Issue 23 > March 2015


Hello and welcome to Peter Rogozik Property Consulting half-yearly newsletter.

It was only a few years ago when organizations such as the International Monetary Fund were predicting gloom and doom for the Australian property market.

They were saying that Australian property was substantially overpriced and predicting there would be a substantial price correction.

How wrong can you be? As I have always said, when it comes to real estate never take the advice of an economist.

When it comes to the financial industry, shady operators will always have an angle that sounds convincing. In reality, however, it is just a ploy to make the uninformed part with their hard- earned. In this article I explain one of these strategies known as “off market opportunities”.

Consumer Affairs Victoria is the statutory authority that regulates the real estate industry. In fairness to them in the past they have enacted laws that have gone a long way to improving the industry e.g. dummy bidding laws.

However, in recent times they have been lazy and ineffective. In this edition I explain why.

Many things influence property prices; the unemployment rate and interest rates being at the top of the tree. What impact do exchange rates have on property prices here in Australia?

The impact of exchange rate movements has grown in relevance in recent times as foreign investment in Australian real estate continues to increase. In this article I explain the intricacies of this often misunderstood area of real estate.

Over the years I have purchased many apartments for investor clients.These have always been in apartment blocks that were built in the middle of last century as they occupy the best locations in Melbourne.

During that era of construction building regulations weren’t as strict as what we see today. Also, building technology has advanced in leaps and bounds since then.

In this edition I provide solutions to common building faults buyers will encounter in the bathroom of these older-style apartment blocks.

As usual, my regular article, Market Snapshot, features in this edition. 

Market Snapshot gives an up to date review of the Melbourne property market. I explain how the market has performed in the second half of 2014 and give my opinion on how it will perform in 2015.

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



In this issue:

Lazy and Ineffective

As far as the real estate industry goes, Consumers Affairs Victoria have proven itself to be lazy and ineffective in recent times.

Never before has the Victorian real estate industry been faced with so many important challenges that need to be addressed. These issues go to the core of the future well-being of many Victorians.

Unfortunately all we have seen of late are token efforts and superficial changes; not one initiative that addresses the endemic problems that will cost many people a comfortable retirement.

Among the many important challenges that need to be addressed are the re-emergence of property spruikers who are using self-managed super funds as a vehicle to drain many retirees of their retirement income.

Self-managed super funds may be a tax effective way of holding real estate however this is irrelevant if properties held by the fund don’t provide sufficient capital growth to ensure a comfortable retirement.

Currently we are seeing some financial advisors masquerading as real estate experts. These financial advisors have direct links to property developers. Many are promoting low-grade property with the reward of a sling in the back pocket from the property developer.

Deliberate and substantial under-quoting from vendor’s agents continues. The regulations around this practice remain vague, ambiguous and are not being enforced.

The buyer advocacy industry remains unregulated; there is no differentiation in licence requirements between a buyers’ advocate and a vendor’s agent despite the roles being distinctly different. This has led to a sham buyer advocacy industry where many so called buyers’ advocates are merely marketeers for property developers.

Buyers’ advocates have been operating in Victoria for more than 20 years but not one law has been passed to regulate this industry.  

The Corporations Act still doesn’t recognize real estate as a financial product despite it being the cornerstone of most Australian’s retirement plan. This has resulted in a real estate industry with only basic entry requirements.  Completing a six week part-time real estate course is all it takes to advise on property matters.

These are just some of the important issues that need to be addressed. Despite this, all Consumer Affairs Victoria could come up with during 2014 was some insignificant changes to section 32 of the Sale of Land Act and a half-baked buyer checklist that now must form part of the contract of sale.

This incomplete checklist does very little to protect or inform property buyers. Astonishingly the checklist does not mention the one overriding issue that has brought howls of discontent from property buyers; the practice of deliberate and substantial under-quoting.

Ultimately, the Minister for Consumer Affairs must take responsibility for not keeping pace with the ever-changing real estate landscape. However the microscope needs to be placed well and truly on the Estate Agents Council (EAC).

This is a little known statutory body comprising eight people that was established to advise the minister on developments in the real estate industry.

The recent change of government in Victoria has meant the appointment of a new Minister for Consumer Affairs. The Victorian public has had enough of ineffective and lazy policy efforts. It’s time for real change.

Whether the new government takes on these difficult issues remains to be seen. However if past performance is any indication not much is going to change.

The Bathroom Blues

Apartments have become the preferred investment choice for many astute investors over the last few years. This is because the price of a house in a quality street and location has skyrocketed and therefore has put it out of reach of the average investor.

Apartment blocks that produce the optimum capital growth were mainly built in the 1950-’s, 60-’s and 70-’s; they occupy the best streets and locations in Melbourne. Generally speaking these apartment blocks have been well built; however, a recurring problem relates to water and moisture penetration in the bathroom.

Most of these apartment blocks don’t have adequate waterproofing membranes around bath tubs and shower recesses. On many occasions this has resulted in moisture transference through adjoining walls. This will produce unsightly paint bubbling, not to mention unhealthy odours in rooms that adjoin the bathroom.

Unlike other states the waterproofing industry remains unregulated here in Victoria. A water- proofer is not required to be licensed. As stated in a previous article, I find this to be astounding given the fact that most building faults are a result of inadequate or sub-standard water-proofing during construction.

Despite some of the claims made by people claiming to be waterproofing experts there is no quick fix to this problem. The tiles need to be removed and a proper waterproofing membrane should be installed.

It is important that tradesmen be familiar with the Australian waterproofing standard AS 3740. This standard outlines the correct technique for waterproofing domestic wet areas. I would avoid any water-proofer who is not familiar with this standard.

A property owner should insist on a written guarantee from the tradesman stating that the work has complied with this standard.

Another recurring issue in the bathroom of these older style apartments is lack of ventilation. This invariably results in unsightly mould on ceiling and walls.

Many of these older apartments were built without an exhaust fan installed in the bathroom. It is well worth the outlay (around $1000) to install one. Many apartments cannot have a ceiling fan installed due to not having access to a roof space for the purposes of extraction.  In these situations an exhaust fan can be placed in a bathroom window.
Investors should not be put off by an apartment with waterproofing problems provided it ticks the boxes of what constitutes the optimum-performing investment. The cost of rectifying these issues is minuscule compared to their capital growth potential.

Property and Exchange Rates

What impact does exchange rate movements have on property prices?

Exchange rate movements mainly affect demand for Australian real estate from foreign investors and expatriates.

Australia is seen as a preferred destination for overseas property investors. The opportunity to own a freehold title as against a leasehold title, a relatively fair and transparent business environment and a strong economy  are some of the factors that make Australian real estate inviting.

Quite simply if the Australian dollar is high this increases the cost of property for foreign investors. A low Australian dollar makes property more inviting for overseas investors.

Increases and decreases in the Australian dollar can have indirect effects on demand for housing. For example a fall in the Australian dollar will increase tourism to Australia which will result in lower vacancy rates for holiday and rental properties.

In recent times Australia has experienced a substantial increase in foreign investment particularly from Asia and especially China. Many Asian investors have their currency tied to the US dollar so a strong US dollar results in greater buying power.

Expatriate Australians are able to secure loans that are not in the same currency as the secured property. This strategy is used to take advantage of lower interest rates. However this strategy can backfire if the exchange rate falls. The financial institution can then demand the borrower pay the funds required to compensate for the loss as a consequence of the unfavourable exchange rate movement.

In summary, a low Australian dollar does stimulate demand for Australian property, but factors such as employment growth and interest rates play a far greater role in influencing local property prices.

The “Off Market” Hoax

You have saved hard and made many sacrifices over many years. At last you have been given approval from your financier to take the plunge into purchasing your first investment property; now for the exciting part, finding that perfect property.

You have been reading the real estate sections of the daily newspapers and have often noticed buyers’ advocates being quoted. Perhaps you should speak to a few; it doesn’t cost anything to have a chat. Besides they must be experts; they are often quoted in what appears to be reputable newspapers.

Your appointment is set and here you are speaking to two experienced buyers’ advocates. The interview is going well and they're asking you all the right questions. What’s your financial capacity? What are your expectations about property investing?

They explain to you their level of experience, many successes and how you will be soon financially independent.These two polished performers are going to take the time, worry and stress out of your property purchase.

According to them all you have to do is put your trust in them and you will be on a jet to your private island sipping Champagne surrounded by your many servants.

Then without warning they drop the deal-sealer.These two smooth operators will give you exclusive access to “off market opportunities”.

They explain to you how they have access to properties that constitute the optimum performing investment, properties that will double in value every 7 to 10 years, properties that if placed on the open market would attract multiple bidders, properties that any astute investor would love to have in their portfolio.

Wow! This is your lucky day, maybe they like your alluring smile, or maybe it’s your outfit or maybe you’re just special. Surely they couldn’t do this for everyone; you can’t believe your luck.

If placed on the open market these “off market opportunities” would be fought over by multiple buyers and result in a premium price. However the owners of these properties are going to sell them to you and only you and according to the friendly buyers’ advocates at under market value.
The reality is the claims made by many buyers’ advocates that a potential client will have exclusive access to investment grade property is a sham; a sham designed to suck you in to engaging their services and ultimately buying a dud property.

There is less than 5% of investment grade property on the market at any one time. Investment grade property is situated in the best streets and suburbs of inner Melbourne. Quality of location and streetscape are two high priority ingredients when it comes to premium grade investment property; there are many other important ingredients.

Investment grade property will always be strongly contested under auction conditions and achieve a premium price.

The fact is the greater majority of buyers who have been bluffed in to these “off market opportunities” are not buying true investment grade property. These lower quality purchases will underperform by many hundreds of thousands of dollars in the medium to long term.

The average first time investor is not aware of what criteria are necessary in order that a property produces the optimum capital growth. These unscrupulous operators will cite factors such as large floor and land areas, new kitchens and bathrooms and amenities such as gyms and swimming pools as features that will drive capital growth.

Unfortunately for the uninformed buyer these features are not high priorities that will produce the optimum capital growth.

The fact is if a vendor owns an optimum performing property they will not dispose of it via a buyers’ advocate. Quite obviously they will place it on the open market and let intense competition drive up the price.

The old saying “if something sounds too good to be true then it is” should be heeded when a buyers’ advocate offers you an “off market opportunity” that is presented as investment grade property.

Market Snapshot

The Melbourne property market finished strongly in 2014. We have now experienced two years of sustained growth after the property market began moving forward at the start of 2013.

In the final quarter of 2014 the median house price reached $669,000, up five per cent on the September quarter.

Auction clearance rates throughout the second half of the year continued to hover around the 70% mark.

The Reserve Bank reduced the cash rate in February of 2015 by 25 basis points to 2.25 per cent, the lowest level since the 1950’s.  

The national rate of inflation is currently  1.7 per cent - well below the Reserve Bank’s inflation target of 2-3 per cent.

Victoria’s unemployment rate has rose slightly over the 6 months to December 2014 to reach 6.7%. 

Auctions are now back to full swing. I’m expecting to see another year of continued growth in the Melbourne market.

Prime inner Melbourne locations will always be in demand; however, vendor’s expectations will need to be realistic as the majority of properties do not occupy these locations.

The Melbourne property market has now been in overdrive for more than 12 months. History tells us that it rarely continues at a fast upward momentum for more than two years. 

Property markets will always ebb and flow. However investors should realize that the “what” they buy will always be more important than the “when”.
LET US ASSIST YOU +61 3 9689 9080
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

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Rialto South Tower
Melbourne, Victoria 3000

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