The property poker game

with Gareth Kent – Director, Preston Rowe Paterson

There are a lot of forces playing in the perpetual poker game that is property.

Undoubtably the biggest player to date has been inflation. Forcing the Reserve Bank (RBA) to up interest rates, inflation has been a dominate force that will just not be tamed. But thankfully, Inflation might have run out of chips! Throughout the June quarter inflation dropped from 7 per cent to 6 per cet and is on a downward trajectory. This will no doubt have an impact on the decision the RBA makes next Tuesday, and hopefully we avoid another rate rise, a reprieve for a strangled market? I think the peak cash rate will now be 4.32 per cent.

Some of the key property factors influenced by inflation pressure over the past 18 months have been the cost of new dwellings, which peaked last year at 21 per cent, but has now slowed to 7.8 per cent. I have read articles suggesting that it is the easing in material cost pressures that has impacted this slowdown in new building costs. However, I have also spoken to many people who purchased property to build their homes and have cancelled the build contract or put the project on hold, due to the increase in the costs. Labour supply remains a challenge and while the government is paying $300,000 per annum to tradies on projects such as “The Tunnel”, there is little hope for the small business operators and builders to compete. The labour market remains very tight, construction times are still well out.

We also have a lack of stimulus in this sector, the Regional First Home Owners Grant ended in June 2021 and was not replaced. The people looking to use this grant have just gone back to renting, and this has raised another concern. The same inflation report indicates that rent inflation rose to its fastest pace since June 2009! This is obvious locally, with long waiting lists for rental property, and some tenants resorting to bidding wars to secure a property. No new supply equals more demand for existing housing!

This has stirred the attention of that old player in the game. I speak of course of the state government or rather our Premier, Daniel Andrews. A very active player in this game since his re-election! In the past few days they have announced a plan to cap rents for existing tenants for two years. Now there is no dialogue around what the cap will be set at, but if for example it is set at CPI, this would mean a rise of 6 per cent on current CPI rates. Now this concept isn’t new, most commercial properties have set annual review rates at either CPI or fixed rate adjusted annually, within their term. However, these are not commercial properties, the Residential Tenancies Act prevents a landlord from contracting a tenant for a period longer than 12 months in Victoria. Those laws have been strengthened in the tenant’s favour so much that a tenant can almost leave whenever they want, whilst a landlord requires a notice period. Landlords also now have onerous responsibilities enforced by law regarding the properties and choice of tenants. There is already an exodus of investors from the residential market due to the previous changes. I also note that the plan is to apply the rent cap only to existing “sitting” tenants, i.e. if you re-let the property to the market, you can put it up to whatever you want. This is contradictory to the Residential Tenancies Act, as it is encouraging landlords to kick out sitting tenants and re-advertise the property, taking away the security of tenure that the Act has tried to strengthen.

In this current term the Andrews Government has unloaded tax hike after tax hike on the property sector and small businesses alike. Changes to land tax, converting stamp duty to an annual levy, the creation of the Windfall Gains Tax and the removal of thresholds for Payroll Tax from July 1, 2024. This State Government wants the whole pot this round and is going all in!

So when should you play your hand? I am seeing lots of opportunities in this market. For example, two identical properties in Isabella Street Geelong West. Property 1, sells in November 2021 for $1,240,000. The peak of the market. Property 2, sells in April this year, for $961,000. Same street, identical houses of the same period. The cheaper one had a bigger block!

These interest rate rises are starting to pinch! In some areas and locations like Geelong West, there are opportunities for shrewd players. But play the game as you see it, as the song goes: ‘’Know when to walk away, know when to run!’’