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Issue 26 > September 2016

Editorial

Welcome to the six-monthly edition of The Buyer’s Advocate.

Melbourne’s population has steadily increased resulting in it joining the ranks of the world’s super cities. This transition has slowly occurred over the previous 20 years. Unfortunately the hallmarks of this change aren’t necessarily positive.

An increasing strain on amenities, particularly public transport, the proliferation of high rise apartment construction, an increasing amount of residential sub-divisions being built on the city’s fringes and a loss of green open space are some of the by-products of this change.

An example of a project that is inappropriate is the sky rail project on the Cranbourne-Pakenham railway line. Constructing kilometres of concrete pylons that over shadow residential neighbourhoods is not what Melbourne is all about.

These changes have added a further layer of complication for inexperienced investors. It is more important than ever for investors to seek independent professional advice when buying  real estate.

Understanding the ingredients of what constitutes the optimum investment is vital as the capital growth gap between an average investment and the optimum investment is substantial.

A buyer’s advocate should be 100% independent so that a property is selected strictly according to a client’s criteria. Monetary gain or any other form of remuneration shouldn’t have any influence when assessing the suitability of a property for a client. In this edition I explain how many organizations within the real estate industry, despite claims to the contrary are in reality “independent sometimes“.

Assessing the success of a residential property investment is quite simple. It should double in value in approximately a 10- 12 year period. Many investors place too much emphasis on rental return. In this edition I explain exactly why capital growth is king.

The regulations on underquoting are changing once again. However in reality there is no real change. I explain why underquoting has occurred for so long. At last we are seeing some action taken by Consumer Affairs Victoria.

Building regulations stipulating when it is mandatory for a property owner to engage a building contractor are outdated and unrealistic. This not only effects the real estate industry, it has repercussions for all property owners. I explain the current situation and what needs to change to make the rules more realistic with current times.

As usual in this edition included is my regular article, Market Snapshot. Market Snapshot gives an up to date review of the Melbourne property market. I explain how the market performed in the first half of 2016 and give my opinion on what will happen in the second half of the year.

Finally, if there is a topic that any of my readers would like covered in the next edition feel free to contact me.

Regards

Peter

In this issue:

Independent sometimes

Not influenced or controlled by others in matters of opinion, conduct, etc; thinking or acting. This is the dictionary definition of independent.

Many organizations in the real estate industry make false claims about being independent.

Even the bastion of the “Independent. Always” The Age newspaper can at best in reality be independent sometimes. When there are large sums of money at stake unfortunately the promise of “Independent. Always” invariably goes out the window.
 
Newspapers and their associated digital media rack in enormous amounts of money from real estate advertisers. As one regular Age property writer believes, he has to “be careful” not to upset this lucrative stream of income.

If your opinion or comment is affected or influenced by the amount of monetary gain then you are not “Independent. Always”.

Some buyer’s advocates falsely claim to be independent. The word “independent” is written all over their web site yet they are far from independent. Many engage in a service known as vendor advocacy.

Vendor advocacy is a service offered by most buyer's advocates. The service involves a buyer's advocate acting in conjunction with a selling agent to sell a property; they share the sales commission that the vendor pays.

This arrangement is not conducive to a buyer's advocate selecting the optimum property for his client in his role as a buyer's advocate.

Will the buyer's advocate favour a particular selling agent’s properties when selecting a property for his client?

Will the buyer's advocate negotiate rigorously on behalf of his client against the selling agent that assists him earning a substantial fee through selling property?

When reviewing his client’s property portfolio will the buyer's advocate advise his client not to sell a property, if that is in his client's best interest, knowing that if he does a substantial fee will not be made?

The reality is because of this cosy relationship the buyer's advocate’s client will lose out.

Some buyer's advocates involve themselves in joint marketing initiatives with selling agents. For example using the selling agent’s website to advertise breakfast information sessions.

There is no such thing as a free lunch, or in this case a free breakfast. It is likely that the buyer's advocate will give the selling agent preferential treatment when the opportunity arises to the detriment of his client.

Buyer's advocates who claim to be independent should be at arm’s length from selling agents 100% of the time.

Organizations who claim to be independent cannot be selective as to when they are independent based on opportunities of earning revenue.
 
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New underquoting rules

New legislation aimed at curbing underquoting is due to be passed later this year. Unfortunately the new laws are essentially a duplication of the current law.

Currently the law says that an estimated selling range must be stated on the authority between the selling agent and vendor. The selling agent cannot advertise an estimated selling price below this figure. The selling range must be based on recent and comparable sales.

Theoretically this is supposed to stop the selling agent underquoting.

Selling agents are able to get around these laws in either of two ways. Firstly, by deliberately stating a selling range on the authority that is artificially low. This then allows the selling agent to underquote the property on advertising mediums during the marketing campaign.

The second way they get around the current law is to not quote a sales range in writing on advertising material. The selling agent would then only make vague verbal representations to buyers about the likely selling price of the property e.g. “there is buyer interest around $500,000”.  These verbal representations are of course deceptively low.

The essence of the new regulations is that selling agents must produce an information sheet for each property they sell. An estimated selling price must be stated on this document.

Unfortunately, there has been no real change to the law. The only change is where the estimated selling range is required to be stated.

The new regulations give selling agents the same opportunity to rort in exactly the same way that is currently occurring.

The only effective way of stamping out underquoting is for Consumer Affairs Victoria to carry out audits as to the veracity of the estimated selling range derived by the selling agent. This is achieved through comparisons with accurate recent and comparable sales data.

Astoundingly over the last 10 years there have only been a few prosecutions for underquoting despite it occurring on a weekly basis in Melbourne.

Historically the various Ministers of Consumer Affairs have been content with enacting superficial changes in regards to real estate industry legislative reform. The only real way of changing behaviour is to issue fines for substantial and deliberate incidences of underquoting.

It appears the state government has finaly run out of patience as over the last few months a number of investigations have been initiated about alleged occurrences of underquoting.
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Property improvers beware

Some property owners are unwittingly breaking the law when undertaking home improvements.
 
In Victoria building regulations state that if total works are greater than $16,000 there must either be a major domestic building contract in place between the property owner and a registered builder or the building owner must register as an owner builder.

If the building owner registers as an owner builder then they are only allowed to complete one project every five years.

Domestic building insurance must also be taken out for work worth more than $16,000.

This law applies to property managers who are organizing works on a client’s rental property. In other words it is illegal for a property manager to organize maintenance or improvements over $16,000 without engaging a registered builder or the owner registering as an owner builder.

The cost of tradesmen and materials has risen steadily over recent times so an improvement or maintenance project can and does regularly exceed $16,000.

Regulations in Victoria governing when it is necessary to use a contract, when it is mandatory to engage a builder and what constitutes building works are covered in the Domestic Building Contracts Act (the Act).

Property owners should pay particular attention to sections 5 and 6 of the Act. This section outlines what is considered building works.

This part of the Act is very general as to what exactly constitutes building works; “the renovation, alteration, extension, improvement or repair of a home”. It seems to include cosmetic improvements such as landscaping and painting.

If the law were to be followed to the letter then merely undertaking substantial cosmetic improvements such as painting and plastering could necessitate engaging a building contractor or registering as an owner builder as the cost of these works would invariably exceed the $16,000 threshold.

The necessity to engage a builder or register as an owner builder should in my opinion only come into effect where structural works are being undertaken.Cosmetic upgrades should not necessitate the need to engage a building contractor or register as an owner builder.

If in doubt as to when it is mandatory to use a building contract or engage a building contractor property owners would be well advised to seek advice from Consumer Affairs Victoria or a lawyer that specializes in this area.
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Capital growth is king

When it comes to residential property investment capital growth is king. Exceptional capital growth as against rental return will put an investor hundreds of thousands of dollars in front in the medium to long term.

Furthermore exceptional capital growth allows an investor to accumulate equity. This makes it possible to purchase additional assets.

In my experience chasing above average rental return seems to be a preoccupation with overseas investors. Investment strategies that produce the optimum result outside of Australia invariably don’t work in Melbourne. 

Melbourne is a unique market place with a unique set of dynamics that drive capital growth. Melbourne has been and is one of the top capital growth performing cities in the world.

That’s right Melburnians, you’re standing in it.

Some investors can be put off by the fact that the initial rental return of the optimum performing capital growth property in Melbourne is a meagre 3% to 4 % of initial capital outlay. However when it comes to residential property rental return is the cream not the cake.

Choosing the optimum capital growth performing property will give investors a positive outcome in regards to rental return. A fundamental of residential property is that capital growth underpins rental growth, not the other way around.

An optimum performing property asset is by definition in high demand by both buyers and tenants. Therefore by choosing a high growth property asset investors can expect regular rent increases, high quality tenants and low vacancy periods.

By choosing a high growth asset investors will over time achieve an exceptional rental return.

All the sweet tasting jam of residential property investing revolves around making capital growth king and all other important determinants of a successful investment will be fulfilled as a result.
 
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Market snapshot

During the first half of 2016 we have seen the Melbourne property market continue to perform at a high level. It almost seems that it is beyond a downturn given the fact that it is driven by a wide variety of demographics.

The last significant downturn was during the global financial crises, almost 10 years ago. Even then the market bounced back within a short period of time.

Melbourne's median house price has seen solid growth in the June quarter, up 3.6%  to $725,000. 

The average clearance rate for Victoria has continued to hover between 65% and 75%. Last year it was consistently above 70%.

In relation to the rental market the proportion of vacant properties dropped slightly over June in metro Melbourne to 2.7%  while rising slightly to 2.9%  in regional Victoria.

Following its September 2016 meeting, the RBA decided to leave cash rate at 1.50% 

According to the RBA, economic growth is expected to improve steadily to more than 3 per cent by 2017.
 
The unemployment rate in Victoria fell to 5.8% in May. Consumer prices in Australia rose 1.0%  through the year to the June quarter of 2016 from 1.3%  in the previous quarter.
 
The short term outlook for the Melbourne market appears sound. It would certainly take a significant event to impact the highly sought after quality segment of the market. The key for investors is to select wisely.

A selection that has 90% of investor grade attributes will still underperform significantly compared to the optimum investment selection.
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Note: Readers should not act solely on the basis of the material contained in this newsletter. Peter Rogozik Property Consulting expressly disclaims all liability for any loss or damage arising from the reliance on this document.

Copyright © 2013 Peter Rogozik Property Consulting
Licensed Estate Agents ~ Registered Building Practitioners

Level 27, 525 Collins Street 
Rialto South Tower
Melbourne, Victoria 3000
Australia

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