonight. So they they've expanded the first home loan deposit scheme, which allows buyers to buy with a 5% deposit without paying lender's mortgage insurance. So they've got another 10,000 places on that. They've also increased the super saver scheme, which allows you to put in $30,000 into super and then take it out for your deposit, paving up the tax benefit on the way. So they've made that they've increased that to 50,000 and they've also brought in 10,000 places for the family home guarantee, which will allow single parent families to purchase a house with a 2% deposit instead of five. So and even smaller deposit there,

Veronica Morgan: There's a lot of courtesies of that one. What do you, what are your thoughts

Carlos Cacho: Look on, on the, on the whole I don't think the policies are gonna make a massive difference overall. I think definitely for some individuals who are really struggling to Stripe together a deposit, it does, it can be the you know, that little bit that gets them across the line. But you know, you're talking about still in for the first home loan deposit scheme, about 20,000 places. In the last 12 months, we've probably seen over 150 or 200001st home buyers. So it's a relatively small share of that. I also purely, I guess from a risk point of view, I see those five and 2% deposit loans as being quite risky. And I'm in a really hot housing market. I personally wouldn't want to be buying with an LVR of 98% risk overpaying, and potentially ending up in negative equity quite quickly.

Carlos Cacho: I don't think house prices are going to fall in the near term, but it just doesn't give you much buffer if things do go south. And I think, I guess from the bank's perspective, they're not too concerned because it's guaranteed by the government. They've effectively got that lenders mortgage insurance, but it does. It does leave households quite exposed if, if things were to change.

Chris Bates: And do you think there'll be like an apartment builder sort of policy coming out in 2021 where they're trying to stimulate that part of the market? Cause you said that's very sluggish.

Carlos Cacho: Hi, I'm Michael Sucre. The housing minister did say a couple of weeks ago at the [inaudible] conference that they, it's definitely something they're looking at. We haven't heard a thing that, you know, any policies being whispered, talking to people in industry and looking through prior budget proposals from the, from the property sector, what seems to be the most likely route is potentially another sort of first home buyer grant specifically targeted at apartments.

Carlos Cacho: So home builder didn't really do much for apartments because of the time pressure that was built into it. Or the other option could be looking at supporting the build to rent sector. So we're starting to see this new type of of home building come up, the build to rent where developers build an apartment, and then they it's managed they manage renting those apartments out. So they kind of maintain it long-term they usually provide extra services. The rents are usually a bit higher because you're getting more premium experience in product. The big issue for that is the tax implications is the fact that the withholding taxes is quite high. And so in a lot of cases, particularly for foreign investors it doesn't make sense. There's been a lot of lobbying on behalf of the, the industry to try and change some of those taxes so that we can see that sector grow more. Indeed, if you look overseas it's a massive driver of construction in the U S and Canada in the UK and in many parts of Europe where the household landlords are not the norm like they are in Australia. So that's definitely another area that they could look at supporting

Veronica Morgan: It is interesting cause we interviewed oh, I can't remember his name, but he was a general manager of Mirvac build to rent a while ago, back before COVID cause we interviewed him in the studio and it, he said that one of the big hurdles is the land tax that and that's, but that's a state government thing. And of course, you know, I'm fully in favor of encouraging that. I think that's a great thing for governments to be supporting because then you that's being built for institutional owners and you can expect the quality to be better. It's more incentive to build a better building.

Carlos Cacho: Exactly. I, I can't, I cannot agree more. I think if the developer knows they're going to retain some ownership, stake of this apartment in, you know, and have that in five, 10, 20 years time, they're going to build it to a higher standard than if they know they're not going to have any residual exposure within 12 months.

Chris Bates: So there's a lot of talk just a few months ago around regulation and macroprudential sort of limits put on lending. What your thoughts, if, if your thought of belief that maybe the strongest growth in the, you know, the inner rings let's say or growth does slow down just naturally with more supply, do you think there's still going to be the pressure on the government to sort of try to put restrictions around lending and try to slow things down? Even if rates stay low?

Carlos Cacho: Yeah. I think that if, if we see growth naturally moderate, then we probably don't then there's probably less risk of saying any kind of macroprudential tightening in terms of what we've know from, from the regulators opera and the RBA been pretty clear that they're not worried about house prices on their own. They're worried about the riskier types of lending and making sure that lending standards remain sound. So the key thing that opera is watching who's the banking regulator is basically what's going on for those riskier types of lending. So things like investor lending interest only loans, higher LVR lending, so where people are borrowing more than 90% of the value and also high debt to income lending where people are borrowing more than six times their income and all those measures while they've increased recently. They're not at levels yet that would have them concerned.

Carlos Cacho: And if you look at things like investor credit growth and interest only loans, they're still well well below where they were, where they intervened last time in 2015. So investor lending is picking up, but it's a much from a much lower base for credit growth. And it was back then. And it's still, you know, if you look at, even on the loans, growth numbers, the numbers we got out for for March last week for investor lending were really strong. They're up almost I think, 12% on the month. But investor lending is still down 20 or 30% from where it was in 2015. So while owner occupied lending and total lending is at record highs. So they're, they're a much smaller share of the market now than they were were last time they intervened so I think probably for the moment that they can tend to sit on their hands, but if we get into, you know, late this year, early next year, and we're seeing investor lending kick up, we're seeing more high that high LVR loans. There is a risk they could come in to try and cool things a bit

Veronica Morgan: Yeah. To put it in context there. So I think from memory investor lending back in 2015 was around 55% of total lending. Would that be right? Yeah.

Carlos Cacho: So in, in new south Wales, in particular, we saw investor loans where more than half of all loans. So that's what got APPA really concerned is that they view those loans as being, you know, that that sort of lending is being inherently more speculative. And they usually their view is that investors are more likely to sell in a downturn. And so that it just creates more more risk within the financial system.

Veronica Morgan: And then now as a proportion of total lending

Carlos Cacho: Around, I think it picked up to around 30% again, which is in line with longterm averages. If you think about the Australian housing market as a whole, roughly a third of our own outright, a third of us owned with a mortgage and a third of us rent. So about a third of the housing stock is owned by investors. So it's in the line.

Chris Bates: Yeah, roughly it was over 50 million come right back. It was in the twenties. And now it's probably back to that thirties. And we do need investment lending art because that's also creating combination rental combination. Especially if in, if you use time, we start to open up the borders, which is naturally what the government's going to want to do is grow our immigration dramatically. Cause I guess a bit of a difficult, or maybe not so difficult, but what's sort of the headwinds. I mean, it's been quite positive to be honest. And what are some of the big things over the short term that we just don't know about the Australian economy that could really have a huge impact, but also longer term like structurally, what are the big problems that we are creating for ourselves?

Carlos Cacho: Um I mean, in, in the short-term I think one of the biggest issues is just our, our trading relationship with China. That's obviously been being quite troubled. They're our biggest trading partner. What happens there? Look, I've don't have a crystal ball. I'm not sure. But that's, that's a big that's certainly a risk that it's worth being cognizant. We've already seen obviously action on some of our exports, unfortunately I now, or which is our largest export is still flowing freely into China. And I don't expect that's going to change anytime soon.

Carlos Cacho: I think the other, the other key thing is really the, the vaccine rollout and the opening of international borders. The vaccine rollout's been going well behind schedule, and that's going to delay obviously any return to normal international travel. And I think that's, that's the risk is that even though the economy is doing very well just being a domestically focused economy at the moment, the risk is that as the stimulus is withdrawn as that kind of pent up cash and pent up demand works its way through the system, not having that international exposure is going to see those parts of the economy that are reliant on international international arrivals, international tourism, international education atrophy. And, you know, if we lose them, we might not get them back to the same extent. So I think that those are probably the two big things.

Chris Bates: The other one is, you know, just around the, the housing market, if things get too hot, if regulators decide to step in. But I think in the near term, that's probably a pretty small chance at the moment. Maybe long-term like, you know, say 10, 20, 30 years time where you think Australian economy is really missing a trick here, or this is going to, we're going to create too much service based and not enough manufacturing or too commodity driven, you know, is there anything sort of a macro level that you think that we need to be really thinking about?

Carlos Cacho: The biggest issue over the last decade has really been productivity, growth, productivity growth in Australia. And also to be honest in most of the world has been pretty, pretty poor. Hopefully part of the solution to that is this pick up in business investment that we're hoping for. If you do see that that should support productivity growth ahead. The other one that I, you know, personally worry about longer term is kind of what housing affordability means for the future of our cities. You know, and intergenerational inequality and things like that. If you, if you think about on a long-term perspective where essential service workers who are servicing the, those, you know, very high value parts of our city going to live, are we going to be busing in nurses, into prince of Wales hospital in Randwick in the future, or are we going to be creating affordable housing for essential workers? I'm not sure, but that's, that's a big problem that we need to figure out how best to deal with in the long-term for our cities

Veronica Morgan: To other global cities. These are New York and London and in Hong Kong deal with that.

Carlos Cacho: Well, some cities like, like New York have pretty extensive affordable housing initiatives. So in a lot of cases, when new developments are built, a certain portion of those will have to be rent controlled or affordable rentals. And that ensures that there's you know, sufficient housing within the kind of Metro area for those, for those workers who aren't getting paid as much. And, but who are essential for the functioning of the city other cities I'm, I'm honestly not so sure what they're doing Hong Kong, but I think there is also quite a large social social housing program there. And that's probably something that's been arguably missing in Australia for the last couple of years, since the, since the GFC when we had that boom in spending on government housing, we've seen pretty, pretty weak delivery of public housing. There is some more in the pipeline and there is a bit more spending in the budget for that.

Carlos Cacho: But I think that's probably something that we need to figure out a better way of delivering. And that's another area where we could potentially see reforms to support the apartment sector. If we could maybe see this, you know, co I guess co-development where the, government's putting some of the bills for private developers to build a mix of private and affordable housing. And that's probably something that you know, we really needed to see more of to, to ensure that our cities remain vibrant and you know, can get those essential service workers where.

Chris Bates: They need to be, that's a build to rent a solution there as well as part of that overall you know, part of that built around is a big part is affordable. Say, for example, in near hospitals, or, you know, near K employment hubs policy, if you've got a property Dumbo for us.

Carlos Cacho: Yes, actually I do. I do have one from when when my wife and I were looking at houses last year before we bought ours, we were at an auction in a west suburb and it was it was fairly slow going. There was one very keen couple who were in the lead. At one stage, the agent went into the, the auction hadn't been called. They've been cooked going once, going twice, the agent went into confer with the, the vendors. And then he announced that he announced the property was, was now on the market. And a new bidder came in the previous leader at this stage basically through that, through their head and they, sorry, I'm through the towel. And they decided that, no, this is unfair. We should have won it. You, I thought you called it for us. You, you know, you, I thought it was, you know, it was already hours already. And they basically refused to bid. So they got one, one bid from the new from the new entrance and no reply from the other bidder. And in the end I think the vendor got a lot less than they were hoping for the agent didn't get the bidding war they were hoping for and the potential buyer who was in the lead missed out. So I think there were a couple of Dumbos in that situation,

Veronica Morgan: A number of them, what month was that? Do you remember?

Carlos Cacho: That was June. So that was right. Kind of at the bottom of the market. And I suspect that young couple if they haven't bought something already, maybe kicking themselves for, for getting out that chance.

Veronica Morgan: And also not just not understanding what happens, you know, not, maybe they'd never been to another auction. Maybe they'd never seen it. That's what auction is. Do they bluff? They try to flush out, you know, are the beaters, it's hilarious, really they're then jam, they fail, they're failing, or maybe they're a stooge. Maybe they were a dummy bidder and was always part

Carlos Cacho: Of our guests. Was that yeah, they didn't really know what was going on with this. Probably their first auction. They didn't necessarily know how it works, but I also think the agent could have done more to, to kind of talk to them and to manage them instead, the agent was just focusing on getting the new bitter in. They weren't worried about keeping the current bitter in. And so in the end they got one, but they lost the other. And of course in a two horse race, if one horse falls out, then now it's not going to be a great outcome for the vendor, God, on the face there for everyone.

Chris Bates: Right. Because they're going well, we got to, we know we've got this other investor. They wouldn't have obviously put it on the market. They knew that they had probably made an offer prior to auction, maybe more than what it's selling for. Yeah. Probably they were very confident that they'd have two people bidding. But they obviously didn't understand the rules and rules of engagement. Yeah. Yeah, absolutely. I'm advising say a choice, a mortgage broker there, by the way color.

Carlos Cacho: No, we had a, we had a very, very good mortgage broker.

Veronica Morgan: Am I guessing there might be a prayer of relationship with you? I was actually talking about auction Dumbos. I was at an auction last weekend and we were actually registered, there was five registered parties including us. So not huge. And it was for a client who wanted to go for this property. I actually didn't like the property, but some of our clients do go to properties that I don't like that's okay. As always, I got open eyes as to why anyway, we ha we had a fairly good limit for it. We should've bought that property really. And so I opened it at more than what they'd been quoting. They've been quoting 1.6 throughout this campaign and I watched the other bit is and all the rest of it. And I thought I'd made a calculator opening of 1.73. I think it was. And that was around really where we started to see value when we'd done our pricing research.

Veronica Morgan: So I thought, look that that hopefully will be knock out at least one or two of the others. Anyway, the guy that took me on, he had actually rocked up just before me. And he had tried to register for his daughter. He didn't have any of the documentation. It's the first time we'd seen the property, the daughter lives overseas. He's just decided he's going to bead they're online. They're trying to get authority sign up over, over internet, et cetera, et cetera. They managed to do that in that, that half hour prior to the auction. So he's the guy that, that bids against me and I'm bidding. I chose seven as my number and I was sort of bidding in either a seven or more B 17 or 27 and sort of mixing up and down and all the rest of it.

Veronica Morgan: He, he gets to 1.9 and I've put in another seven on top of that. He says, now she can have it. I had a little bit more in my gas tank, not a huge amount. And that was fairly big money. I thought that was, that was a very good price for that house. And given that they were quoting more 0.6. And so then the auctioneer starts this bill, because you could actually tell it wasn't over the reserve. And I could tell that because of the language of the auctioneer was using and he started talking about, well, you know, you will be the first one refusal, the first one negotiation, et cetera, et cetera, as you're using this language. And I'm like, you're kidding me. This is not all actually over reserve yet. The agent comes up to us and starts trying to gas up to bid more. And I just turned around. I said, look, you need to go away. You know, we've got our instruction. Oh, sorry. And then that, then this guy comes back. So we're at nine oh one, nine oh seven. Then this guy comes back while this is going on. He then bids one nine, five, one nine 50 on top of our beat. First time he's ever seen the property, you know, like for his daughter just comes in out of nowhere with this big beat on top.

Veronica Morgan: I'm like, well, you can have it. You know? And so then it's still not over reserve. And then the agent comes up and starts trying to hassle us. I said, go away. We are out. And that I cannot believe you're not over. The reserve has not been met. And we are now $350,000 over your quote. You know, that's 200,000, it's 190,000 over, what's legal for you to be quoting. You know, it was just ridiculous. Anyway, the guy actually, they finally got the reserve dropped and they sold it to him. They realized nobody else has gone to bed. But he turned to Rachel who works for me and sort as he sort of walked into sign up, he says, oh God, I think I pay too much. You kidding me? Not really. I just madness that people it's almost like walking the dog and just decided to buy a house just nuts.

Carlos Cacho: We're saying that at the moment, unfortunately clients that are still, you know, fear of missing out, maybe they sold something just this morning, I'm trying to calm a client down it's sold. And you know, they're out of the market now. And so they've got a set of mine in, you know, eight, 10 weeks then buying in a new suburb. They've seen a property they're in love with it. And you know, it's ultimately, they just want to get a deal done, right? Cause that potentially could be home within six to eight weeks time. And you're already a very emotional at that time and they haven't seen that many properties and it's easy to just go and buy the first property to solve that pain. But is that the right property for them? Is it a good value? Is it et cetera? It's hard to get that those reference points when you're very new to the market. And so and Claus buying without contract checks and building and pests and coming to us after and things like that. And it's rant that when the market's sort of hot, cause that's been amazing so much great goal there for our listeners really appreciate you coming on. Thanks very much for having me. It was great. Thank you.

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Veronica Morgan: Talk about this idea of a rising tide lifts, all ships. You know, I've heard a lot of property experts say this, you, a lot of agents say this. And certainly when I was a sales agent, I used to believe it too, that, you know, if you bought a property on a main road and a suburb that you know, you'd still do okay, because the whole suburb rises. And so therefore yours would rise as well. And you get it for a bit of a bargain on the way in, when I became a buyer's agent, I started really, really investigating that and really looking deeper into it. And I guess what I'm distressed by at the moment is I'm seeing hearing a lot of agents. And as I said, even some, some experts saying that, you know, it's okay to make those sorts of compromises to buy those, those really poor assets fundamentally because ultimately, you know, the gap isn't that different.

Veronica Morgan: It's not that bad. And however it is, but there are times if you time the market perfectly, you can maybe make a real windfall, but you have to know what you're doing and you have to absolutely understand the market and the movements of the market and the signs that the market gives just before it's going to turn. And I tell you what I used to when I was sort of just looking at this academically, I go, right. Well, I can definitely see that properties such as on main roads. They don't go up in long periods of time. They, they underperformed compared to other properties in a given suburb, but there are short periods of time within that. Well, they will outperform and severely underperformed. And so I said thing for a little while. I think he, you know what, in a downturn, I'm going to go running out, buying all the dumps, all the stuff that nobody will touch because in a hot market, they'll go up disproportionate amount.

Veronica Morgan: And so then I flogged them and it sounds great in theory. And if you look at isolated sections of time, you know, these properties can be seen as outperformers, but they're in reality over long periods of time, which is what we should be thinking about with property. They are absolute under-performers. And if you don't know how to read the market perfectly, which I would guarantee you don't cause even I'd own, then you know, it's a, it's a fully, or it's a real risky strategy to try to be buying and selling properties on main roads or other highly compromised properties.

Speaker 3: Yeah. We had a client literally yesterday trying to buy property that was backing onto a train. And I I've on a, through an email just said, look, you know, these are the real concerns here. You're going to be paying high, a load of money for that. Cause the market's hot right now and there's other issues with the property, but just focusing on that issue. And it, it really, what matters is what she bought that property. It's when you sell that property will determine you know, your financial gain, I guess, and you've gotta be going in at a high price. You are going to underperform the better streets. And what you've now done is lost control of the sell date, because if you want to sell it in the market, when the market's not hot you know, it was a 2018, the markets or compromised properties are really getting discounted.

Speaker 3: No one's going to compromise, you know, for that sort of property. And you just don't know when you're going to sell and that's the risk. So you may overpay the purchase because of you had to buy a poor asset in a hot market, but then if you have to sell a poor asset in a poor market, you can be absolutely smashed and you can get stuck because you can't sell it in that market. You've got to wait for a better market. And then when you wait for the better market, the property that you want to upgrade into grows on you. So just be very careful with doing you know, buying those compromised properties of big prices because you lose control of this outdate really

Veronica Morgan: That's such a good way to phrase it. Actually you lose control of the sell date. I'm going to remember that it's still there. That's okay. I, you know, I've spoken to Megan Wells a bit about this in Brisbane. It's the same, the similar vein. She's saying that properties that are known to be flood effected and now not selling for a big enough discount against those that are known not to be flooded effected in some cases is selling for the same price. And they're exactly the sorts of properties that are gonna fall dramatically in price when either the next flood comes or, and then for a period of time, you know, people don't have short more people in that short period of time when people do have a memory or when the market slows down, because then it becomes important. These things become important. And it's so, you know, for any commentator, for any agent to be encouraging you to just get into the market, it doesn't matter what just get in the market. You just gotta get on the ladder, but to be pointing to the direction of those heavily compromised properties, danger, danger, danger,

Speaker 3: Absolutely. Especially if it's an investment house that's encouraging you to buy an investment and saying, don't worry about the main road because the main road won't grow it will grow. Can't grow that much less than the other streets, just buy it anyway. That might that extra potentially 1% a year is a lot of money. And so just avoid my buying compromised assets as an investment. The other conversation you've mentioned, everyone, I care about, you know, making money off poor assets. If you time it perfectly, absolutely you could have bought a really compromised property in 2018 and sold it in 2021 and probably made arguably maybe more money than say the better street over that three-year period. But the problem is you've by actually doing that trade, you've also got to pay 5% for stamp duty selling costs, some costs. And so it's hard to make money trading property because of the ongoing cost and also capital gains tax.

Speaker 3: You know, you made 40%, but you lost 10% of that in capital gains tax 10% in cycle phase. And then you gotta go and buy another asset. And so in this market, you go all the good stuff's going really hot. Then you want to sit out and then you move lose growth because you're out of the market. And so I think it's a very fraught with danger. Flipping is the same sort of issue like buying compromised properties is you've got to keep on doing it to keep on making money that way long-term, and that sort of buying in poor markets, selling in good markets, you don't get those opportunities constantly. You only get them for a certain period for certain, maybe three years in 10 rather than, you know, all 10 years in a

Veronica Morgan: Row, which basically means that all your capital and your borrowing potential borrowing capacity has to be sitting there just waiting for a crap market so that you can pick up some junk stock so that then you can hold onto it until the market takes off again and then flog it and, you know, and then pay the tax and the cost and all the rest of it. It doesn't actually make sense when you think about it that way, but it's the only logical way to approach it. And so I guess that's the thing we're not in academically. It was like, this is what I'm going to do. And then in practice, when I sat down and waited all that sort of stuff, I was like, that's fully, that's a, like, that's a difference between being, you know, I look at the, the classic bit that Warren buffet had about ETS versus active share trading.

Veronica Morgan: It's the same thing really it's like at the 80, at the equivalent here is you buy a really solid asset and you, and you just let it do its job as long as it's a good quality asset, let it do its job. That's the equivalent of buying an ETF with low costs and you're buying effectively buying the market. If you do, if you choose your asset well, and as opposed to this flipping and trading and lose energy around it, but burning a lot of costs in the process and also taking on a hell of a lot more risk.

Chris Bates: Yeah. And what ends up happening is people don't ever make those full returns. They don't ever buy that compromised property, the absolute lowest part of the market. You need luck more than skill to do that. So, you know, we didn't, we kind of knew that maybe the election would have been a turning point, so maybe you would have bought, but it was, it kind of market moved maybe late 2018 or early 2019. So you had to be pretty fortuitous to bought that property right at the lowest price and got an sow and then to basically sell at the highest price. And a lot of people sell too early. So they buy too late. They may have bought after the election. So maybe 10% of growth they just missed out on and then they potentially sell too early. They pay maybe a sold late last year, and then they missed out the growth this year.

Chris Bates: Really, you know, absolutely. Exactly. they, they get too greedy and the same thing happens with shared trading. You know, a lot of people would've thought in March, April time, market's down 40%. I'm going to wait for the stock markets to keep falling. That was the consensus view. And then they would have sat on their hands. Couple of months later, the market's up 20% and you know, they've missed that boat and then they go, should I chase it now? Or maybe no. And so it's really hard to time in markets because unfortunately emotions play too much of a role in that decision.

Chris BatesMay 24, 2021de-index

Episodes

Episode 177 | Australia’s Economic Recovery | Carlos Cacho, Jarden Group