Stuart Wemyss on Selling and Borrowing at Record Levels

In this episode, we're talking with Stuart Weems from Pro Solution Private Clients and the Investopoly podcast, and we're going to explore how two opposing facts about investor activity can both be true at the same time. While investors are selling in record numbers, they're also borrowing record amounts of money.

How can it be that in the face of rising costs and mounting negativity around what's branded anti-investor government policy, Australians' appetite for property investment remains unquenched? Who is buying? What are they buying? And who's being left behind? Welcome to the Elephant in the Room.

This is a 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.

And I'm Chris Bates, mortgage broker, recently ranked number five in Australia out of over 18,000 brokers in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, I need to let you know that nothing we say here can be taken as personal advice.

we always recommend you engage the services of an appropriate and experienced professional. Our guest today is Stuart Weems, Director of ProSolution Private Clients. Stuart has over 20 years of experience and founded ProSolution in 2002. He holds a Bachelor of Commerce, is a Charter of Accountant and holds many postgraduate qualifications.

He is licensed to provide credit, tax, insurance and financial advice. He's published four books, including The Rules of Lending, Game and Best Selling in Bestopoly. He's a regular contributor to the Australian newspaper and other TV, radio and print media, and also the elephant in the room. We're delighted to have you back, Stuart.

It's been a while since we've actually chatted, so thanks for coming along today.

Yeah, thanks for having me back. Appreciate it.

As you know, Stuart, I always love chatting to you and some of our listeners love hearing from you. So thanks for coming on again. I mean, I think the interesting thing to start today is that you've kind of revealed some investment stats from a lending point of view.

And we're at all-time highs, right? When you have to think from an investor's point of view, it's really a great time to invest. Interest rates are high, you've got a lot of taxes, et cetera. So how can this work in your view? And What are some points you've sort of thought about?

Yeah, Chris, my head exploded when I saw the numbers and it kind of dawned on me. And you think, you know, like you've mentioned the backdrop, we're almost 20 year highs in terms of interest rates.

Interest only, the share of new loans that are on interest only have reduced from about 40% in 2017 down to 10%.

So it means obviously a lot more new investors are borrowing on a principal interest basis, which means the holding costs are much higher. You've got property taxes and then you've got tenancy laws that have tightened up. And then just overall borrowing capacity with the 3% interest rate buffer is pretty daunting.

Probably the worst in history, really, because you've got the living expenses focus. They've moved away from... a really low index, plus then the 3% buffer.

So you put all those things together and go, well, I would expect to see that lending to new investors is dramatically below the long-term trend, not at all-time highs. So, yeah, I was really stumped by the numbers.

And you can explain it away, I guess, to some degree in terms of where is that new lending going. Seasonally adjusted over the last six months, the lending in WA, investment lending in WA is up 40%, which is a huge jump in the six-month period.

And it probably makes sense if you think, well, people's borrowing capacities are tighter. then naturally they're going to look to markets or sectors that are more affordable. So whether that's a capital city in WA or whether that's a regional area, you could see the money sort of flowing into those areas.

But still, you've still got to try and contemplate how are all these people borrowing so much money? Because at the end of the day, the aggregate number is very high, all-time high, as I said.

It's not just how are they, but why are they? Because, you know, it potentially goes to that underlying belief that we all have in this country. And it's not just a belief. It's been borne out in many cases, but not every case, is that property is a vehicle for wealth building.

So it doesn't seem to be that that notion is being disabused in any way.

No, it doesn't. I wonder if it's because, you know, obviously a huge share of the population lives in Melbourne and Sydney in terms of density.

And for those people then to contemplate investing in property, probably most of them have thought, well, I won't invest out of my domicile state and I don't want to go to a smaller state like Adelaide and Perth.

But when you start seeing the prices accelerate in those capital cities, maybe it's given, I guess, whether we call it false confidence or at least some confidence to investors say, well, actually, maybe I can generate some decent returns by investing interstate in a market that is relatively more affordable.

Because it's unusual at the moment, of course, we've got You know, Sydney growing about 5%, Melbourne's even or slightly in decline. And then you've got Adelaide, Brisbane and Perth going gangbusters. That's really unusual.

And I guess, you know, people, a lot of people, if you ask them 10 years ago, do you want to go and invest in Perth? No way. Why would you? You know, the growth has been terrible. It's too linked to mining. It's too small. No, thank you.

But now, you know, and there's a lot of research in the share market. About, you know, if you have a good managed fund that generates great returns, the reality is when you look at the investors in those funds, few investors have actually enjoyed those returns. Everyone's too late to the party.

Yeah.

Right? It's when that managed fund starts to generate good returns, then people start investing.

Yeah.

And so they might advertise we've generated 20% over five years compounding, but the reality is very few investors have enjoyed that return.

Yeah.

And so the same sort of human psychology, I think, would apply to the property market. Everyone jumps into Adelaide or Perth, but is their timing a little off?

Stuart, you've been a broker a lot longer than I have. I mean, I started 2013. I mean, I started working around it 2012. So I sort of know since then a lot around lending and I've seen it obviously decline dramatically. It was 10, 12, 14 times income when I started.

If you knew how to play banks against each other and not even that hard to figure that out, to be honest. Now we're at four and a half, five, maybe a bit more if you get a bit tricky with it.

I mean, can you remember a time pre-2013 when lending was anywhere near this high or a period, you know, where you thought, hang on a sec, like a similar lending environment?

You'd have to go back to the early 80s. No, I wasn't. I wasn't running a mortgage-working business back then. But you'd have to go back to early 80s if you look at the stats for lending to be as tight as it is today. And it's not very comparable.

We can't go back to it was pre-banking deregulation. The population was much smaller. And so on and so forth. So it's not very comparable, but there's no way.

Now, I think if I charted it, borrowing capacity has been in very steep decline, probably beginning just after the GFC, but certainly since 2017, it's been significant. Which I guess, you know, asks us then or begs the question, will this trend continue? Is there still some legs?

Like even if we get some interest rate reductions, certainly that will have a positive impact on borrowing capacities. But maybe the case is that fewer people can afford to invest in a Melbourne or a Sydney.

And so maybe the disparity in growth, long-term growth between those capital cities won't be as stark in the future decades as it was in the past decades. I'm not suggesting that. I'm just throwing that out there.

It's sort of interesting because I think of scarcity, you know, the scarcity bias. And I think, well, if borrowing is difficult, it's difficult to, and still that perception is difficult to get into the market. Therefore, I want to. I want to because it's hard to do it.

So I wonder if that sort of fuels the psychology of it in some way. But also, it's funny, I'm not sure if it was you, Chris, I was talking to or somebody I was talking to recently.

It was saying that quite a lot of people who are investing in Sydney at the moment are really just sort of almost like washing Sydney money and Sydney equity back into the Sydney market. So it's almost like it sort of props itself up in many ways.

And particularly when you've got people entering the market, first home buyers that are supported by their

their generational wealth you know their parents and their grandparents who potentially also um you know own in the same city then in a way that's sort of going to it's going to i guess decouple say sydney particularly or let we can talk about melbourne because that's sort of different things happening there at the minute but perhaps sydney will just decouple from the rest of the rest of australia and and unless you already own property you may never get to own property here

Yeah, and one thing I've been banging on about for a while was that dramatic change in borrowing capacity, let's say from sometime in the 80s, mid-80s, through to, say, 2017 or 2010.

That period of time, dramatic increase in borrowing capacity, which is great for people that wanted to get into the property market at that time. And certainly there is a strong correlation, strong positive correlation between money flows and price growth.

As we can see from the most recent data, the more borrowing there is, of course, that's going to flow through to higher prices.

But one thing that investors need to keep in the back of their mind, if they're investing in an area where borrowing capacity is going to be closely linked to income, then that could be problematic, right?

So if I'm going to go and invest in an outer sort of suburb in Perth that has the average Australian income, if you like,

Which is not a criticism on that demographic, but it just means that the propensity for the next person to come into that suburb to pay more is very dependent on their income growth.

Whereas I think in Melbourne and Sydney, there's going to be a weaker link to income growth or, and importantly, the people in those blue chip suburbs are earning well above their average incomes.

And one thing I've observed that's been a big change over the last five years, and Chris, you probably see it as well, is clients that work for listed businesses, whether they're Australian listed or US listed businesses, that are getting a lot of free stock. You know, it's part of their short-term incentive.

and they'll get you know 100 000 200 000 of kind of free stock if you like um that that didn't used to happen previously and a lot of these are from tech companies and whatever but that didn't that wasn't as prevalent as it was even five or even certainly ten years ago and so where are these people living because if i can invest in that area these people have always got propensity to pay more i'm not relying on borrowing capacities i'm relying on other things

Yeah, the interesting thing, I was just looking at the AFG index, which is sort of a great thing to get a snapshot on, because it's like 4,000 brokers and they can aggregate up all the data and what people, the average loans, et cetera. So it's like a very good snapshot.

And back in 2022, the average loan nationally, I'm talking, was 624. Borrowing capacities have gone down 30%, 40%, but the actual average loan is now 640%.

It did drop a lot over the last two years, but you can see that either people are stretching more than they were in the past, so they had excess capacity left over, or you're seeing that a higher number of the market is actually the higher and middle incomes.

And I think that's what's happening a lot at the moment is a lot of people are getting pushed out of the market because their incomes and what their borrowing capacity is, they just can't enter. You're seeing that a little bit as well, Stuart.

So if you haven't got great incomes and you haven't got you know, a lot of family wealth, then you're just not in the market.

Yeah, it's hard for me to judge because most of my clients are higher income earners, so my data is a little bit skewed. But there was a slide in the recent CBA results where they sort of profiled the average family income of the people doing the borrowing.

And in fact, I just found that chart. So the family income between $200,000 and $500,000, we're doing the lion's share of the borrowing. I mean, I can't add up all those numbers in front of you. It looks like at least 60%, 70% of the total borrowing.

So it shows, and this is the unintended consequence, right, of tightening prudential regulation, higher interest rates. The buffer rate, for example, it means it's just a rich person's game.

Like, if you're not, if you don't have an income north of $200,000, it's almost probably forget about it, which is a real shame because all it does is contribute to wealth inequality.

I think there's a story there, right? So like that can't continue because that'll create social unrest. It creates people leaving our cities, right? Productivity, you know, I think you can already start to see this. We can't easily produce lots of new alternative housing options. People still want to buy, right?

The government could do home equity schemes, but there's limits on what they can do there. And so there is pressure to increase borrowing capacity. Again, you can see Shane Elliott at ANZ talks about this, NAB, etc.,

So do you think that, Stuart, they're going to have to go back to that world where they increase borrowing capacity, whether that's through rate cuts, that's just going to be naturally happen, but where the APRA steps in, whether we go see longer loan terms, whether we see a little bit more gray area where banks can come up with innovative products, particularly targeted to first-time buyers.

Do you think that we're naturally going to have to go in that direction because a lot of those other options, like building cheaper housing, just isn't possible?

That's a great question, Chris. It's hard. I mean, the people, you know, APRA that's in control of the banks are really their only mandate is to focus on the strength of the banking system. And so then if you then put the question back to the banks, who do you want to lend to?

You know, someone on a family income of half a million dollars or a mum and dad, you know, that have a very tight budget. Well, of course, you know, the more profitable customer is the higher income earner.

And then, you know, if you say, well, those higher income earners then also have the propensity to pay down debt, so their total LVRs are a lot lower as well. Well, to the prudential regulator, that looks like less risky lending.

The amount of lending that has been done to people with more than six times income has dramatically dropped off as well. Again, it's a rich person's game in those numbers. Now, for APRA, it's fine. They're achieving what they want to achieve.

The banking system is less risky today than what it used to be. But there is a big problem, and I've thought deeply about this. I wonder if maybe higher income earners should be penalized by assuming higher level of living expenses, which banks do do that, of course.

If your income is much higher, they're going to assume that you're spending more. But to make it a fair game, sounds a bit socialist, so I don't know if I totally agree with it, but to make it a fair game, maybe we should be penalizing to some degree the higher income earners.

And I hate to bring this up, but they talk about negative gearing, but maybe capping negative gearing might make it a level playing field. So that if you say, look, You can claim deductions, but only up to $50,000 or something like that.

And maybe that means that the people that have the capacity go and buy six investment properties only buy two and therefore reduce the demand and hopefully open the door for other people. But it's a massive problem that will take years, I think, to show.

It's whether the government is smart enough to sort of pick it up now. I think we know the answer to that.

It's interesting, actually, because I'm wondering, like last week on the podcast, we discussed the PIPA investor sentiment survey and the rate of investors selling up is still rising. And so you've got the rate of investors selling rising. You've got the rate of investor borrowing also rising.

Are they the same investors recalibrating and moving their money to a different state or is it a change of the guard? Are the people that are selling actually really suffering under those cash flow pressures and there are lower incomes and then the people actually investing are actually a new breed?

Can we find that out or can we just sort of make assumptions and guesses?

I think the PIPA survey said that of the people that sold last year, 40% had held their property for 10 or more years. So to me, that looks like, and most of the selling was done in Queensland.

So to me, it looked like, and I've certainly got clients that fall into this category that bought a property in Queensland 15 years ago. It did nothing for the first 10 years. They contemplated selling it. I said, no, no, hang on. It'll kick off.

And now it's kicked off and they think, well, I wanted to sell it 10 years ago. I'll sell it now that I've got the growth. So I certainly think that's the case. But absolutely, the holding costs alone have risen substantially.

I did some work on this recently where I used to assume 25% of gross rental income for holding costs, which are maintenance and management and insurance and council rates and all those sorts of things. Now it's 30% or 35% of gross rental income.

So notwithstanding, interest rates have increased substantially over the last couple of years, but the actual holding costs, and it's naturally going to put pressure on people that, you know, might already have had a pretty tight budget. And the PIPA survey said that as well.

Like I think 13% said as a result of higher holding costs, I would consider selling my asset. So we know that happens.

Yeah. What do you think that... unintended consequence right now of this though like all this investors selling and absolutely you would be you know if you're struggling with your home mortgage you've had some good growth your holding costs have run on you you haven't had the income increases you know times are tough

You don't sell your home, you sell your investment property, you get some money in your bank, you sort of recapitalize, you start to enjoy life again. And maybe you buy an investment property in the future, but at least you get through that time.

And maybe you do enter the market, but you don't enter into the capital cities or you enter in more of the affordability part of the market. And also a lot of the investors, I think, are first-time buyers. They would love to buy a home in a capital city.

They might be living in Sydney, Melbourne, Brisbane, but they can't afford it. And so then they go and buy an investment property in Adelaide or Perth, et cetera. So they're not long-term investors. So- How do you think that this really changes the rental supply across our country?

Because what you thought you could rent, say, five years ago is not really going to be the same in five years time. For example, it's really going to shift the dynamics. And how do you sort of see that playing out?

I think everything's cyclical, isn't it, Chris? And we see markets in all asset classes. You see markets that become depressed and then they turn around and become a little bit too exuberant. But I think it's a good observation.

What happens if we've got all these investors flocking into WA and Queensland and that's where the lion's share of the lending is going? that's going to increase rental supply, which is great to solve the, you know, rental crisis.

But it means that, you know, investors are probably selling in Melbourne, for instance, and then maybe reinvesting in Queensland as new investors are going to Queensland. So we've got a deficit of rental properties in Melbourne and then potentially oversupply in Queensland.

But it'll course correct, you know, everything moves in cycles. So If there's a higher vacancy, well, then there'll be put pressure on rents.

I guess it has impact for overseas immigration as well. Like, why would you come if you want to immigrate to Australia?

Most people aren't just going to go straight away and buy a house. They're going to be renters initially. Right. So if we've got a shortage of rental properties in Melbourne, but an oversupply in Brisbane, well, where is that immigration going to go?

And Brisbane, relative to population, gets a pretty decent boost of that immigration. Used to be because property prices were cheaper. I mean, they still are a little bit more affordable, but... Whether that persists, who knows?

So it's probably, it has some, I guess, positive consequences of having a great supply of rental properties, you know, from an economic growth perspective. But it's a problem that needs a solution. And I think rents will continue to climb in a market like Melbourne where supply is reducing.

And that will eventually attract, I think, new investors.

Let's go to Melbourne then. I mean, it's still there. It's going to hit every, you know, property stories about how bad Melbourne is and everyone's just really having a tough time. They already are in COVID as well.

But from a property point of view, it's not the favorite, you know, the lucky star, right? What's happening on the ground now, right? Like I think is confidence returning? Are you... Because it is a kind of cyclical play.

We're actually seeing investors actually wanting to buy Melbourne because they're seeing around the traps and go, it's good affordability. But what are the locals feeling and how is the market changing?

Well, referencing that PIPA survey, I think the results were they were most optimistic about Melbourne. And interstate immigration figures were, migration figures were released today and Victoria is now positive in terms of interstate migration.

Normally, if you look at the longer term trend, We're normally negative 1,000 people. New South Wales, negative 5,000 people per quarter. And then Queensland's positive 6,000. So that's the long-term trend. So for Melbourne to be positive, that's actually in a good position.

The market's patchy down here. You could have a sale. I had a sale a couple of weeks ago for a client and they got a couple of hundred thousand more than I thought they would get even in an optimistic standpoint.

And then we've had a couple of clients purchase as well recently, and they've been able to buy for less than what I think the property is worth. It's intrinsic or technical value. So it is patchy. You know, there's not a lot.

I mean, there's more stock coming on, but you wouldn't want to buy all the stock that's coming on. So in terms of their really good quality blue chip areas, most people, you know, if they don't need to sell, they're not selling in this market.

What will be most interesting, because there's been an uptick in listings, so we're only just sort of into that sort of spring market. It'd be very interesting to see what happens over the next couple of months and whether that puts pressure on prices as well, which I wouldn't be surprised if it did.

But I think that there's a greater chorus of expectation that, you know, the government needs to change or government policy needs to change. And so I think we're getting, if we're not at the bottom, I think we're getting really close to it. There still might be a little bit more pain to come.

It's very hard to pick these things, of course. But I think if you look back in five years' time and you bought at the end of 2024, I think you'd be pretty happy that you did.

Yeah, there's been a lot of legislative change in Victoria and the tenant reform, land tax, you know, it's been well known, I guess, across the country that Victorians seem to have been the worst hit when it comes to government intervention.

But it's interesting that, you know, you've got investors leaving. You can understand why some may buckle under that financial pressure, but it is so interesting. I noted that as well in the PIPA survey that it's the contrarians, you know, seem to pick Melbourne as the place to be. And

To be quite frank, if I was investing probably in the minute two, I'd certainly be looking at it as well. Certainly, if Melbourne is for the contrarian investor, Perth at number two in terms of best place to invest is certainly for the popular vote.

Personally, I go more contrarian every day of the week.

Across the country, we're going to get more tenancy reform. We're going to get more legislation that some perceive to be really anti-investor. I actually wouldn't necessarily give it that title myself. All of it, that is. And

I guess, what conversations do you have with your clients in terms of, okay, you're going to have cash flow pressures and you're going to have increasing compliance costs as well with these updated tenancy laws. What should property investors be focusing on to ensure that they make good decisions in the light of that?

Capital growth. Of course. Because, you know, if your property is going to grow, you know, two, three, four million dollars over the next few decades, do you really care about putting ceiling insulation in that cost you $5,000? I mean, it's a pain in the neck.

And it's a ridiculous policy by the government without, you know, providing any sort of assistance or compensation to investors for doing it.

But at the end of the day, these improvements that we're making to property in terms of heating and air conditioning and insulation, all those sorts of things, at the end of the day, it's improving the asset.

And you're then making sure you've got an asset that's up to standard, so it should then improve the rental income and minimize vacancy. So look, we don't want the government dictating to us about what to do with our investment properties. And I think most landlords are doing the right thing.

They want to provide decent rental accommodation, notwithstanding because it's a good thing to do, but because it maximizes their financial outcomes as well. But at the end of the day, these things are going to change.

And I say to my clients that at the end of the day, 90% of rental accommodation in Australia is provided by private investors. The only way Australia can grow and therefore provide housing for renters is to attract more private investors to the market.

So it'll come a time, I don't know when it will happen, but it'll come a time when they'll have to do something

particularly say in melbourne for instance they'll have to do something to attract private investors that could be something as simple as a government coming out and saying we're not going to change any rental laws for the next five years or something like that just to give people confidence to come into the market i don't know what it's going to look like but they're going to have to do something to attract investors because economies are reliant on private investors to provide that rental accommodation

I mean, investors hate taxes, right? And so in Victoria, changing the land tax absolutely has to impact investors, right? Because a lot of investors go, I'm not going to pay land tax. I haven't hit the thresholds because I haven't got any properties there. And so I'm not considering that.

But actually, no, no, in Victoria now, basically you are going to pay land tax, particularly if you're entering the housing market. And you're going to be paying it on all your land because the threshold is basically zero now.

So, you know, that is definitely something they could unwind, but it's a recent change as well, right? So it's very anti-investment down there, but it's also on the second home market in Melbourne. Have you seen some...

You know, I guess people in Melbourne that have had to sell their second homes who have just said, look, I just can't hold it right now. I just can't justify paying this big land tax every year. Plus, I've got my mortgage. Plus, I've got my home.

Plus, I've got to pay the kids' private school. I'm just going to have to let go of that portsy house.

We sold, my wife and I had a place down the coast that we sold in early 21. Thank God we did. Nice timing. Perfect timing. Rub it in people's faces there.

Did really well out of it too. So that was great. Anyway, so we keep a watch on the market just because, well, I mean. You want to gloat. We want to gloat. That's right. Yeah. Also, I wouldn't discount the probability maybe of going back into that market anyway, whatever.

The listings in those markets are huge. There's a huge increase in listings. But land tax is insidious. It has a lot of... implications. I even have a client that has had a business, he owns a business premises in Collingwood. He's owned it for decades.

Well, he's going to sell that because the land tax bill is 150 grand or something like that, which is a big hit to a business that employs I think about 40 people or something like that, and he's going to move somewhere else and reduce his headcount as a result of that.

So, you know, there are sort of flow-on effects. But the other sector that's really hurt by the land tax are people that bought sort of investment-grade apartments, you know, those older-style apartments, maybe 10, 12 years ago, that have a relatively low land value, so would have always been under the threshold.

They've seen very little growth to no growth over the last 10 years just because that sector's underperformed. And then now they're being hit with land tax. So they've got this property, they're going to spend money on it to keep it up to standard with all the tenancy laws.

They've had no capital growth and now they're going to pay some land tax. It's actually a bit of a surprising policy too from a Labor government to say we're going to spread the burden

across the bottom end of the market rather than the top end of the market which is what you'd normally expect so it's probably as a government that's going to come into power it's probably an easy win to scrap that levy um so those people aren't paying any more land tax

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That's, yeah, it is quite astounding that they, you know, put such burdens on investors. But the thing is that there's this argument and, you know, I know it comes out with the PIPA survey as well, is look, you know, of the properties that were sold, only 35% went to other investors.

Therefore, I can't remember the exact numbers, obviously 65% goes to other upgraders, downsizers or first home buyers. And so... You know, a lot of people argue and say, well, that's just, that's net zero.

You know, I mean, at the end of the day that those people were living somewhere, they might've been renters and then they vacated a rental in terms of moving in or whatever.

And we don't have good data around that because we do know that a lot of first home buyers aren't necessarily renters before they buy. So it's not necessarily doing that.

But there's not a lot of, I know there's not a lot of sympathy for investors in a lot of quarters because it's basically, well, we don't have enough supply, right? So we don't have enough properties. So therefore, why should investors be able to buy them?

The owner-occupier should be buying them, not the investors. And so, you know, I've got some sympathies for some of those arguments. At the same time, it's like tenants do need somewhere to live, you know?

And so it's like, it's okay for owner-occupiers to have housing, but it's not okay for tenants to have housing, you know? So that's another way of looking at that argument. I mean,

It's a bit of a movable feast, you know, and depending on which side of politics you're on as to whether you're shouting from the rooftops one thing or the other. But I find that both arguments tend to forget the opposite side. The opposite side is intrinsic to the whole conversation.

What are your thoughts on those numbers that are bandied around to say that we, yeah, and you're right, we do need mums and dads investors. We need individual investors.

And I'm not suggesting they buy the sorts of properties that need to be built in order for them to invest either, but we've got this problem of supply. And so this whole argument is really quite complicated, isn't it?

It's a very costly problem for the government to solve by themselves, whether we're talking own-occupy or investor. If we want just more housing, how do you solve that problem as a government? Shared equity, all these sorts of things.

It's just an incredibly expensive way of doing things. We know the government isn't so economical at the best of times, and it would just be a complete waste of taxpayers' dollars. Whereas if you just push it back to the private sector and let the market take care of it.

Well, I think that's a better way to go. And therefore, if there's an influx of rental properties, a supply of rental properties, and it's too much for the market, well, simple. Rental values decrease, vacancy increases, the market will get the point, right?

Well, I guess that's what happened, though, in Brisbane and Melbourne in particular, and even Sydney to a degree, before COVID, right? Yeah. That sort of happened, but now the pendulum's swung the other way and the market's not taking care of itself.

Yeah, that's right. I think that's the best measure, you know, because not everyone that could buy wants to buy, right? There needs to be a choice. I might decide for a variety of reasons that I'd much rather be a renter than a property owner. So you do need that supply.

Plus, also, if you want to grow your population, the people that move to your state or move to your geographical area won't want to buy straight away.

And so if you want to accommodate and attract that growth, you need to be able to provide housing and rental accommodation is the best way in order to do that.

So I don't necessarily think there's a potential downside to, if you could magically wave a wand and open the floodgates to a lot of investors entering into a market, other than prices becoming overcooked or something like that. I think the market will sort that out.

If there's too many rental properties, the market will sort that out. Investors will leave, returns will compress and those sorts of things. But I think you want to...

We're not going to be able to build enough housing and that housing isn't going to be in the geographical location where people might want to live either.

So you might need to do things to improve new supply of new housing, but you must certainly, a key piece of it needs to be how many private investors do we have in the market providing rental accommodation? That's key for economic growth for a lot of different things.

Do you think, Stuart, I mean, coming into this next election, right, at the federal level, there is going to be these investor stats. And, you know, we are seeing prices go up, right? And who those investors are, you know, a lot of them are first-time buyers, which we said.

A lot of them are people who have never invested before. So it looks like there's this investor frenzy, but that's on the backdrop of a lot of investors leaving. So if you looked at that one measure, which we've spoken about today,

You could take an argument and say, oh, look, investors are running rampant. What we need to do is slow them down. We're going to put a cap on investor lending. We're going to put caps on interest only loans or we're going to change negative gearing.

And what we're going to do is try to encourage more first home buyers into the market with interest.

you know access to super etc so do you think that that's that dynamic is potentially going to play out next year you know because it's the whole super conversation um is a big one next year as well because you've got that sort of three million plus limit um how are your clients feeling regarding that and are you seeing behavior change obviously it hasn't gone through and hasn't been passed yet etc but like how are you they get quite concerned around it and are you seeing them shifting their investment philosophy

No clients made any changes as a result of the $3 million cap, and we probably won't make any changes until it becomes law, of course. And we've got some easy solutions to move the money out into other environments, whether it's company or trust, that's going to deal with that.

So I don't think it's that big a deal. I mean, it's something that you'd prefer not to do, but it's not that big a deal. Look, I think the biggest problem, because you do look at those aggregate numbers, you go, well, investor activity is pretty high.

We don't need to make any changes here. And certainly APRA would look at it and go, well, why would we reduce the 3% buffer? That's only going to further stimulate it. So I think at an aggregate level, it's not going to attract very much attention.

But the bigger problem is the current prudential regulatory settings with respect to borrowing capacity. And I don't think it'll be an issue next year.

But I think it's insidious and I think you won't really see the flow-on effects for locking lower income or even middle income earners out of the property investment market for many years. But it's a problem that does need a solution.

It's just whether, you know, the government's not going to attract the government's attention because it's probably not going to win them any votes initially. Right. but it's a, but it's a problem, as I said, that it's, it's just going to creep up on us.

And, you know, I think it's a, it's a real issue when you've got a big bank saying we're lending to people that earn $200,000 or more, and we're not lending to much to anyone else is a, is a real problem.

Are you seeing appetite for a super lending increase? I would say we absolutely have seen it over the last few years. Like I thought it was dead and buried and writing was on the wall. The bank pulled out, um,

And, you know, there were some brokers that did a lot of lending in this space. And to be honest, the markets probably saved them, to be honest. Just that the, you know, all the rising tide lifts all shit. You know, I don't think there's been too many catastrophes with the high density.

And, you know, when they're entering a lot of the house and land packages and Their board of sort of building costs have sort of saved them there, right? And that under supply.

So have you seen that the investor lending becoming more and more of a, particularly into resi, you know, clients coming to you and say, hey, you know, I've got some money in shares, but, you know, can we look to leverage it into property?

We don't get asked about it very much. We don't recommend property inside super very often either. And I reckon we don't get asked about it very much just because share market returns have been so strong over the last two, three, four, five years.

So I think if the share market was to cool down and the returns weren't there, I think people would be asking about it a lot more. The whole super and property thing, you know, I tend to like to have shares inside super and gearing outside into property.

And so I tend to think about shares versus property as gearing versus no gearing. Yeah.

I'm working on a client at the moment that has a couple of commercial properties inside Super and he's got himself into a situation where he kind of has to sell one now. Whether he wants to or not is a completely separate issue. He needs to start paying a pension.

and need some better diversification in there. So I think that's the problem is that property is a very lumpy asset and it can make it really difficult then to plan around that for super. Not impossible if you're ahead of it.

So if you know, okay, I'm going to do this over the next 10 years, then great. But a lot of people in property tend to be for the now, not really thinking about the consequences in 10 years time. And that's problematic inside super because of all the rules that you've got.

Yeah. Just in terms of that, you know, higher level of investor borrowing at the minute, I would imagine that people must be taking a position on where they think interest rates are going to go. You know, there's sort of anecdotally I talk to people that say, oh, I'm going to buy now.

I want to get in before prices rise because when interest rates go up, prices will rise. I mean, we know that that's not necessarily automatically the case. We know that, but not everyone does know that. It seems logical.

It's like when interest rates rise and prices must fall, so therefore the opposite must be true, but neither actually are true, as we know.

Um, but there, you know, you had a recent podcast episode on, on Investopoly around, I think it was four things, you know, four factors to, or four inputs, I guess, into the, into thinking about interest rates. I thought it was really interesting what you said about the reserve bank and jawboning.

And so, so while I've heard that term jawboning, actually, I love that term. Um, so what position do you think people who are borrowing to invest now are taking on interest rates and the direction of interest rates?

Well, just reading this chart a little bit better, 70% of investment lending by CBA over the six months to June, end of June, went to people on incomes of greater than $200,000. And about 20% to greater, so this includes 20% to greater than $500,000.

I don't think they really care about interest rates too much. I think they make friends with this is the interest rate setting today. It's affordable for me. It's probably going to be cheaper in the future. But as long as I can stomach it today, then I'm completely fine with it.

And it's people on lower incomes, I think, that might be thinking, oh, well, I'll wait for a couple of rate reductions. That'll make it a little bit easier for me then to get into the market. And again, that's the problem. That's why interest rates are a bit of a blunt instrument.

Of course, they really hurt people with very high indebtedness or lower incomes disproportionately to the higher income earners, which is problematic. but I don't know what you can do about that. Other than maybe having a different rate of GST for luxury items.

I think that might make monetary policy a little bit more effective in these sorts of situations. But apart from that, I don't really have any other suggestions on how you can improve that.

I mean, when you talk about the other ones who have benefited from high interest rates, right? You think about the ones who have

properties are paid off they're in cash you know their shares are doing well they've got lots of their rents have gone up on their investment properties um the boomers the ones that are spending money at the moment let's blame the boomers but i mean ultimately though i do think they are giving it away what are you saying stewart like the family wealth transfer we're saying in sydney is ridiculous like it's crazy i haven't paced those in the last week it's still blown my mind um

And yeah, I was talking multi-million dollar deposits that kids are getting that are entering the market. So what are you seeing?

Because you've got both the younger one coming who's getting the inheritance and maybe the client is your parents and their grandparents aren't your client, but you've also got clients who are in those pools as well, I imagine. How are their attitudes shifting and particularly in the Melbourne market?

I think it's a common concern by parents when they have kids, young adult kids, how I'm going to help them get into the property market. And it's something that my clients that are in that position will talk to me about.

Okay, they just finished uni, they got their first job, how do I get them into the property market?

um and they acknowledge or recognize that or at least they assume it's a lot harder today than what it was 20 or 30 years ago when they got into the property market and so uh it's a combination of gifts um family guarantees all these sorts of things that they can that they can help with but

It was last week I met a client that they wanted to upgrade their home and the parents gave them a couple of million bucks as a contribution towards upgrading that to borrow some additional monies. But yeah, there's a lot of, there's a huge wealth transfer.

And I think over the next 25 to 30 years, the predictions of how much money will transfer are massive. And it'll be interesting to see how that distribution of wealth changes. You know, does it all stay in property?

Or does some of it come out of property and does it all stay in the same geographical area as well? So if my parents owned a property, a huge property in Sydney, what would I do with those monies?

Would I go and buy another similar sized property in Sydney or would I invest somewhere else? So there's some great opportunity there and there's some great planning opportunities, I think, for both the person that's making that gift and the person that's receiving the gift.

But yeah, I expect over the next period of time, the next couple of decades, it's going to be a big part of our business.

Yeah, and it's happening, you know, I guess slowly, right?

Like it's happening earlier, I think, and it's happening, you know, like you say, when the kids are at certain ages, they're giving some now and I'll give you more when, I'll give you some to your brother or sister when they hit a certain age and, you know, they're doing potentially, you know, protecting their money.

They're worried about divorces, et cetera. But I do think there's an attitude shift to help, particularly because they're doing quite well financially and maybe their parents hasn't given it to them until they're passed away, right?

held onto it to the last minute in the 80s, 90s, and they're going, hang on a second, if I hold onto it for another 20, 30 years, that doesn't really help my kids like my parents didn't really help me. Do you think that that attitude is shifting?

Because the earlier they give it down, the more likely it's going to come back into property and the more likely it's going to get leveraged, right? Because People haven't got the ability to make that move from this house to this house.

Yeah, they're going to go more debt, but they also need more money. And so if they don't get the money from the parents, they can't upgrade. And so it's kind of like a chicken and egg. Are you seeing that mentality shift a little bit?

Yeah, a lot. And it's on my list to write a blog about it, about the idea of if you feel like you're in a position where you're going to have surplus wealth, that you could lend that to your children with the idea of getting it back at some particular point in time.

But it is surplus, so if it disappears, well, then at least your own financial situation is still secure.

And the way I'm sort of thinking about that is to say, well, if someone that's just sort of starting out has a million dollar borrowing capacity, but they're just at the beginning of their kind of career building their incomes and so forth, but they really need to borrow, let's say, $2 million.

Well, and the parents had more than enough surplus wealth, lend them a million dollars in time. Given where their career trajectory is going, they'll be able to repay that in the next 10 years just by refinancing with the bank.

And then the parents sort of get the money back and it's only a longevity risk that it is to the parents. So they don't need it for another 30 years anyway, even if it wasn't to come back to them.

And just to think about then, you know, from a parent's perspective, why would I wait 30 years or 40 years when I die to give them the money? It's too late then.

I may as well try and lend the money today and help them get into the property that ultimately is going to be a great investment for them anyway, notwithstanding the lifestyle benefits.

And then when my child is in their 40s or whatever, I'll get that money back and then it will fall into my will and I can do what I want with it.

It's funny. We're also seeing the, I'm not sure if you asked, well, Stuart, the couple that is doing quite well financially, right? And they haven't leveraged up to the nth degree in 2021. So maybe they leveraged up in 2018, 2019. They didn't have to do a huge reno.

They've been doing quite well over the last four or five years financially. So incomes have jumped. They've also paid down their debt. And they're in a pretty nice position equity-wise, right? But they haven't really invested because their money went to the upgrade, right? And they didn't have the capacity to invest before.

They're an interesting client because they really want to invest for their kids. They've almost got this house, this forever home. They're not thinking, I'm going to invest for my retirement. They're in their mind. They're saying, I want to get some. And the kids are like under 10.

And they're saying, I want to get something that's going to support them in 15, 20 years' time. Obviously, we're saying, hey, don't just buy one property for each kid, like what they want in 20 years' time. They might not even be living in this city. Who knows what their situation is.

So don't buy something you think they're ever going to live in. Once we reframe them, ultimately, they're trying to build wealth for the kids to get into the market because they've seen how lucky they were because they were able to enter. If they tried to enter now, they wouldn't be able to.

Are you seeing that as well where, you know, she'll be right, mate, the kids will sort themselves out in 15, 20 years' time to actually, no, no, no, we've really got to take action here?

Yeah, I think it's always a key impetus for people to reach out to get advice.

You know, they buy the family home, they start the family, and then they sort of turn their mind to get through that really tough period when the kids are young, the kids go into school, and they sort of turn their mind to, hey, not only do we have to look after ourselves, but now we've got these kids to sort of look after.

And I say the same thing. I say, don't worry about the kids. You just make sure that your financial position is strong as possible because the reality is your kids are going to need different types of help at different stages that are completely unpredictable at this stage.

Yeah.

But if you get yourself into a position where you've got more than, you'll have more than enough money for yourself, so you've got surplus assets, well, then you'll be in a great position to be able to help them in the best way that is to help them at that particular time. Yeah.

Exactly right. Forget about the kids. A property for the kids, each or those sorts of things, I think it's nonsense.

It is interesting, though, that it is property prices and the, I guess, the difficulty in getting into the market usually triggers that desire to invest. passed down wealth, even a 10-year-old, right? And we have the same conversations with a lot of our clients as well.

It's like if you're trying to make one property do too many things and we really need to be looking at really what you want that property to do. And a lot of people, there's a behavioral bias around this, but I can't think what it is at the minute. But it's around...

To justify an investment decision, if you couch it or cushion it with all these other justifiable, really good reasons for why that's a good thing to do, then it makes you feel good about it.

I'm going to buy it near Sydney Uni because I'm sure one of my kids will go to Sydney Uni and that sort of mentality. And we're always saying the same deal. It's like, just get yourself good assets. Just make good decisions, get good advice.

Whether you buy a property, whether you don't buy a property, it's setting yourself up so you've got flexibility and options at that point in time when you do know what you need.

Stuart, we love to ask about property dumbos, as you know. Did you come armed with one?

I did.

Excellent.

I did. A client I'm working on at the moment that I think the way that I would frame the dumbo is just complete lack of planning. And, you know, I've written a lot about loan structuring and planning and all those sorts of things. So it really goes to the heart of this.

Unfortunately, the client's done, well, fortunately, I should say, the client's done really well at a property. Unfortunately, without any planning, he's got himself into a situation where his loans have come off fixed rate terms.

They're now flipping over to principal interest, and he's going to have to sell an asset. It's to the point where, unfortunately, there's almost no way that we can, we'll be able to refinance the debt back to interest only. Which is a real pain, really, for him.

Doesn't really want to sell them, doesn't really need to sell them from a cash flow perspective. Has enjoyed the fact that he's owned most of them for more than a couple of decades, you know, so they're really doing well.

And knows that if he held them, they're in Melbourne, so he knows if he holds them for another decade, he'd do even better. Yeah. But it's just that lack of planning to, you know, that foresight to think about, well, debt management and borrowing capacity and all the loans are cross-securitized.

It's just a real mess. And the consequences, well, he's got about six properties, I think, will have to sell probably, certainly one, probably two to sort of unwind it, which is unnecessary. He'll be fine. He's got plenty of wealth.

So, the consequence isn't going to be dire, but it's a great case study, I think, for future planning. And I think a lot of property investors, as I said previously, it's very much in the now. If I can borrow another $200,000, if I can borrow another million dollars, I want to do it.

I'm going to go and buy the property without any real foresight to say, okay, how am I going to manage this once I do have to pay principal interest? What am I going to do then?

And there could have been things that he could have done leading up to this date, you know, maybe many years ago to avoid it and to at least stagger some of those interest-only periods so you don't have all the risk when all coming off all at once.

You know, there's lots of things he could have done. And yeah, that's my Dumbo. Yeah.

Yeah, I mean, as you say in that story, I can think of multiple clients. I think this is where the rise of private lending has come in the last couple of years where the big banks, you know, because they would go to the big banks before, right?

Then they would go to the non-banks. And what we're saying is like in the last six months, I think it's also because our business has changed a bit and we've got different brokers now, different people who are bringing different type of clientele to our stereotypical client before.

But yeah, there's a real like, where people are actually going, hang on a sec, my option here is to go to a private lender, pay, you know, 3% above because I'd rather pay 9, 10% interest rates in an application fee than sell an asset.

And yeah, it's, and I think there's quite a lot of money in that type of investing around. There's quite a lot of funds and things like that. But yeah, before the people wouldn't have to go there because they'd be able to get a solution in the banks or the non-banks.

And there's a lot of people in that situation, you're right, where, because capacity is four and 30, 40%, you know, it's hard to offset that with earning capacity. And, you know, particularly those people who have got bigger portfolios, you know, their earning capacity was high five, 10 years ago, right? Like they've,

They're getting to the tail end of their careers and they're finding it harder and harder to refinance.

And so, yeah, I think you're right though, Stuart, is that it's when you're not consciously, particularly if you try to build a big portfolio, if you're not consciously reviewing your debt structure and optimizing and tinkering and building buffers and restructuring and extending loan terms and constantly just buffering yourself and

When the market shifts like 2022 to 2024, those buffers were there, but maybe 2021, 2022 was the year where they could have reset. Even if they released three integrated equity, they said, oh, I don't need it. I've got heaps of, I'm fine.

Just that small extra tinker could have been enough to just support those negative cash flows for another two years and ride it out. But yeah, that, yeah.

Or even in this client situation, I'm not suggesting this could have been Ivan done the numbers. Or if you know that it's going to be a problem in 2024, have a think about what you might want to do in 2020. So what he could have done is sold a property maybe during COVID.

No. when the market was running hot and then therefore dumped a whole bunch of money in his offset account. He wouldn't need to then worry about it and therefore he's only letting go one property rather than two.

But it's really just this foresight of knowing, okay, what is the plan if this thing changes? I know I might have to sell a property in the next five years. Well, if you find yourself in a great market, it could be the time to hit the button on something like that.

It's also, it comes sort of back to holistic advice as well, doesn't it, Stuart? Because I mean, you know, I know people that if they're in that situation and they might choose the property to sell that is, if you've got six properties, which of the ones are you going to choose to sell?

Now, obviously you might, from the accountant side of things, you might look at the one that has the greatest amount of equity to release for argument's sake. But it actually also might be the best asset that you have and that's actually going to be the one long-term you want to hold on to.

So there's a lot of these different levers that you have to play and I find it when I'm doing strategy sessions with people and also when we're doing vendor advisory work, it's like, hang on a minute, is this the one you should be selling? It's a question...

Yeah. I'd hate to pick on this client more, but he said that, but I will. He said, oh, this property is the tenant's lease is about up. They actually give a notice. Maybe I'll sell that one.

That's the one. Okay.

Yeah. Maybe we just do a better analysis to work out which one we should sell rather than just picking that low hanging fruit.

Yeah, but it's hard though, right? When you're in that position, you have to sometimes sell your best one because the other ones, particularly the market is not great, hence why you're having to sell because borrowing capacity is tight, the market's not great, right?

So at the worst time, your worst property is underperformed, your better one holds its value. That's usually where your equity is. And that'll solve the problem. It will solve, absolutely. In the short term. Yeah, and then you're stuck with your duds when the market bounces.

I had exactly this conversation with a client yesterday, exactly the same sort of conversation. And the problem is that it is really difficult for people to get good holistic property advice. Stuart, the lovely thing about you, you really get property.

Everyone can give property advice. Sadly, it's unregulated. Therefore, you can go to an accountant who will give you property advice. You can go to a financial planner or mortgage broker that will give you property advice. You can go to a property manager who will give you property advice.

is unusual to find a property person. I'll put my hand up here because I have a sensibility around those other things. And my little antenna goes off and goes, whoa, hang on a minute. You need to go and consider this, this, this, this, talk to these people. But there's no one-stop shop.

And one-stop shops are dangerous in the property world, let's face it. But there's no one-stop shop to get access to all the things you need to be thinking about. So it's really easy to be a dumbo in this regard.

It is. It is. And maybe that's why we're talking about it to give people a little bit of forewarning to know that it requires planning. Most things require planning and something that's so important and so valuable as property. I would argue, you know, it doesn't take a lot of time.

You don't need to labor over it for months and months, but you just need to come up with a plan.

And I think once you know you need to come up with a plan, then you can go and talk to a whole bunch of different people and maybe even talk to someone that you trust that's already been through that path.

You know, if they're already an investor and so forth, they can point you in the right direction. But it's not being caught out by these things because I'm sure this client would have addressed it five years ago if he knew it was going to be a problem today. Oh, absolutely.

It's just about knowing it's the potential problem down the track.

That's the thing, isn't it? It's what we don't know, what we don't know. And then it's like, oh... Oh, just not a very nice sound. Thanks so much, Stuart. It's been a really great chat as per normal. We really appreciate your time today.

Thank you, Stuart. It's been fun. Thanks so much. Talk soon. 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.

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