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Australian Property Update

October 2020 Property Update by one of Australia's best

Okay, welcome, everybody. Welcome to the Pacific East Coast property focus, apologies for the technical delay and issues we had earlier today. We have a little bit of an issue with the service provider that we use over in the US. We think it might've been the Trump, Biden getting in the way of the debate. I'm not sure. I'm joined here today by Tim Forrester. We're up here in Brisbane.

Hi, everyone.

We're in the Aria office to bring this presentation to you with our market update. And then Tim will be joining me, later on, to give you a firsthand look at the next release we'll be doing with the Aria Property Group as well. So thank you, Tim look forward to having you back shortly.

So again, to start off the usual disclaimer, obviously, the property is not a financial product, but still, when you're looking at the property market or investments, you should be seeking independent financial advice, legal advice, all those sorts of things.

The introduction again about Pacific East Coast, our company. We've been in this market now for over 40 years, 42 years, we've been doing it, if you want to get an indication of just how long we've been involved in the market. That was our first off the plan project that we did in May 1978, up on the Hill in Cronulla just looking over Cronulla Beach. So, for all the ups and downs in the markets, recessions, all those sorts of things, we've been through it and seen it all. This is our head office down in Melbourne on the right-hand side there. Our property business came out of our accounting practice originally. So, we're accountants that got into property, which I think is a big point of difference. We've now done over $4.5 billion worth of property, direct property to investors through other accountants and financial planners.

And I guess the big news for us here today is our head office is in Melbourne, but just recently, probably about six weeks ago, myself and my family and Richard Bournon, our other director from Pacific East Coast and his family, have relocated up here to Brisbane. And we're working out of our Brisbane office. There's going to be a lot of marketing information and data that'll talk about that story and the effects on the market as it evolves. Getting straight into the market data. And this is probably what you're most interested in with our... I guess our research and what's been happening over this chaotic six months of COVID. What I'm going to start with, though, is a little bit of history. This is the February 2020 house and unit prices, if I just move over here a little bit. You've got all the way Darwin, Hobart, Canberra, Perth, Adelaide, Brisbane, Melbourne, Sydney, and you can see the values of those markets heading from your right to left.

So these are the pre-COVID numbers. These are the average house prices and unit prices in February 2020. And these are the post COVID process. These are August. We haven't got the September figures that have come out from Corelogic as yet. And if I just switch back and forth between those, there's no big deal. There's some ups. Some markets have improved. Canberra, obviously, with its security of employment, has done really well. Even Perth started to have a bit of a rebound. If I go back to February, you can see the Sydney market has come off a little bit. The Melbourne markets come off a little bit. What we see in the mass media and the reporting in the headlines is all about the potential issues. The 30% correction in house prices, the negativity. What I want to show you is the absolute reality of what's been happening in the market.

And again, these figures are hot off the press, and we're focusing on Sydney, Melbourne, and Brisbane with this data. So the last three months, the Sydney market's dropped a bit over 2%. The Melbourne markets corrected almost three and a half percent. In Brisbane here, less than 1%. So really a bit of a neutral market. It's amazing the amount of headlines and media we get on those figures about what's been happening in this tail end of COVID. If I go to the 12 months performance, though, Sydney is almost 10% higher than it was a year ago. Melbourne, almost 6%, and Brisbane three and a half. So, I just want that reality, and I want, I guess, our clients to sink in that there is plenty of value in the market. Overall, the market is worth considerably more than the three cities than it was 12 months ago.

Again, then we've been reporting this now for many years, is the growth has particularly come into the Sydney and Melbourne market. The yields have dropped not because of a lack of demand or anything like that, but because of the big capital gains, those markets have had. So again, probably down here on the right-hand side, we're looking at the Brisbane market, really favorably from an income point of view, and today's presentation is going to have a lot to do with the value of debt and credit and that income potential of the properties as well. So obviously, our favorite market from that income potential is going to be that Brisbane unit market at up at over 5%, with an interest rate around 3%. There's some really great numbers and performance there. Overall consumer sentiment. Again, this is going to be, I guess, our position is, is trying to highlight some of the positivity in there. Most importantly, the consumer sentiment rose 18% just last month.

And that's obviously as Sydney, in particular in Brisbane, these bigger cities were waking up out of the slumber, even though Melbourne still lagging down around there. And now we're not quite back to neutral with a hundred in the index, but we are up just under 94 points. Of all those consumer sentiment indexes, time to buy a major household item. The one we care about, though, is the time to buy a dwelling. And we can see here at September 110.5. So, a positive figure. There's positive sentiment about it being time to buy a dwelling. And even compared to two years ago, in September 2018, it was 103.5. So we've actually got more confidence in buying a dwelling now than we did two years ago. Why is that confidence out there? And again, it's not being widely reported because there's so much cash in the system. Is its still equity in the homes.

The homes, as I said, are worth more today than the family homes, worth more today than it was a year ago. And we've had these huge stimulus in cash washed through our economy. On top of that as well, we've also had the five interest rate cuts. So, all of the numbers are getting really finely tuned. You can see here if I move over to the other side, and again, this is a really interesting figure. The household savings ratio has gone through the roof. We're saving about 20% of our income, which the last time we're doing that was back in the late sixties, early 1970s. Even during the GFC, we was... the conservatism in the GFC we were saving about 10% of our household income. The reason I think we've doubled it up to 20% is we physically can't spend the money. We can't get out to a restaurant. We can't head overseas.

So there is this real silent majority out there. we're hearing and we've got great sympathy for all those industries, whether they're tourism, hospitality, all those sorts of industries that are really suffering. But there is a big silent majority of people who have maintained their jobs, maintain their income, and they just don't have the ability to be spending that money. The borders are closed. They can't get overseas. And there's some psychology of frustration of sitting with that money that when you do open the cage, people are going to come out and be wanting to invest and spend those dollars as well. We do a lot of work with My Mortgage Freedom. One of the biggest independent brokers in Australia. Interestingly enough, they say, on average, they usually have about 15 clients at any one time waiting in pre-approval or waiting with approvals or loan approval to purchase a home.

To date, I think they've got about 65 clients that are waiting with finance approved in place, waiting for that market to open up. There's been a 71% jump in home loan activity from January through to August, which is the biggest increase we've seen since 2014 as well. So, hearing recession and all the reality that goes along with that. Where's the money coming from? A lot of it is government stimulus. The other big player in the market of actual cash into the system is the... excuse me, is the $33 billion that has been early withdrawals out of the super funds. You can see this is the paid out rate with red going up to 35 billion. So this is just from April to August. You could draw out $10,000 early out of your super pre-financial year and another 10,000 posts financial year. If you look at that amount of money, that's come out of super, which is the blue line on the graph, on the right-hand side. It's significantly more that's come out of just the government stimulus.

So the black amount of value there is the job seeker benefit. The gray is the five 50 supplement, and the $750 economic support payments is in red. And then you've got this huge amount of money that's been taken early out of super. And that's not just people that have needed it to pay the rent, to buy food, put food on the table. Such a big number of taken advantage of that at $20,000. It's about one and a half million people that may have taken early access to the super, and this money is sitting here right now. There's that extra money that's sitting there in the system. And we're now, again, looking at interest rates decreasing even further. The one thing we look for confidence as property investors is stability in the interest rate outlook. And I think there's a real desire from the reserve bank government for all of us to be really confident that the interest rates are going to be tied to the floor for some time to come to give us the confidence to invest.

So on the left-hand side there we're currently sitting our current interest rate, we're looking at a drop next week, next Tuesday. And there's even some lenders today, as we speak, doing a preemptive drop on that. That steady line is exactly what we're looking for. One of the biggest influences I think in the market moving forward will be the credit factor. Will be the cost of borrowing. And then for us to make recommendations into market that provide those higher incomes. And there's been a lot of changes. And some of them just really recently that you will have seen in the headlines to do with responsible lending and all those sorts of things. But the first thing that happened was the changes or the detuning of some of the APRA tools. The weighted average assessment rate for a mortgage serviceability in 2019 was about seven and a quarter percent.

So, regardless of what the interest rate was if you and a husband or wife headed into the bank to borrow X amount of dollars, they stress-tested you at 7.25% interest rate. With the reduction in interest rates most banks now are using 5% and that detuning of APRA as well. So this is a significant boost to borrowing. Nothing can have changed in your life, and in the coming months, the banks will be giving you more money than you could have gotten the last year. The 2019 version of you tested at seven and a quarter percent, and we got these figures from My Mortgage Freedom. If you're a single person earning a $100,000 per annum, the maximum borrowing the banks would give you would be $600,000. Still pretty good going. So this is only 12 months ago. The 2020 version of you will only be tested at 5%.

So nothing's changed in your life. You're still the single you. You're still learning a $100,000 per annum, but the bank is going to give you a $740,000. That extra money is going to go into the property market. That's where it's heading. There is absolutely no doubt about that. So you've got more buying power. You're buying power has increased by about 23%, just due to these changes in regulations. This will be one of the most powerful things to come into the market. The other thing, the restrictions that came into the credit market over the last few years, and this was mainly post-GFC with all the issues in the US about subprime. The slowdown in the market that we had because of this lack of credit availability was man-made. When the market started to slow down last year, it wasn't because there was an issue with supply and demand was out of whack or unemployment was through the roof. The issue was the credit availability.

So, it was really in late 2014 that the bank started to cut back and reduce what you could borrow by about 20%. And they went really deep into your personal lifestyle. These were the days where you'd go in to ask the bank to borrow some money, and they'd be looking at what you spend on Foxtel and how many Ubers you have a month and all these really silly restrictions. And many of the banks, they have admitted that they did put the... I guess they did put the brakes on a little bit too hard. That correction that we saw in the market, just because of the credit tightening up is here on the right-hand side, that dip that we had in 2018, '19. And again, that's the annual change in dwelling values over the last 20 years. You can see on the front right-hand side that the 2020 markets actually outperformed that late '18, '19 market, which was all to do with credit.

This slide up here behind me. It was from our focus on property presentation. We did last year. This was sort of my two cents. As you can see in the dot points that we started with, the first one was, "The environment of restricted credit availabilities had the most significant impact on the market." That's what we were talking about this time last year, and some other one's like the political stability. This was back in the days of Bill Shorten, wanting to attack us on every front as well.

The responsible lending laws, as you would have read a lot about over the last couple of weeks, have now been removed. This will have a huge effect on the residential market as well. And there's been some commentary that we're going back to cowboy dies. The bank's going to be throwing money at us, and everyone's going to be over-geared and over-leveraged. There is no way that will happen. What we're looking at doing is speeding up the ability of getting credit, speeding up the process. The credit available or the removal of the responsible lending laws they were there, to begin with for fairly legitimate reasons. But the lenders became too cautious after the world banking commission. It was almost like the pre-deregulation days back in the days where the banks would really only lend to the people who didn't need the money. That was where we were heading, and that tightens up and reduces the property market.

As Chris Joye said here on the right-hand side, from the Australian Fin Review, his comment there, don't be worried about the banks behaving badly because APRA's rules and regulations is still in there, "are much tougher, and far more prescriptive, than the poorly-drafted responsible lending laws." And we've seen that with, I've tried to enforce with people like Westpac Bank and have lost two appeals through the courts as well. So this easier access to credit at lower interest rates, you're getting higher borrowing amounts. All of this money is going to go into the value of the residential market. If you go to an auction this weekend and you're earning a 100,000, your maximum bid was 600. This weekend, it'll be 740,000 compared to this time last year. The market will move on the back of this. This is just to finish on all of, I guess, that credit, a real-world example.

This is a townhouse we actually put one of our clients into just yesterday, up here in Brisbane. It's a completed townhouse. So, there are no forecast or figures in this. All of this is reality. And just very quickly, the property value wasn't expensive... it's a big four-bedroom, three-bathroom townhome in the middle ring of Brisbane, $990,000. I know it's a lot of numbers and our advisors know what they're looking at. But this is borrowing 100% LVR. So the client's paying 990,000 for the property. They're borrowing the maximum amount, $990,000. Even borrowing all of the money it's a thousand dollars cash flow positive after tax each month. It's $12,000 cash flow positive in the first year. Also, very important. The pre-tax cash flow before you've headed off to the taxman on your 47% marginal tax rate, it's cash flow positive as well.

These are extraordinary numbers. Certainly, in my lifetime, we haven't been able to invest with some income and then waiting for the capital growth. It's a different, I guess, rules of engagement. And that probably leads me into the Brisbane market, which is going to be one of our key markets, as many of you know, our advisors and referral clients. We've been up here solidly for probably the last four or five years recommending Brisbane because of that price gap to Melbourne and Sydney. We've been waiting for that trigger for the Brisbane market to take off. Our clients already have made really great money up here that we're waiting for the market to move as a whole. And I think we're as prime as we can be with all of that perfect storm coming into the Brisbane market at the moment. And I guess the opening line here, and this is a little bit to do with our personal situation as well of relocating our head office and families up here as well. Whether you would agree or disagree with the politics of what's happened with the borders.

The one thing that you would have to agree on is that Queensland, from an economy point of view, from a state health point of view, is far ahead of everyone else. It's done extremely well. And you can just see that that percentage infected rate, Queensland at 0.02, compared to Victoria at the top at 0.3. We're very cautious and sympathetic about the health implications. As property people, we really care as well about the economic implications of those. There's just been... just recently in the couple of weeks, the NHFIC, the National Health Finance and Investment Corporations, just released a full report on Australia's population and housing demand.

One of the big pickups out of this report and one of the big focuses down here is on house prices, and this report made it into the newspapers, but it was all about the international borders being closed. And the negativity of that and Melbourne and Sydney could suffer because of the international migration. A great part of this report that, of course, didn't get picked up in the media is that Queensland will be a big beneficiary of the domestic and interstate migration that will happen during and post COVID. And that I guess, myself and Richard and our families are living example as well.

So, all we really, I think, focus on and care about up in any market but particularly in Brisbane at the moment is supply and demand. If supply and demand is right, we will see growth in the market. And the figures I'm going to give you on Brisbane are really extraordinary. Again, this is a slide, and I know a lot of our advisors will remember this slide when I put it up in 2019, really because it's such a messy slide and probably a bit complicated of what's going on there in the data. But this is showing the correlation between interstate migration between Sydney and Brisbane in particular, and the median house price. So, the  up here with the people that were entering Brisbane. So this is back in '99, and the population growth really boomed in '03, '04. There was lots of people moving out of Sydney and moving into Brisbane.

These are people leaving Sydney. These are people moving into Brisbane. So what happens with the house price? It goes through the roof because of that relocation of the population. Demand goes through the roof. It goes through the roof in particular. The interesting thing up here and this is a price point that's indexed, just pre-GFC, an index task price in Sydney, a million-dollar home. The equivalent in Brisbane was about 880,000. As we got out to 2018, this population growth into Brisbane cutoff. It's slowed down. People weren't leaving Sydney because the economy is so good, the markets were going well. A million-dollar house in Sydney, the equivalent price point in Brisbane, was about $550,000. So there was that great affordability. We were talking about this in 2019 because the numbers were starting to increase. This is pre-COVID nothing to do with COVID.

You had, I guess, economic refugees, moving out of Sydney. The house price was way too high. They were moving up for the cost of living the housing market into Brisbane. And for the first time that an opportunity to match the job and income that they could get in Sydney and match it up in Brisbane. We now expect this graph to blow up. It will blow up in the COVID period that we're in now. There'll be more Melbourne and Sydney people moving into Brisbane. They've already happened. I'm a real-life example. But the data we will see on this in 12 and 24 months will far outshine what the peak was back there in the early 2000s. We're starting to see these articles as well, and the media is always reporting on the past. These things are already starting to happen. Simon Pressley, great property researcher commentary there that 30,000 odd people are expected to leave Melbourne for Brisbane over the next two years.

Another article recently the exodus of New South Wales residence to Queensland and the effects it's going to have in the issues it's creating for supply of property up here in Brisbane as well. Back on that bigger graph. In 2019, it was the biggest exodus ever from Sydney to Brisbane was 22,100 people. That was the biggest numbers that we'd had leaving Sydney into Brisbane over the last decade. I was at an event with the Lord Mayor of Brisbane about two weeks ago, talking about numbers of 50,000 people coming from a combination of Melbourne and Sydney and other locations. Now then, this is just a little interesting stat. Muval, which is the biggest furniture moving website, reported 20,000 Victorians looked to relocate after stage four. Now there's probably a lot of stage four restrictions. There's probably a lot of emotion in that as well, but the number one quotes they were giving was destination was Brisbane for the Melbourne people moving up to that Brisbane market. So, that is demand.

Now we're going to go over to the supply side. So we know there's going to be a great domestic demand up here in Brisbane. From the supply side apartment completions across Brisbane peaked in 2016, '17, and they peaked about 7,000 plus apartments per annum. The city really only needs 5,000 apartments per annum on average. But since then, completions have fallen by about 50%. In 2021 they're looking to track about a completion of 3,300 apartments, and then it falls off a cliff because of confidence. Developers and bankers are exactly like we are. There's COVID, and all these things going on that the supply and the desire to invest will drop off. "Beyond 2021, completions are forecast to continue to fall further. Assuming all currently marketed projects do proceed," which they won't. So everything that's going to right now, if every one of those get up, the construction activity will continue to fall to be about 14% of what it was in 2016 in the peak.

That's a lot of words. What does it look like in numbers? Here you can see the drama of it. So this is the 2016 peak. So they're actually supplied and delivered to the market in 2016 and 2017. So this is what we need in Brisbane about per annum, 5,100 units. The best step for us is these two big years of supply. The rental vacancy rate in Brisbane dropped in the years after. So we had this over the top supply in the market, but the market absorbed it. And the vacancy rate actually dropped. Here we are in 2020. Completions and still under construction. And then we dropped down to literally nothing. And Tim will talk to you a little bit more about what's happening locally in certain markets of Brisbane that we're recommending, where the outlook for supplies only in the hundreds that there's no thousands coming on.

So we know domestic demand is going to increase dramatically, and the supply is falling really off a cliff, and there's not much we can do about it to get it recovered. So what's the forecast for the Brisbane market? And this was done by Bill Evans and Westpac. There was a lot of media on this, 20% increase in the Brisbane property market. Now that's not everywhere. There's a hundred different markets plus in Brisbane. Again, the product's so important, and the local market within Brisbane is important. But they're looking for Brisbane to be the best performer over the next two or three years. Behind that is Perth, which is coming off from a recovery as well, and then dropping down in sort of Sydney and Melbourne in the 14, 12% increases in value. So, everything's really primed, I think, for that Brisbane market to make a move. And just to finish and on, I guess, the big white screen, and particularly even in the last couple of weeks, almost since we sent the invite out to you for our event, the market is beginning to move.

We're starting to see the headlines come through. Once, it's in the papers, it's already happening. So we really do urge you. You've got to be properly qualified, be property ready, working with your advisor. But particularly up here in the Brisbane market, now is the time to act. Waiting another six to 12 months to see what happens in the new year, I believe, and I honestly believe the Brisbane market will have moved. It will have run. It will have jumped. Talking to the Ray White guys here locally in Brisbane. They did more sales over $5 million during COVID than they did in all of 2019. Their last 18 auctions have sold under the hammer, 18 out of 18. We're seeing all this data, the reports from Westpac, the big brains of Australian economics as well. The Chris Joye's. It's all really starting to build momentum. We do have the product here now available for you.

We didn't do this market update in May when we'd normally do it because Pacific East Coast didn't know enough. There wasn't enough information. We didn't know where COVID was heading and what the economic consequences were. We've got real confidence now that we know enough information of what's happening, that we can make these recommendations. So thank you very much. Again, apologies for the technical issues this morning, but you've now got the recording. You can keep on file and this email link as well, email that we've sent you. There's some links there to request specific information on each of the projects.

The Aria One we'll be launching in two weeks' time, probably the end of next week. That one will be available. Price ranges from mid to high 400 thousands for a one-bedroom up to the early eight hundreds for the best two-bedroom on the front with the panoramic Riverview and the three bedrooms as well with those views really starting in the light eight hundreds up into the 1.2 to 1.3 million, depending on your level as well. The townhome product, as well as Even covered off with you. Great buying in the mid-six hundreds with that supportive cash flow in that really protected middle ring area of Melbourne. So thank you very much. I hope you enjoyed today. Again, apologies for the delay in technical issues, but, appreciate your time. Thank you.

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