We’re currently at the halfway point of what I think will be — yet again — the greatest real estate boom of all time.
Just like the last time — and the time before that.
But even bigger this time. History suggests this is likely.
As an Australian resident, you are in a front row position to take advantage of it.
In terms of capital growth, Australia — Melbourne and Sydney specifically — cannot be rivalled.
In every real estate cycle Australia has witnessed, Melbourne and Sydney have consistently experienced the greatest gains over the course of the cycle.
But Melbourne has historically been the winner.
I believe coming out of this mid-cycle slowdown, some of the biggest gains will be had in Australia’s second biggest city.
This doesn’t mean you can’t benefit from investing in the other states. You can. In fact, Perth is probably my top spot in this particular second leg.
But I’m sure Melbourne will offer some fabulous opportunities in terms of capital growth. (And, as a consequence, some of the worst for rental yields.)
I know right now it might be hard to conceive the idea of our market booming again…
But we have a tax environment in Australia that favours real estate buyers and investors.
Negative gearing, halving of capital gains tax, first home buyer benefits such as elimination of stamp duty, generous grants, ongoing debates about allowing first home buyers to dip into their super, banking innovations such as crowd funding for mortgages, the list goes on…
All of this ensures there will be plenty more fuel to fire the real estate cycle back up once this current speed bump has been negotiated.
As for affordability…
Well, if the 18-year cycle plays out, I believe you’re about to see Australian property as affordable as it’s been for many years…and as cheap as you’re likely to see it again in your lifetime.
For real estate investors and developers, this is an exciting time indeed!
Billionaire investor Mark Cuban has the right idea.
He says: ‘If you think you want to live in New York in the future, now’s the time to buy…’
The same, I believe, is true of our ‘blue chip’ Australian suburbs.
If you dreamed of moving to a nicer neighbourhood…but always thought it was out of your price range, you may soon be pleasantly surprised…
The capital growth king
I’ve already mentioned Perth — which could be super strong this time around. But other than that, I know of only a small handful of cities around the world that can present the same capital growth opportunities that Melbourne will offer coming out of this crisis.
Let me give you a few examples from Melbourne’s recent past…
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In May 2016, I purchased a house for an investor 12km north of Melbourne’s CBD in Glenroy for $480,000.
We secured the deal off market, although still faced competition from other buyers that the sales agent had informed.
Sitting on around 650sqm of land, the home was in original weatherboard condition — with an estimated rental of $350 per week.
By January 2017 (seven months later) the home (or more accurately, land — the house was worth little) was revalued in excess of $600,000.
Using the equity, we purchased another property for the investor 15km west of the city (Sunshine West) for $620,000.
12 months later, the price had appreciated over $100,000.
These suburbs — and others I will mention below — still have a stigma attached to them. They are areas traditionally thought of as undesirable ‘poor suburbs’.
However, if you haven’t visited recently, then you will not be aware of the gentrification that has occurred. Gentrification that has pushed some results — renovated houses or larger blocks of land — well over $1,000,000.
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Another example…
In September 2016, I purchased a house on 670sqm of land, 17km north of Melbourne’s CBD in Lalor for an overseas investor.
The appraised rental was $400–420 per week.
We negotiated an off-market deal at $620,000. By April 2018, the same block was worth over $900,000.
Nothing has been done to the home.
It’s simply an example of the real estate boom that occurred in the first leg of the current real estate cycle on select land blocks in Melbourne — and I can site numerous case studies.
Another example.
A client of mine purchased a home in Braybrook (9km west of Melbourne’s CBD) in 2002 for $220,000.
The property — a rundown weatherboard — sat on 580sqm with good development potential.
The block is not walking distance to the train station. But in a good location for local schools and shopping facilities.
Over a 10-year period, the owner did nothing to the property aside from add a few solar panels to the roof. We sold the home for him in 2017 for $730,000.
Land values on select blocks of land have not doubled in the last 10 years or so (as is so often spruiked)…
They have tripled!
I have not witnessed similar rises on any other type of property investment.
Not double-story townhouses, and certainly not apartments. (Although inner ring Sydney, due to its geographical constraints, can offer some exceptions to the rule — and we’re likely to see this again in the second half of the cycle.)
As I’ve said many times, you have to be very careful when purchasing apartments.
Apartments are not necessarily a bad investment. They are good for balancing a portfolio that requires a better yielding investment.
You just have to be careful, that’s all.
Here’s a quick example.
In 2018 I assisted in an investor’s sale of a two-bedroom apartment in Melbourne’s St Kilda East — 6km from Melbourne’s CBD.
It’s a 1970s building with 15 units in the block. The property was purchased in 1988 for $70,000.
It was valued at the time of sale at $420,000.
Not bad, you’d think. But in the 10 years up to when it was sold, the value of this apartment appreciated roughly $50,000.
And over the lifetime of the investment, its capital growth did not exceed 6% per annum.
The power in the land
Had the investor chosen to purchase a house on a block of land in 1988, a few suburbs out for the same amount of money, Clayton for example, 19km south east of Melbourne’s CBD, this investment would be worth well over $1,000,000 now.
If you’re going to invest in Australia in the next leg of the 18-year real estate cycle — and you want to maximise capital growth — you could do a lot worse than to buy well-located land in Melbourne.
But this essay is not just about capital growth.
It’s also about how you can make a lot of money, in a short period of time.
The key to doing that is to develop!
The advantage of land is that you can do SO much with it.
Unlike cities in Europe, we have only just started to infill our suburbs with smaller subdivisions and apartment blocks.
Roughly five years ago, the Victorian government rezoned Melbourne to allow for this.
They — the urban planners and government — decided we no longer wanted ‘sprawl’ and placed a permanent urban boundary some distance around Melbourne’s greater metropolitan area.
Most of the land within the urban boundary was quickly purchased — via options — by Melbourne’s biggest housing development companies. They hold around 12–14 years’ land supply.
It’ll be drip-fed onto the market in ‘staged releases’ to maintain prices. And typically, in small subdivisions of around 350sqm. Not the 600sqm-plus subdivisions that are still available in the middle ring suburbs of Melbourne.
Consequently, for the first time in Melbourne’s history, we are building more up, than out.
Following the rezoning, some owners, sitting on suburban land blocks, won fabulous windfall gains.
Those that had purchased close to rail lines or on main roads prior to the rezoning, suddenly found themselves in ‘Activity Zones’ or ‘Residential growth zones’, allowing for construction of four- to eight-stories (or more) apartment blocks in some circumstances.
The land value immediately appreciated 10–20%
Other blocks fell into Neighbourhood Residential Zones. Stricter development conditions applied. However, potential to split the block into two, or build behind the existing home, still saw opportunities to profit.
Rapid subdivision followed.
And now the only thing disappearing in Melbourne is land — unbroken blocks of land.
The owners of the land are benefiting from capital growth. But the ones really maximising their profits are Melbourne’s savvy developers.
An example.
My team purchased a property for a client in 2016 in a south eastern coastal suburb of Melbourne, prior to auction, for $1,000,000 on a 12-month settlement.
The property sat on a circa 600sqm block of land, with the existing home far enough forward to allow for construction at the rear.
The cost of renovating the existing home and building a new four-bedroom townhouse at the rear totalled around $400,000.
Upon competition, the project was valued at $2.1 million. A 30%-plus return on the initial investment.
The investor now has numerous options. If he rents out both properties, with depreciation included, he will cover his loan repayments. The end value of the block allows him to draw on equity and invest elsewhere.
If desired, he can live in one of the properties and rent or sell the second…
Of course, even if he had done nothing at all to the block, he would have benefited from over 10% capital growth for the period held.
You don’t need to have a lot of money to develop
You can do it too!
Of course, if you are already sitting on a block of land, you don’t have to purchase another.
The previous owner of the above property could have done it alone, by borrowing against the equity in the home and developing the backyard!
Another client of mine went one step further.
He owned a home on 600sqm of land. His principal place of residence was valued at $550,000. He gained approval for the construction of three dwellings. Total cost of construction was $600,000.
The process took around 18 months.
Following construction, the value is now $1,520,000 and he has a positive rental return. Another example.
Recently we purchased a block of land in a beachside suburb 31km southeast of Melbourne that is tightly held and well facilitated. We paid $985,000 for the block. The developer is constructing a mid-rise block of apartments.
The total cost of construction (including development approval) is circa $2.2 million. Once completed, the assessed end value will be in excess of $5.1 million.
That’s a potential 300%-plus profit on the initial cash investment.
Of course, if it were easy, everyone would be doing it. Believe me — many are!
But not all are profiting.
The profit is really in the buying
And there’s nothing more rewarding for me than seeing people come out with life changing profits.
Additionally, it never ceases to amaze me how real estate sales agents neglect to check the details of the zoning specifications, prior to appraising a listing and promising the vendor big profits.
For example, take two neighbouring properties on a similar land size in an ‘Activity Growth Zone’.
It may not be immediately evident that one allows construction of up to four stories, another eight stories. The devil really is in the detail.
Of course…
Knowledge of the 18-year real estate cycle is vital
Knowing where to buy and the timing of those investments is vital as well.
And the media is always behind the eight ball.
As with the stock market, the insiders (usually the developers) know where the gains are likely to be made before anyone else.
For example, the REIV (Real Estate Institute of Victoria) named Epping as one of the suburbs to ‘watch’ in 2018.
However, they were too late!
The median price in the suburb appreciated more than 20% in 2017.
I targeted Epping in 2015.
Investors got in ahead of the crowd and reaped rewards. I can name a dozen other suburbs that did the same.
How much do you need?
Not as much as you may think.
Most investors have $600,000–800,000 to spend. However…
You can do it for less
There are areas of Melbourne that experienced rapid gains in the months before the coronavirus, which still offer homes on sub-dividable blocks for around $500,000.
If you have less — regional areas such as Geelong and Ballarat have also experienced their own mini boom in development, subdivision, and capital growth.
Once again — knowing where to buy is the key.
Of course, the major disadvantage of capital growth is that rents can’t keep pace. Put simply — you can borrow to buy, but you cannot borrow to rent.
Rents are tied to wages and additionally affected by current vacancy rates.
Yields are less than 3% gross in some cases.
Until property prices moderate, demand falls, construction slows, and vacancy rates tighten, rents are unlikely to improve markedly. We may see this happen in the current mid-cycle slowdown.
For those doing a development, following completion, investors often find themselves positively geared.
However, if you are investing in an old house on a block of land, the low rents will eat into your cash flow. Hence why it is important to balance your portfolio with listings that are not all negatively geared.
If you haven’t taken the plunge and invested in real estate — seriously, now is the time to be preparing.
I do believe house prices will drop over the coming weeks and months as a response to this crisis.
But this is expected in a mid-cycle slowdown.
On the other side of this — if the pattern holds — will be a wonderful opportunity to buy prime Australian real estate at bargain prices — and ride the boom all the way up to the next cycle peak in 2026.
There will be many options for all budgets.
Sincerely,
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| Catherine Cashmore, For The Daily Reckoning Australia |
PS: Want to discover more about my new property market eBook and the18-year cycle? Click here find out more!
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