Hegney Property Group

Aspirational suburbs

Tue, 08 May 2012 15:46:48 +0800

Today I wish to talk about what I call ‘aspirational suburbs’. These are suburbs that are usually very uniquely positioned either near a café strip, the ocean, river or a regional hub that have several ‘feeder’ suburbs. Aspirational suburbs are where people want to live if it wasn’t for the price. They are end of the line suburbs in which people buy into and rarely leave.

What makes these suburbs unique becomes their drawcard locational feature which people, homebuyers aspire to be located on or near. The growth in such suburbs tends to set the pace, not follow others.

Some may even term these suburbs as having ‘blue sky potential’.

In these suburbs it is often position and location that drives the price and often capital values and rental values within these areas are often very disconnected.

The aspiration is to own first. Those who can’t afford the suburb often own elsewhere. Some people rent, but this is usually scarce, hence the rental yields of properties are often very low.

These aspirational suburbs require 3 to 5 ‘feeder’ suburbs to put pressure onto their prices. The feeder suburbs are seen by buyers as ‘stepping stones’ to eventually be in a position to buy into that aspiration locality.

Where there are 3 or 4 suburbs of owners where many of them are looking to buy into that aspirational area once they can afford to, this creates demand relative to the supply available, hence placing extra upward pressure on prices allowing it to outperform the market.

We see this scenario sometimes with a particular building which has unique charm and appeal – often the design, position or both of these factors make the building desirable to buyers.

Characteristics of such a building tend to mean there is a lower rates of sales activity over time and sales prices are often more that what is expected in a shorter than expected timeframe.

We also see this trend in certain streets within a suburb. There are always the one or two most desirable streets in a suburb. It may be because of the quality of housing, the views, the position, the streetscape or a combination of these factors which gives that particular street its unique appeal.

Whatever the reason, one must ask: “Is it truly unique? What makes it unique? Will this unique factor continue to exist?”

It is also important to ask: “Does all this lead to demand outstripping supply? Will this last? What would change this?”

Housing appeal may change over time. Locational and positional factors usually don’t change in time.

So what is the importance of these aspirational suburbs and locations?

They make the properties seem scarce and scarcity creates capital value outperformance over time.

In Australia, 8 out of 10 buyers are looking for a home to live in, not for investment only. Such buyers aren’t so investment focussed as ‘home’ buyer focussed. They are more intent on factors such as desirability, a place situated near friends, family, work, transport, schooling, shopping along with all the other factors that go into their choice of homes and locations that they choose to buy.

Importantly, they are not looking at rental yields, returns on equity or past capital growth. Their decisions are family and emotionally based and the aspirational suburbs and locations are the benefactors.

Consider those aspirational areas when buying your home.
If money was not an issue, where would you choose to live?

Article written by Gavin Hegney, Executive Chairman, Hegney Property Group, Perth

For more information regarding the above comment, please feel free to contact:

Mr Gavin Hegney
Executive Chairman
Hegney Property Group, Perth WA
Phone: (08) 9489 9489
Email: property@hegney.com.au
Website: www.hegney.com.au

Gain or pain?

Mon, 30 Apr 2012 15:25:44 +0800

Is the drop in interest rates more about providing excitement in the property market or taking away present pain?

We all get excited by the prospect of a drop in interest rates, those of us that have mortgages that is.

For the people living on savings, a drop in interest rates can mean a drop in income of their deposit rate as their savings also drops. At this point in our economic cycle, fortunately for the savers, competition for deposits amongst the banks remains high and hence a drop in the cash rate by the Reserve Bank of Australia (RBA) may not completely flow on as a fall in their returns.

When the RBA lowers the cash rate it is normally a sign that the economy needs some form of stimulation and business and people need assistance. The converse is true when rates go up.

Today, many parts of the economy are not travelling as well as expected or hoped hence the likelihood of a fall in interest rates. This will assist mortgage holders and put an estimated $3–5 billion back into the economy for each 0.25% drop in rates.

Some will use it to repay debt, some will save it, whilst others spend it. Whatever the use, the one positive for people is that it will make them feel better, and hence raise sentiment.

Market cycles after all are largely a reflection of how people, we, are feeling. So for some, it’s a move away from pain, for others it provides the potential for gain.

Somehow, I don’t think a 0.25% or even a 0.5% drop in rates will open any floodgates of excitement. In the back of my mind, I know the Federal Budget is coming very soon and the aim of a surplus requires a reduction of some $35–40 billion to come out of the economy.

Put back $7 billion with a drop in rates of 0.5% but take $40 billion out in creating a budget surplus. There is still reason to be concerned if you are affected more by the budget than you are by the interest rates.

That’s why I will be saving my rate cuts.

Article written by Gavin Hegney, Executive Chairman, Hegney Property Group, Perth

For more information regarding the above comment, please feel free to contact:

Mr Gavin Hegney
Executive Chairman
Hegney Property Group, Perth WA
Phone: (08) 9489 9489
Email: property@hegney.com.au
Website: www.hegney.com.au

Perth rental market update

Mon, 30 Apr 2012 09:36:27 +0800

The rental vacancy rate in Perth has rapidly dropped, and only reached levels below 3% late in 2011 – a level at which rents normally rise. Hence, rents are rising in the Perth market but only in the last 6 months. During this short period we have seen a breakout in rents with prospective tenants willing to pay above the asking rent price in order to secure a property. This scenario would be classified as ‘boom’ conditions with many people acting on an emotive reaction.

Often when booms in any market subside, some of the gains made during that boom are then retracted, or given back. So then how much longer has the boom left to go?

Currently, tenants are shifting into the buyer market and first home buyer levels are increasing to longer term levels of 15-20%. This level is now rising due to the final end of the First Home Owners Boost effect and tenants are being forced to move with rising rents reaching beyond their affordable levels, meaning they must shift elsewhere. Also, the thinking of tenants starts to become, ‘if I have to pay that amount in rent, I may as well buy.’

Rents in Perth will rise to sit around 25% of disposable household incomes to catch up with many parts of Australia. Hence rents can in fact rise another 10% plus on top of the 10% already.

Vacancy rates will rise if enough First Home Buyers move out of rental accommodation and buy property. Similarly, vacancy rates will also increase when investors see the market as bottoming and start buying from home owners, not other investors, hence the supply relative to demand increases.

Investors normally don’t start buying until prices stabilize and evidence of capital growth emerges. Why get $5,000 more rent in a rental boom market if the capital value drops 5%, i.e. $25,000?

Rental yields put a floor under values. When yields become too low, say 2-3%, then a drop in values is possible and a real risk. When yields are closer to 4-5%, then this is like an insurance policy on the capital value of the property.

Rental yields in Perth are now at around 4-5% in many areas with inner city apartments at 5-7%.

Why has it happened?

Under-investment – people fearing buying and electing to rent instead, concern over the future of the residential market and the unaffordability of purchase a property relative to cheap rents – these factors all affect the demand/supply equation.

At the same time, mining and construction executives are being relocated, family and all, to Perth to work in the booming mining sector. This influx has taken 50 to 100 homes out of the top end of the housing market at a time, in what is already a shallow market. Higher valued properties that normally fetch yields of 1% are now getting 4-6%.

This has also sured up suburbs like City Beach which may have otherwise dropped far more in value than current levels. Homes are being let by owners rather than being sold and the higher rents give greater cash flow that allows owners to retain these properties which may have otherwise become forced sales in some situations.

Article written by Gavin Hegney, Executive Chairman, Hegney Property Group, Perth
30 April 2012

For more information regarding the above comment, please feel free to contact:

Mr Gavin Hegney
Executive Chairman
Hegney Property Group, Perth WA
Phone: (08) 9489 9489 or 0418 921 055
Email: property@hegney.com.au
Website: www.hegney.com.au

What people are asking two breakout trends

Fri, 20 Apr 2012 15:21:07 +0800

There are two questions that I am constantly asked at the moment, whether it be at seminars, on the ABC radio show or during private consultations.

The first is about property investment in the North-West of Western Australia. Typical questions include: “is it a good idea to invest in the North-West?” and “where are the best locations?”

The North-West has many towns which are tied to a particular company. I always like multiple resource towns and never suggest a single company town, one in which is a single resource mined by one company only, as an “investable idea”.

I also look at the upside potential versus the downside risk of prices in a mining town. Today I find the cash flow returns in these towns are mostly above interest rates so hence are cash flow positive after borrowings, which seems to be what draws people to them for investment. I have to ask though, ”what is the chance of the property for $1.5 million becoming $3 million versus the risk of it becoming $750,000?”

The upside potential relative to the downside risk just doesn’t seem to equate, and to buy with a 10 year plus timeframe into a mature commodities growth cycle seems risky.

Towns like Karratha seem more secure due to the multi commodity, multi company mix yet as part of the new proposal, the supply of property in that town is set to increase by around a third. It is said that this move with more “normalise” prices.

To normalise prices is not, as I take it, for them to increase or double supply. If anything, to normalise prices would be for them to come down in value.

So I am probably not sounding that keen on investing in the North-West, even though Port Hedland has been a star performer over the past year or so. Even still, more land is due for release there and it has always been restricted supply relative to demand that has caused prices to rise, along with higher than average wages and capacity to pay. The supply of land increasing should be watched closely in any investment town, especially in tightly held mining towns.

There are other towns that have interesting opportunities.

Derby for the detention facilities, Kununurra for the irrigation and food and Exmouth and Broome for the gas are all interesting prospects. Both Broome and Exmouth are tourism/lifestyle focus and non-resource driven yet are likely to be adequately supplied with new land.

So to sum up, why not invest in a capital city or in commercial property within a capital city if it is yield that you are chasing as a lesser risk option. Many capital cities appear at a low point in the cycle so perhaps the risks may be less from a cyclical viewpoint. This is the option I prefer.

The second question that I am being asked with regularity at the moment is with regard to the South-West of Western Australia, particularly the Dunsborough and Margaret River region.

There seems to be a lot of interested parties with money waiting to buy into this market when the bottom of this market cycle becomes apparent. This says to me that when this situation occurs, there will be increased activity due to pent-up demand and prices may jump initially. That scenario usually suggests that buyers should get in early or wait it out for the first winter after the initial jump which will probably occur in the prime holiday season of December to March.

Either way, know that there is demand waiting for this South-West market to turn. Historically, it follows the Perth market, yet with an ageing demographic chasing lifestyle, it may turn closer to the Perth market cyclical upturn, so just be aware.

Hopefully, that gives insight into my views of with which you may agree or disagree. I am happy to be right but also happy to learn from where I am wrong. One thing I have learned looking forward into property markets is to aim to understand human behaviour and in doing so, understanding what will likely occur.

When it comes to residential property, it is mostly people buying homes, hopes and futures based upon feeling good and avoiding loss. That’s the tricky part, it’s not what the numbers are saying as much today – it’s more about how this will make people, buyers and sellers, feel. It seems emotions have been down for long enough and sellers have been over-anxious. Fear of buying will turn to fear of missing out at some stage and that will probably lead to greed in the course of time.

I suppose I ask: “can people be more fearful than they are today and have been over the last couple of years?” Perhaps it really is like that horror movie when you thought the scariest part was over, just when you thought you could relax, open your eyes and breathe, the next twist comes. I don’t really believe so, and I don’t like horror movies.

All I know is that when markets are down, they turn up eventually and markets don’t stay up forever.

Buy in gloom, sell in boom has been proved to be right over and over again, and will again. Good luck and good timing will always reap good rewards.

Sales unsustainably low

Fri, 20 Apr 2012 09:35:52 +0800

The rate of turnover in our property markets currently are at an unsustainable level.

The current rate of turnover of stock suggests we will only own two different homes in our property ownership lifetime, given a current stock turnover rate of 1 property in 25 years. This is half the normal lifecycle average of 1 in 12 years, or 4 homes in our lifetime. The normal average rate of home ownership is 12 years. When we get back to this normal level, sales activity has the potential to double from the current levels.

Interestingly, it is not just happening in Western Australia, or Australia, but it is also occurring in the UK where a recent research report surveying 6,000 adults living in various accommodation were questioned over their buying intentions.

Some interesting findings of this study were:
62% said they were happy where they were
21% were unable to move due to not having enough deposit
56% of tenants cited the deposit as the main barrier
16% said changeover costs were a barrier
5% (only 5%) cited falling values as a barrier to purchasing a home.

There are some parallels that could be drawn from the UK study to Australia and to Western Australia.

The tight rental market in Perth makes saving a deposit more difficult. Conversely, the incentive to buy has increased from a price perspective as tenants weigh up the cost of renting versus buying. Being forced to move your home because of rising rent is also a strong motivation to buy.

I would suggest the changeover costs are a barrier today in a prudent financial environment, as these costs are after tax hard-earned savings and capital. People need to have a big win for the move today or else the costs versus benefits just don’t make sense.

The willingness to take on debt to fill in the upgrade changeover is a barrier today in Australia. Selling the $500,000 home and upgrading to the $700,000 one by borrowing more on the mortgage in order to make the move is not as attractive today as it was 5 or 6 years ago.

Hence, people tend to do nothing, and stay in either their existing home. This can only last for so long before pent-up demand releases, especially given the increased savings rates of 10 – 12% and the repayment of debt which has been occurring for several years by many mortgage holders in our market.

In any event, the rate of owning 4 different homes in our life is based on the life cycle of start-up home, family home, family upgrade and lifestyle downsize/retirement home.

Owning only 2 homes is a big step and unlikely to be a longer term trend.

Looking for sales activity to increase first before the prices move is a normal leading indicator. This may move concurrently this time around. Either way, watch for an upturn in sales activity before getting too excited about the market, it will come.