Has Melbourne's Market Turned? Cate Bakos on What She Sees at the Coalface

In this episode, we're talking with Melbourne buyers agent Kate Bakos, and we're going to find out what's happening on the ground in the Victorian capital.

February data has reported price increases for the first time after 10 months of losses, and while the data points to the upper end of the market having the sharpest increase, on the ground, the lower price points are showing strong competition. What's behind this sudden activity?

It can't all be from a 25 basis points interest rate cut. Has the worm turned for Melbourne? 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 and buyer's agent mentor, co-host of Foxtel's Location Location Location Australia, author of Auction Ready and co-host of Your First Home Buyer Guide.

Hi, I'm Chris Bates, mortgage broker, currently ranked number three in the MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Our guest today is Kate Bakos, an experienced Melbourne property market specialist, and her journey has spanned from earning an honours degree in chemistry to being named 2018's number one national buyers agent of the year, since then adding past president of Reba, podcaster and author to her list of accolades.

Kate has guided over 2,000 clients in their property strategies, and I think we've actually probably read her bio before when she's been on the podcast, so I thought I'd ask ChatGPT to help me. Thank you, ChatGPT.

A decade ago, Kate founded Kate Makos Property, a boutique Melbourne buyer's agency, and she brings a wealth of experience in asset selection across both metro and regional markets, that's specifically Geelong and Ballarat. And today, we want to gain her insights into Melbourne specifically.

But we're sure that there's going to be some knock-on effect in some of those other cities. So, Kate, we're all ears. Thanks so much for joining us today.

Thanks for having me. I love GPT's effort too. That was all factual. I'm quite proud when I hear it all like that. Aha.

So, Kate, you've been a long-term friend of the show. I think we've had you on multiple times. You know, the Melbourne market better than anyone, to be honest. And I think we're really excited because I've got a bit of confirmation bias.

I think even Veronica and I have been very pro-Melbourne over the last couple of years. And when you look at the price growth around the country and what Melbourne's performed and, you know, just having a fondness to the city.

But then on the other side of the coin, Melbourne's had some real challenges at a government level and a debt level and economy level, et cetera. And so it's a real sort of seesaw. What are you seeing on the ground?

Because nothing sort of proves the point than what you see on the ground every day.

Yeah, we do have a great insight from our little coalface. It's actually a big coalface. And the coalface that I work in, I think it's important for your listeners to hear that it spans a wide array of price points. And we are certainly seeing segmentation.

We have seen segmentation in the lead up to what looks like green shoots. And I'd like to say recovery. In answer to your question, Chris, I think we started seeing a little bit of a murmur of things looking up.

late last year but it wasn't really until I was away enjoying or trying to enjoy a summer holiday and my email was just pinging all the time and my rate of new inquiry was disproportionate from other Januaries and I had a feeling that you know I was being beckoned back to the office early so I came back early because you know what it's like you're self-employed you've got work on let's go and

And I was fielding a lot of inquiry from interstate investors and namely in this order from Perth, then Adelaide and then Brisbane, which is interesting, but that's where the equity gains have been and active investors who want to diversify and who've had great equity growth.

will sit there and look at their borrowing capacity and ask themselves where they could go next. And so, Melbourne has been in news feeds for a little while as, you know, an opportunistic pick for a few reasons. A lot of people chat about mean reversion.

A lot of people talk about sheer value for money and heaps are talking about the increase in our gross rental yields. And, you know, when you marry all of that up and you listen to a lot of white noise in the media,

It's easy to circle in on an area and, you know, confirmation bias kicks in. And I'm not wanting to sound negative because I think Melbourne's got a lot to offer, but we've had a pretty rough time. You know, it's been three years to this month since our last peak.

So we chat about 10 months of negative performance. In fairness to Melbourne, the negative performance has been reasonably minuscule. Each time the CoreLogic data comes out, it's minus 0.1, minus 0.2. It's not like we've had colossal falls.

But when you have a look at what all of the other capital cities are doing, you do scratch your head and say, Melbourne, what's going on? So yeah, we've had a hard time since COVID-19.

I want to talk about that. I'm sure we both want to talk about this because there's a couple of things in this. One, you know, we talk about confirmation bias. And as we're talking, I think to myself, and I've always looked at Melbourne and Sydney as being somewhat similar.

Okay, we've got similar populations. We've got sort of similar income and, I guess, employment profiles or those sorts of things. But we do have differences. I mean, particularly, I was just

We talked to some research that one of his, I think it was a master's student that had done that looked at the drivers of the property markets in the capital cities of this country. And Sydney's is a very different driver to Melbourne's.

And I thought that was rather interesting because I've always just sort of assumed they're the same without having any real evidence to back that up. And I also know that, you know, it's like going with people that are like us.

Like I feel like when I go to Melbourne, I'm with people like me, you know, and so therefore it should do what Sydney does. And so I know myself, I've totally had confirmation bias or that sort of familiarity bias, if you want to call it that, with the Melbourne property market.

And then there's that reversion to mean that you talk about. A lot of that idea of, well, it's got to come good. It's got to come back. It can't.

How could it be possible the dwelling price in Melbourne could be less than Adelaide, less than Brisbane, you know, and coming up to, you know, Perth shaping up to be at that same level. And you think that can't be right. So, therefore, Melbourne should take off.

And I'm wondering how much of that type of thinking is actually behind some of this investor attention that's been turning towards Melbourne. Yeah. Yeah, most definitely.

A lot of people believe that moon reversion is one strong measure.

I think in combination with other factors, it's worth paying attention to, but you've got to look at your classical drivers, and they include wages growth and employment, and certainly looking at the financial state of the government.

We've got a big question mark on that one, and I think it will take a while for us to recover from that, but Before I go suggesting my own hometown and capital city isn't going to do well, I believe it will as well, in spite of some of these things.

But let's talk about the debt and where some of that has been born from. You listed all of the negatives about Melbourne, Chris, when we started the show, and one of the biggest ones is just debt.

getting around right now we're just gridlocked with roadworks and bridge works and train works and we've had such a huge amount of investment in our state and particularly in our city and all of that stuff isn't just to put us through hell and to drive up debt it's to to make getting around and to you know give us better amenity to make it all easier we've got a we've had enormously strong population growth and i know that they've just backed off that a

And our urban sprawl and our arterials haven't really kept up with that. It's not ideal at all. Go out to Melbourne's outer west and try and commute in at peak hour. It's a nightmare. Try and get a car park at the train station.

It's not been super well thought out, and that's not just the west, we've got northern and eastern coronal growth as well. So all of these things that we've spent a bucketload of money on, including new hospitals, all of those will start to come to fruition.

And unfortunately for us, I think the pain that our city's gone through over the last three years in particular, has included all of that, you know, the roadworks and the closures and just the gridlocked traffic and insufficient options for getting around. That's about to change very, very quickly.

We've got the distributor opening up this year, the Western Distributor, which is, you know, tunnels and taking trucks off. I'm very familiar with that because it's on my side of town. We've got our Metro Rail project opening.

delivering us new stations and much more efficient trains with a new transport system that's quite different to what the previous loop trains have been working with. And we've got eastern side of town roadworks that are shaping up to be finished.

We've got the most enormous hospital that you can probably see from the moon sitting here in Footscray. So lots is happening. Yeah, we've spent a lot of money. We've got a lot of debt, but we haven't had the benefit from that yet. There'll be tolls on the roads. There will be revenue.

I don't think for a second that it will solve our problem, but it won't be this bad forever.

However, I mean, investors absolutely are a big part in driving booms, right? So, you know, a strong investment market's a good sign for the Melbourne property market, right? Because that's, you know, when you've got investors competing with owner-occupiers, that's better than just owner-occupiers competing.

But how are the locals sort of feeling around that?

You know, I guess when interest rates are still quite high, the borrowing capacity, so even though prices haven't run, they've still got to, you know, obtain big mortgages that, you know, unless they're really confident on their short-term work prospects, they're really, their desire to upgrade and take on debt isn't really there.

How are the locals feeling? Are they still sort of under the COVID sort of, you know, impact of that or has it got its mojo back? Yeah.

It's a good question. What we found when COVID hit, and obviously the lockdowns were severe in a lot of places, but Melbourne took the brunt, certainly did it the hardest in terms of days in lockdown.

And we saw a lot of people scatter out of the city and into the regions or into properties with larger blocks or whatever it might have been, extra bedrooms. Yeah.

And it was when the market was running hot and we had to do all of our activity in between lockdowns, which was a little bit hairy. And our lockdowns didn't allow licensed real estate agents to go into properties for one of the lockdowns. So unlike other capital cities, we just couldn't trade.

So you can imagine all of that pent up. energy and lack of planning when buyers got a chance to jump out of the blocks and go and buy something that would just do. Unfortunately, a lot did make that decision.

They bought properties that weren't a 9 out of 10 or a 10 out of 10. Some of them are probably a 6 out of 10. So we saw a lot of people making, well, unravelling those decisions shortly afterwards. All people saying, well, I've gone and done this and I can't transact too quickly.

So, you know, I think a lot of Melburnians have just bunkered down and dealt with the status quo since all of those changes that, you know, COVID brought.

um you know implemented or caused us to implement i think they've just wanted to bunker down and and take a bit of a breath and then of course we've had borrowing capacity slashed so you would know yourself chris if people are wanting to make a move but the borrowing capacity precludes and they'll just sit tight and wait because what's the option so you have some downgrade anyway so we've we've had a lot of that and i think also when you when you're in it you can't always see out of it you know you're stuck in the forest and you just think that the

the median house price data keeps coming in and it's static or it's slightly negative. It's very hard to believe that there's a turnaround unless you're actively in the market like I am and you're feeling it. You're at the coalface and you can feel the energy. You can see more people at the opens.

You can see more bidders than the agents anticipated. All of those things are signs that the market's picking up. And I was saying it back in Early January, this feels different. You know, it's like we went to sleep and hibernated for a bit over Christmas and came out.

The planet feels a bit different. That's how I'd describe Melbourne. So the locals are still catching on. I think the investors jumped onto that a little earlier. But if I can recount the auctions that I've been bidding at recently and spirited bidding, it's mostly owner ox.

They might have to fight the investors, but owner ox are certainly giving it a go at that – 1 million to 2.5 mark, that segment is still very much dominated by owner-occupiers.

It's interesting, isn't it? Because when the market turns, after any period of prolonged downturns, It feels sudden. It really does. But it never really is sudden. There's little hints of it.

So, and I know certainly amongst, you know, even some of our guests on the podcast, we sort of got murmurs that investors and on forums and buyers agents, you know, and we're sort of all looking to, you know, the contrarian, shall we say, was looking to Melbourne. Yeah.

And I think I spoke to you late last year about this.

I certainly spoke to some other buyers' agents who were saying that they were amazed, actually, that agents are starting to tell them, the interstate buyers' agents were coming, you know, the sort of fly-in, fly-outs, the ones that don't fly in, those ones, that they get a property manager or the sales agent.

The Google in and Google out.

Yeah, the Google in, Google out. They get the sales agent to do a WhatsApp inspection. It was like, oh, my God, what could go wrong?

It's not funny and it's true. Yeah.

That's another topic. Yes, I'm laughing, but I'm certainly not happy about it or think it's funny. So this was happening at the end of the year. And, you know, we didn't see anything in the data till February. And then we also had a six-week period where there's not much happening in the marketplace.

So we could definitely say that, say, December, maybe even November, I can't think that far back, to be honest. But so... Definitely there were murmurs. And even at that point of time, I'm thinking, is there any evidence to support this investor activity? Like, is it just back to my own bias?

Oh, it must get back on track soon. And obviously we're seeing that. And certainly in your First Home Buyer Guide, so our course for first home buyers, we've got people, we meet our students every week and they talk about what they're looking at buying.

And we've got some students that are first home buyers in Melbourne at the moment. And I'd said to them, In January, I said, you guys need to be looking at your second tier suburbs now because I really feel that you need to be prepared in case the market does move.

And one of our students, for example, was looking in the eastern suburbs there and they were looking at a villa unit and lots of comps showed that it really should have pulled up at 700 and it sold for 742. Yeah. You know, so that's what a difference can make.

And it seems sudden, and that's certainly more than your 0.07% or your 0.7% increase as well. But that's segmentation at its best. I mean, that's a 6% gain.

It's probably spot on. It's probably spot on, actually, now I think about it. You know, it's... And that segment of the market is the segment that's doing very well and it gained traction last year.

And in particular, think about that price point for houses on their own, you know, 500, 600 square metre block of land. That takes you into Melbourne's west. There are a couple of other options, but there's a lot of buying activity in Melbourne's west because you're not 100 or even 50 kilometres from CBD.

You can get a fair bit closer than that. The demographic profile means that you've got to be pretty organized and have a great property manager and be pretty clear about which pocket you're buying in because you don't want social trouble to cause your sanity on an investment property.

But we saw a lot of price pressure in that sub 700 market last year. I could already feel that brewing. Yeah. But what we do know is in a down market, it's usually that bottom quartile that's pretty resilient anyway.

So I don't like to use that necessarily as a driver for a complete market shift. I think looking at quality properties and what's happening with them, you know, in the inner and middle ring gives you a really good gauge on what you can anticipate in those markets as a buyer's agent.

And let's be honest, most of our work as buyer's agents tends to be in the inner and middle ring. It's not often dominated by the outer ring.

Investors might get you chasing that, but it's often a really emotion-filled buyer who has the income to pay for a buyer's agent, who doesn't want to miss a great deal, who's probably circling those markets that are closer to the CBD, particularly if they're on ROC.

So Kate, let's talk about those properties, right? So over the last, say, two years, there's been a lot of articles saying Melbourne listings are through the roof and blah, blah, blah. And I never buy it.

I was just going to, you know, you can look at a city level, then you go houses versus apartments and this region versus that region. And you look at current listings versus long-term listings and the story sort of loses, you You know, it doesn't become true.

You know, it basically shows that it's still pretty tied down there for houses. Have you find it really hard? Because everyone's bunkering down. No one wants to upgrade.

Even if you are in a good house, your desire to sort of go and get a better house isn't there because borrowing capacity and higher rates and you're concerned around short-term economy prospects. So buying's been really hard. Yes, there's been less competition, but it's been really hard to find good assets.

Has that been the trend or...?

Sort of. Chicken and egg is a very real concept. I'm not selling the house until I can see my next move and the stock's low or great stock's limited or borrowing capacity's hampered. That's an issue. Vendors won't move on unless there's an option to move to.

I think the best thing I can say about the Melbourne market is 2024 for me wasn't just the year of my daughter doing year 12. That was traumatic though. 2024 was the year of low-hanging quality fruit.

It's the first year I've worked as a buyer's agent that I think I could genuinely say I bought some really high quality properties and not necessarily at a perceived bargain price because you always have a little bit of competition on a good property, even in a down market.

But I was buying great quality properties with, you know, one or two bidders up against me as opposed to eight or nine. Yeah.

And I was paying what I thought was a fair price, not having to apply a stretch or deal with, you know, emotional people that were targeting something that was a really high grading property. So that's how I described 2024. And of course, there were a few auctions and negotiations that I had where...

Yeah, do you want to ring me up and say, oh, the other buyers are still chasing finance or they're thinking about something else or lost their job or whatever. Do you want to just wrap this up prior?

Imagine buying a great property with zero competition and all you're doing is negotiating with an agent and their vendor. That's how I describe 2024. I know.

It's a little bit of a momentum thing, isn't it? Like if there's less people, like less quality assets on the market, less people are upgrading. And so, and then there's less stress in terms of having to find something else because, you know, there's not that much competition.

So do you feel like it was just literally that there was fewer of them available on the market, but there was less competition. And so it was just really a momentum issue there.

Yeah. Confidence, buyer confidence was not great here last year. And, you know, all the people that kept asking me, when do you think the right time to buy is? I'm saying right now.

Yeah.

It's terrible. That's the best time to buy. Because when it's not terrible, people are going to come back in. And it wasn't like values were sliding backwards. They weren't.

I've talked about Melbourne's, you know, you said at the start that values have been declining for 10 months, but it's been a small amount of decline. It's not, you would never describe it as a, as a crash.

Yeah, you're absolutely right.

And in fact, you know, every, every month you sort of check those, that those figures and the top end always had, well, the top quartile always had a higher rate of loss if you want to call it that, but it never got into, it wasn't even as bad as the 2017 to 2019 downturn that Sydney experienced or even Melbourne back then.

Like it, It was much more modest and gradual. It just looked, by comparison, it looked awful compared to a country that was dominated by Perth, Adelaide and Brisbane. Even Sydney's very modest, chugging along sort of behaviour last year sort of just looked pretty awful compared to those three cities.

So Melbourne obviously looked like their sort of sad, sad, sad cousin. I mean Hobart and Canberra in there as well weren't doing too well. But I want to talk a little bit, I want to get back to the economy down there because the simple fact is, you know, there's been all of that.

You had the lockdowns. That really has had a legacy there, right? You've had all this infrastructure work and there's huge government debt. I heard somewhere the interest bill is like a million dollars a day. Is that correct?

Along those lines, it's awful.

What does that mean? What should that mean for a property market? And is this sort of bounce back? Is it sort of a little bit premature, really, if you were looking at pure economics?

Is it like, well, that normally wouldn't happen, but for whatever reason, enough people have believed that it should, so therefore it is.

Is there a correlation between economic prosperity and house price growth? That's what you're effectively asking. The hard... task here is I feel we'd need to see other economic wobbles and downturns, whether it be job losses, so employment is a big one.

You know, these things stimulate market confidence. If we had a record interest rate drop again, I'm very confident to say I think Melbourne would rally, and the economic prosperity question wouldn't be the brightest driver there at all.

So there's more to it than state debt.

Of course there is. But, you know, this is a sort of a figure, it's quite an impressive figure, a million dollars of interest a day.

Who cares? I mean, as an individual buying and selling a property, some of the things that have impacted the property market down there and certainly has had that positive impact on yields.

I mean, you've got falling in property value is going to have a positive effect on yields as long as rents are still the same or rising. But you've also had legislation, which we haven't talked about actually in this podcast. Well, we can touch on all that stuff.

A lot of that legislation that has scared off a bunch of investors, but certainly not deterring a new generation of investors. Yes. So these sorts of things are going on. And in many cases, when you turn to the media, think these are the reasons why the market's suffering. However, they still exist.

Now the market looks like it might be turning. Yeah.

Yeah, that's right. And I've not wanted to call it too early and look like Pollyanna on this one, but we certainly are. There's a change in sentiment out there and sentiment counts for heaps. And regardless of what it's based on, I think the long-term impact of positive sentiment

It is based on these drivers coming good. We can't just have house prices pivot because someone wrote a great article. But we need to look at what stimulated Melbourne's downturn. It's not just related to government issues and land tax.

We had a lot of Melburnians buy a secondary property during lockdown, because, you know, your interest rate bill was 2% per annum, and you just didn't want to be involved in lockdowns, and you could buy something down the coast.

And people were driving, like, to Warrnambool, up to Alpine regions, to the Murray, like, I'm talking several hours, not two hours. And they bought their Ponderosa and they kept their city pad because they were really comfortable knowing that they had this holiday house option.

The interest was record low, so they could hold it. They might have even been able to rent out or Airbnb their place in the city. And all of a sudden, bosses are calling them back.

They're feeling like they want to get back at work and integrate with people and have better job opportunities or advancement opportunities by being seen in the office, whatever it might be. Kids have got to go back to school.

And so we saw a lot of people returning and then all of a sudden we've had all of these interest rate hikes. And this holiday house in Warrnambool, it's really expensive now. And so we saw a lot of people selling their coastal properties.

If you have a look at sales activity in SA3 regions, you'll see the hot spots. And I wouldn't be wanting to sell something on the Mornington Peninsula or the surf coast right now. People paid premiums. And back then I was saying, help me out. I've missed on 10 consecutive boardroom auctions.

I can't miss this one. We'll pay $2 million for it. It's down in Torquay. We saw a lot of irrational behavior like that.

And I think that the data that we've seen since, I'm surprised the losses weren't greater because we saw a lot of purchase decisions that were either regrettable or no longer working for them being reversed. And that came at a cost. or the other way around.

You can connect with me and access all of the tools that I've created to help you make better property decisions at veronicamorgan.com.au. And there you will find resources for first home buyers, details about my buyer's agent mentoring program.

You can connect with my Sydney based property management and buyer's agency teams, Australia wide vendor advocacy, or ask me for introduction to the small group of buyer's agents that I would personally recommend across the country. That's veronicamorgan.com.au.

If you're looking to buy your first home, thinking of upgrading to a new one or purchasing an investment property anywhere in Australia, we would love to carefully guide you through this journey and importantly, get the finance right. Reach out via my website, alcove.com.au.

That was going to be my next question is the buyer preferences and buyer behavior in terms of

what what they really value right now i know that completely got uh dissembled in covid right like pre-2019 i've got to be close to the city uh you know the trams the train you know getting the city's really hard i want to be able to ride i want to be able to walk like you know as close to the city as possible time matters because i want to get home to the family and kids and i even something three or four k's down the road just feels too far right there was this

suction towards the city then covid completely ruined that right like and it would go further and want bigger houses in the suburb have you seen the by preferences of slowly as the city gets this mojo back as more and more employers say back to the office um and it's almost back to the same as what it was you know in 2019 or is the people wanting different things to say five years ago

In one word, yes. You're absolutely right, Chris. I've seen a complete turnaround. It wasn't super rapid. It was like you said, it was gradual. But every call I was getting was about space and about land and about lifestyle. Right now, it's all about city and proximity and walking distance.

I literally had two people last week saying, no, I think Brunswick's too far. I really want to be able to walk. To the city or cycle to the city. Yeah, there you go. Like Brunswick's pretty close.

Yeah.

So, yes, I've seen that turnaround and it's almost like we've forgotten COVID. Gosh, I wish we could.

And that's quite fascinating because that's a living experiment, COVID, when you think about it. Like I was wondering too, like during COVID, I'm thinking, oh, people aren't going to want to live in apartments after this, you know.

They're never going to want to get in a lift again with other people and get diseases and, you know. Yeah.

And, and yeah, and, and, and it's interesting how, like, you know, I try to pride myself for being a long-term thinker, but even myself, you know, I was very sort of getting very insular and, and, you know, um, cocooning, you know, and, and it has so changed. It's very interesting.

You're talking about that complete shift, the back to the original priorities. Um, because, you know, people were talking about Melbourne, the Melbourne CBD. Melbourne has always been famous for really being a very living, vibrant city. You go into Melbourne on the weekends, it's happening.

Whereas you go to Sydney on the weekends, peripheries, it's happening. But the dead heart of it is pretty dead.

The city does feel good. It's back to normal. Yeah, pretty much. Pretty much. We haven't touched on household formation rates and the impact of COVID. I know you've talked about it a lot on your show, but we had a lot of divorces.

And a lot of people spreading out and doing their own thing. A lot of singles and single parents, single everything, buying property during COVID, like when we could get out of COVID or in between lockdowns.

And of course, you know, there's a natural rate of repartnering that takes place when the dust settles and things settle down and people are out again. And so we've seen a lot of people being able to band together their respective groups. purchases and, you know, cash that in and buy something bigger.

So our requirement for housing has, has changed, and there's been a slight uptick in the household formation rates of late, but I think we've got to look at what happened to Melbourne and

understand just how difficult that that rate of you know separation and divorce and breakup and going solo was because it it really did um it made its mark and you know anecdotally the agents were talking about the number of of separations that they were dealing with in terms of of sales

Have we got any doubt?

Yeah, I don't think we've ever talked about that. No. That's completely something I've, and I'm just trying to think about clients and going through, and I've absolutely seen that as well, where people have come, you know, second partnerships, whether they get married or not, probably not. They're not doing that again.

But, you know, they have combined their resources and they've sold their two places and they've got cash and they're almost like they're coming back into the market. And I would say, yeah, I've noticed that in recent times as well.

Are you saying you've noticed that in Melbourne or you've noticed that in other locations? Chris?

No, I wouldn't just say just Melbourne. I would just say just generally, you know, the people coming post, you know, a breakup and then coming back in a new partnership and the deposits they've got are quite big. We're so optimistic, aren't we?

You know, you're throwing away a lot of money in transaction costs by doing that. And also the big expensive thing isn't getting divorced. It's the property settlements. I'm surprised people are doing it.

Well, it takes a few years to work through. I was just curious, Kate, so you've been in the Melbourne market since, what, early 20s? And when did you start buying?

Oh, 2010, 2011.

Okay, so say 15 years. So, you know, the demographic driving the market then was, say, you know, definitely a Gen X slash boomer. And you're now getting down towards more of a Gen Y market.

Are you finding that the mentality of that generation versus, say, a generation before want the same things as their parents' generation? Like, do they still have a preference for the East and the Bayside over the inner North and the inner West? Or do you...

Are they almost like, no, no, I don't want that. I'm more like this and this is more my personality. Or is it, is it pretty much the way that Melbourne property has been priced in the past is based on previous generations.

Yeah.

Is that, you know, the gap between there's always a premium for the Bay and always a premium for the East. Do you see that continuing or do you think the next generation don't value that as much?

No, they certainly value it, you know, the bay and the east. They reign supreme when it comes to land values. But I think there's a real acceptance and an understanding of stepping stone. We talk about this stuff a lot.

And I look at my daughter, she's 18, she shows me all of these amazing people on Instagram that are doing cool things with their money, never mind that she's got mum to tap into, but I don't count because I'm mum. Yeah.

You know, whether they're influencers or just people that are doing really great things and putting it out there, the information is abundant, and I think that generation are getting, you know, a really good understanding of what's possible and how people are doing things.

I sound like an old person, but back when I was into researching property, I'd buy the API magazine and go to the back pages and look at all those charts and graphs. These days, TikTok, Instagram, whatever, follow your favorite person. They're putting stuff up every day.

So there's a lot more out there about what you can do with your money and what's clever, what's savvy. And I think that, that appreciation of starting somewhere, it's, it's very much alive and real.

I'm not finding that, you know, millennials are saying, I refuse to, to live in the West or the North because my family are in the, in Baldwin and that's where I grew up. They're accepting that you've got to start somewhere. Mm.

And I think also in Melbourne, it's been abundantly clear that houses have outperformed units for a long time.

Yes.

And they want their slice of pie. They do not just want to have a spoon of pie. They want a slice of pie, and I get it.

But that's sort of interesting because, you know, I've seen it in Sydney that you'll see acceleration in unit price growth when houses get particularly unaffordable. And so Melbourne apartment market has struggled probably the last, what, decade maybe.

So are you thinking that these, I guess if you're getting on the ground floor of it, the next boom, if that's what we're talking about here, we don't know. So don't let me say that. This is not financial advice. This is not what I'm saying is going to happen.

But if it does turn out to be the beginning of a boom, then anybody gets in now will not be sorry. And particularly if they can scrape in and get themselves a house now before they become unaffordable, they will not be sorry, right? Assuming it's a decent asset. Yep.

But, you know, what are your thoughts on the apartment market in Melbourne?

Has it been, can you sort of segment it to say, well, we know there's been a huge, huge area of oversupply, new developments, and that has dragged down, you know, the underperformance of those areas has dragged down all apartments in terms of looking at the aggregated data?

Or is it really that all apartments really have struggled?

A little bit of both. So all apartments struggled for quite a while. And when you think about the boutique beautiful brick apartments that have, you know, somewhere between six and 12 apartments in the block and they're in a leafy street with period houses around them and shops and stations. Art decos in Elwood.

Well, that's one example, but even your daggy 1970s, you know, I would go into any of those lovely inner suburbs that, even the middle ring suburbs, you know, I've bought good apartments in Bentley. They've got to be boutique, and they've got to be really well run.

And it sounds easy to dial that up, but it's not, because you have to pour through the strata minutes, you've got to talk to the strata manager, you've got to know what else is going on in the street. Like, there's a lot, but...

But to your point, yes, we had a period where all apartments didn't do as well as people hoped they would do. But when we look at the segmentation of high-rise apartments and badly built modern apartments and high-density stuff versus those really well-located premium apartments, there is a differential.

And the only way you can really do that is with data. So I've sat there, I love my data, picked out properties that are representative of that boutique nature, and I've picked out properties

properties that have had several sales results in the last let's say 15 years where I've been able to draw a line of best fit across a variety of them to then benchmark that against a high-rise performance property and and there's no correlation at all the boutique one always does better but the question remains if you could buy a boutique apartment for $750,000 in Armadale

Which is, you know, beautiful, leafy, glossy eastern suburb, versus spend the 750 in, I don't know, let's say, Laylaw in Melbourne's north, which is 16, 17 kilometres north on the train line, dated 1960s, 70s kind of era, blocks all measuring between 530 and 700. Yeah.

Which one will do better? And it's a really hard thing to ask because you're comparing an apple with an orange. But right now I'd say the house in Laylaw.

But if your plan is to live in a property and use it as a stepping stone and you want to be in the eastern suburbs and you want to be close to town, you're going to have the best lifestyle in that Armadale apartment. It will serve you well.

And then when you upgrade and you sell it, you haven't got any CJT. So you've really got to think about these things. It's... You can compare an apple with an orange, but you've got to take into account all of the differences in the tax implications as well.

Kate, we talked about tax there, and obviously there's some huge changes in Victoria around land tax. You know, basically you had a limit or a threshold that you sort of had to hit before you started paying land tax as an investor. It's very low. Yeah, and now it's basically zero, right?

Well, it's 50 grand, yeah. Yeah, exactly. So basically you can have any land in Victoria, you're going to start paying land tax, right?

Yeah, why bother?

Why with the 50 grand? I mean...

We're also at zero.

If you buy a crappy enough apartment, like a high-rise horrible thing with a land.

Yeah, it's a good point.

Oh, okay. Yeah.

It's a good point. There you go. 100 on the block, maybe your land's only 50 grand.

I've seen a couple.

Yeah. Have you seen the, you know, owner-occupier? Because, you know, you change the incentive, you change the behavior. I think someone very famous said that one day.

But, you know, and if you change the incentive here, like if I'm living in Melbourne, right, and I've got my house in Northcote or Brighton or Camberwell or wherever it might be, right, and I would have...

You know, I want to get away from the city on the weekends and have a house down the Mornington Peninsula or down the surf coast or, you know, Echuca or whatever it might be. It doesn't really make sense, right? Because you go, I've got to pay land tax.

You know, there's already a lot of other people on Airbnb down there. You know, it's already gone up a lot. And, yeah, people hate paying taxes, right? Have you seen people just say, well...

Instead of put that one, two mil to a holiday house, I'm just going to upgrade my home and because it grows tax-free and their response has been just go deep, you know, more and more into owner-occupier sort of situation. Have you seen that change in behavior? Because it makes sense, right?

Like I might as well just use Airbnb rather than going buying a holiday home because the cost to own is just so much.

I personally think that's probably a good thought bubble to have. I haven't seen that behavior, but in fairness to people that might have made that decision, I might not get to see the mechanics of that decision behind the scenes. They might just be coming to me saying, we've got a capacity of 3.5.

Can you find us something? I don't know that they've gone. Forget it. We're not buying in Black Airy and we'll upgrade. So I think it does happen, but I believe that someone who's committed to property investing, they... they want to leverage.

They understand, well, you'd like to think that they'll understand their motivation for doing it. So is this, you know, short, shorter term play or is it, you know, long-term rental growth?

Is it crystallizing again, you know, upon retirement, dealing with the tax, whatever it is, they tend to want to buy an investment property. The difference is that they've all gone to other states until recently. Right.

Ah, do you?

South East Queensland and Perth and maybe Adelaide. And I get people sometimes saying, Kate, we're thinking about buying in Melbourne or Brisbane. Well, when you've worked that out, let me know. Because I don't work in states outside of my own home state. I carry bias naturally and I don't know Brisbane.

So why am I going to tell someone not to invest there?

And have you seen though that, because Melbourne was always pretty cheap to rent, right? So one of the things that even if you're, you know, always have the ability to rent apartments, there was never a shortage of apartments to rent in Melbourne. And you got kicked out of one, didn't matter.

He could rent next door or above it or below it. You know, like there was just, it was easy to rent. And,

Even if you're a couple or a family and you wanted to rent a house, you could rent a big house with a big block of land in a great school catchment area, really cheap. And that's because there was a lot of investment properties.

A lot of people had a lot of houses as investment properties. Have you seen that a lot of people have been exiting those over the last few years? Not just through cash flow, but just through death, divorces, getting older. And that's really making it harder and harder to rent every year.

Most definitely. Yeah, our rising rental yields is not just a function of property values remaining static. It's actually been a marked growth in rents. And if you look at the data from...

COVID 2020 to now, Melbourne has had one of the strongest runs with rental growth. And there were a few reasons for that. Before we had our land tax burden, we also had a lot of changes to our rental legislation.

And, you know, some of them are really difficult legislative changes to handle. We had a backlog in VCAT, which is our tribunal, that would put off any investor from having a property, because if you've got to wait for a year for a hearing,

And you've got no rent or you've got a damaged property or whatever. That's just a nightmare. So those things were starting to agitate investors already. We've also got a baby boomer cohort that are moving through and looking to get cozy in their retirement.

So we saw a lot of investor-led sales just to liquidate and to take stock and put it into super. And The taxes have obviously, you know, really rattled a few investors and our yields were always one of the lowest. We compared to Sydney.

In fact, I think for a couple of years there, we were slightly below you. And we saw a lot of pain during COVID when we had the eviction moratorium in place and, you know, Scott Morrison and Dan Andrews basically said, you guys work it out. Look after your tenant, work it out.

I think that the sentiment around being a property investor switched a long time ago for a lot of locals down here. And the land tax was just kind of the nail in the coffin. So we've seen a lot of property selling.

Combine that with the fact that we had people who owned two properties after COVID, when interest rates were so cheap, they were starting to scale back down to one for economic reasons. As a result of all of that, we've had a very strong sell-off.

And the last piece of the puzzle, which is really interesting to note, relates to properties that don't meet minimum rental standards. And it doesn't have to be like a disgusting and rugged property to not meet rental standards.

And if the cost of fixing it, while we've got, you know, tougher interest rates, is too much of a burden for someone, they will just offload it. So I've talked about houses doing quite well in the Melbourne market. You know, I've cited the $1 million to $2.5 million market.

But the disclaimer that I'll have there is within that band of houses, we've got a two-speed market, the renovated houses and the unrenovated houses. So all of the stuff that investors are letting go because it doesn't meet minimum rental standard and it's now a headache, they are not selling well.

But that's sort of quite typical of a slow market anyway. So the conditions that you've had over the past three years have, you know, I know when I've been in that market in Sydney, that if you don't have to buy a renovator, you're not going to. If you can actually get...

a decent home in good condition or even a renovated home and you're not going to pay a huge differential for it you're just going to go for that if you don't have to fight for the privilege of getting into your chosen marketplace and people tend to only compete for renovate unrenovated properties i should say when you know when fomo is driving the market and when yeah

When they feel like that's their only opportunity, they're going to miss out on everything if they don't go for it. So that sort of plays in those two things coinciding or those two circumstances coinciding, you know, makes perfect sense to me in terms of what I know buyers will do under those conditions.

I think you're absolutely right. It's...

amplified here because we've got so much civil infrastructure going on and the government projects have just sucked all of the tradies out of the system. Try and find someone who's happy to build you a pergola, not going to happen. Not for, you know, anything less than an absolute mozza.

And we've also had materials cost rises and labor cost rises, you know, in the construction sector anyway. So obviously all of these things combined to have that happen.

You know, are you finding though, so is your sort of thesis then that the local investor, so the Melbourne-based or the Victorian-based investors have been the ones selling out and the interstate investors have been the ones coming back in, probably buying different types of properties, I'm guessing?

Not necessarily. I mean, all investors that we're working with, particularly if they're interstate, but investors, they want to be hands-off. They're not looking for a project, you know, at all. No, that's what I mean. They're not going to be buying the unrenovated houses that are coming onto the market. Not really.

No, the winners in Victoria, as a segment, have actually been the first-time buyers.

Hmm.

We've had a much greater percentage of property sold to first-time buyers than other states have of late. And that's been a joy.

You've also got your state government shared equity scheme there. What do you know about that? Because that's an interesting... Yes.

concept and certainly does help people i know when i'm talking to to buyers about that i like to consider that if somebody's able to buy a bigger home that they can stay in a lot longer um and they're not going to run the risk of not qualifying at some point and having to sell it right yeah

That, you know, it's something that some first-home buyers should consider. Some will.

Yeah, what are your thoughts on it? Look, for the right person, it's a great product. My favourite product is the deposit guarantee. I absolutely love that. You know, if you can get into the market on 5% deposit and have the government cover the risk so that you're not paying LMI, that's amazing.

So the shared equity buyer should be someone who – it's all about their servicing capacity. It's not about their deposit size. And they can't service any more than X dollars, but with the government taking a share in the property, they can go a lot higher and get something they need.

I would never argue with someone that felt they needed that. But if it's down to the size of the dwelling, let's say it's someone who's got children or they need a bigger dwelling, that's really important. But if

If it's not about a bigger dwelling, and you could get a great location and just have something a bit smaller, and that's your stepping stone property, I'd ask someone to really carefully look at whether the deposit guarantee would serve them better.

Because once you're in bed with the government, you've got a deal going with the government. You've got to work out how to get out of bed. And I'm not suggesting that it's a nightmare, but, you know, it comes at a price.

And that's precisely why I say if you can buy a bigger home that you're not going to have to trade out of in the short term, definitely I would never recommend it for a stepping stone strategy. Basically the fact you lose parts of your gain anyway.

I mean, it's like it's sort of it.

cannibalizes itself yeah it's not just that it's the complexity of it as well you know from from an audit point of view you want to make improvements to the property you've got to talk to your business partner yeah there's a bit there also chris you would know this more than anyone the lending scenario the pre-approvals through to full approval process it's it's not straightforward i wouldn't say it's glitchy but it's it's headachy and and they get very nervous because there's a lot of checks and balances we're talking about the government here

Yeah, we can't even do it, to be honest. You've got to go directly to the bank. It's only a couple of banks that are doing it. It's slow. It's scary.

I think the 5% deposit scheme is a much better option and these are the reasons why. And we had that exact same conversation. Look, if you can get you a much better asset and you're going to live in it long term, you might want to consider it.

But, you know, there are dangers of that. Kate, for the markets are really kick, like a true boom. It needs to be driven by inner occupiers. It needs to be driven by not just first-time buyers. It needs to be driven by people with... Money and also on higher incomes.

So the upgrader, the affluent upgrader that really wants to lock in sort of their forever home.

And the downsizer that's doing the right size. You know, they're not necessarily spending less. They're just getting something closer and better.

It might be smaller. What's going to get them to really enter the market? Do you think it's as simple as, oh, we've seen prices start to run. If I don't upgrade now, I might not be able to in the future? Yeah. Or do you think we'll need something else?

I think Melbournians are just plagued with PTSD since 2021 when the market took off and so many people were priced out or they felt those awful FOMO conditions where they had to make, you know, half-hour purchase decisions. It was mental. Hmm.

And I had a lot of clients miss out in 2021 because we would stand back and say, you can't go and sign a contract for that. We haven't inspected. You haven't got time to get a building inspection done. This ship has sailed.

And there were lots of people that didn't let the ship sail. So I think everyone's still got a degree of trauma over any associated losses or experiences that they had that were scary. They don't want to go through that ever again. So I've had a lot of people saying,

I want to get in before everyone else is now a good time. Right, yeah. And that's the theme.

I think if we get a market rush, which I'm sensing we could over the next, if this continues, because I've had a very busy couple of months, if we continue to feel this, the people that are jumping in aren't getting in because they've got an extra 25 basis points worth of servicing.

That's not it.

It's because they don't want to miss out. It's FOMO. And so it's basically recent history. They haven't forgotten the last time that that happened. Well, it's interesting. It's been a great wrap up of where Melbourne is at at this point of time. We're recording this in the beginning of March.

So we should be going to air still in March. I guess we'll watch this space and we'll see how it unfolds as the year progresses. To see us out, have you got an example of a property Dumbo for us?

A property Dumbo. I think we've just got to remember 2021 and be prepared to do the hard yards really quickly. You know, get that contract review because the worst Dumbo that we could...

see someone doing it in a FOMO market is buy something that they'll make a purchase decision that you want to reverse. That's a massive dumbo because you'll have your selling costs, you'll need to get back into the market, pay your stamp duty. No one wants to see that.

So get in early, do you, make sure you allocate the time to do your DD so that when the agent sends you that text that you don't want to get saying, we've got an offer, it's going to close out at 5pm, you can put your hand up and say, yes, I'll be there.

Yeah, I'd put, I'd add to that and your DD needs to include that pricing research so that you're super clear at where you're going to pull out if it gets competitive. Under competition, at what point will you still be in it and what point are you out of it?

And too many people go into these negotiations and these heightened situations and With the price that they would like to pay as being their limit, then they're rethinking their limit under the pressure, the intense pressure of either an auction or those intense negotiations. So that's sort of that walk away price.

It's a hard discipline, but it's really important. It's an important one.

yeah yeah i think for if it was me and i'm just looking at your market hey i think that people are going to regret 2024 um i mean not buying i think i've been over that year you know saying that exact same thing what you're saying is that the best buying is actually when you can get good assets without a lot of competition and you can take your time and you can you know do your building in person you can consider it and really make sure it's the right property for you you can even hold the agent out for a bit you know

yeah that's right push it give me a second viewing and a third viewing fourth viewing and it's totally fine like and i think just those when markets start running you regret that so fast and then you you live with that regret because you you were thinking about buying you could have done it and then all of a sudden and it's just not a nice experience i'm sure kate can can agree that if we had a dollar for every person we've tried to encourage to buy when the

It was actually a buyer's market instead of they all want to wait until it's actually a seller's market. And sadly, that's what social proof does. It makes people want to act when it's really the conditions are not favouring them.

So true. Let's chat later in the year, Kate. Good to chat. It's been such a pleasure. Thanks for having me on the show.

If you have a question that you'd like us to answer in an upcoming Q&A episode, you can send us a voicemail or written question via the website, theelephantintheroom.com.au, or you can email us directly at questions at theelephantintheroom.com.au. If you like what you're hearing, 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 would be great. I know that sounds a bit cringy, but we have it on good authority that every review helps make it easier for other people to find out about us and hear what our amazing guests have to say.