Hello and welcome to the Australians Money Puzzle podcast.

I'm James Kirkby.

Welcome aboard everybody.

Now today we're going to cover some very interesting issues.

Rates obviously look like they're going to come down.

That's very important to all of us property investors and property investing is the theme of course today being Tuesday.

Later in the week, on Thursday, I will do a full because there's been lots of questions coming in from you guys, full review of what a final picture is on super tax and especially obviously as how that affects you as a property investor, but as a general investor as well, So we'll get across all that on Thursday today.

However, do you fancy yourself as a shrewd operator that can pick a patch of property that's going to bounce in the future, And it would be entirely rational if you were to perhaps look at the great infrastructure projects that are a foot around the nation, even just to think of rail or metro ones.

You've got that extension of the Gold Coast light rail you might be looking at.

You might be looking at the very ambitious Melbourne metro project due to open New Year's Eve.

They say, let's put a few more months on that, but next year I would think, really, Melbourne Metro whole pilot, new suburbs linked in ways they were never linked in before.

You would think that is a license to make money for property investors.

But here's an interesting thing I guess today is Tim Lawless, head of research at Cautality Cutality, you probably know better as core Logic.

It's changed its name of late.

He's just done a really interesting deep dive into the Sydney Metro line thirty kilometer line if you remember, from Chatswood to banks Down thirty kilometers if you like, laid out for the robber barons to make their profits.

And you would think that those suburbs on those lines are doing great, right because it opened last year.

And here's the thing, Tim discovered that every one of those suburbs on that line is is not doing as well as the average Sydney suburb.

Go figure, how are you?

Tim good a James, thanks to the invitation to join you today.

What prompted you to look at how the suburbs around the Sydney Metro were performing.

Were you of the opinion that you're setting out to prove how weather were going, or were you suspiciously that they might not be going as well as the general public might reasonably assume.

Well, the whole idea of doing this analysis was it was the one year anniversary of the second things of the metro opening up, so Phase two that opened up in August twenty twenty four and that ran from Chatswood to Sydenham.

I thought it was just interesting looking at twelve months on what's happened, and of course if for anyone's that's not familiar with the Sydney Metro, it was over two phases, the first phase which ran from Talawang, the Chatswood that's gottening sort of the Hills district mostly that opened up quite a while back.

It was way back in May twenty nineteen, and then we saw the face Who open up.

So I did speculate that market has probably underperformed, just because I'm tracking the trends all the time and I can see really clearly the markets that are really the strongest around Sydney tend to be around the out of West, which have generally much lower price tag and that's where we're seeing mainstream demand being deflected, mostly because serviceability is quite challenging across a really expensive market like Sydney.

So to your point, James, it's really clear that the catchment along the Sydney Metro line we've looked at say one kilometer from the new metro stations and five kilometers and then just comparing it back to the broader Sydney average.

The broader Sydney average, just to give you a bit of a benchmark, over the past two years, is up eight percent in terms of value growth.

We saw the Phase one catchments have increased about three point six percent in that twenty four month period and the Phase two catchments are up about five point two percent, So a pretty clear underperformance, but from a relatively high base.

I mean, the right generally much more expensive.

So there's two things obviously of interest here.

One is this story inside Sydney.

I always say it's counter intuitive, but maybe it is for some people.

They'd say, oh, right, okay, you know, all those sobows are going to thrive, they've got new stations, people get into the city faster than they had previously.

But your research shows beyond doubt that you would have been better off in recent times in Sydney owning a property anywhere but on those lines.

Right, well, yeah, okay, there are other areas that have shared a performance, like if you look around Sydney, some of the more affluent areas like the eastern suburbs, the lower north Shore, the Northern Beaches, that an even softer performance or a softer growth dot come and I think the real reflection of just the affordability challenges and maybe more and more rightly the service ability challenges that have I'm very evident, particularly lender is still assess a borrower at a three percentage point with a three percentage point buffer.

It does seem that demand is very much being deflected towards the lower quartal.

Of the market.

So the rate was highly important here.

The higher rates that we've experienced in recent years are highly important.

But what if I said to you, so, what does it tell us?

This is the thing?

I mean, if it's the case that the people who bought on those metro regions, particularly investors, if it's the case that over the last two years they would have been better off in other regions Beyond the lines like is it a once off Sydney story or I don't know the history.

Is it the case that people were in much much earlier speculating, if you like, and buying an advance along those lines.

Yeah, this is a really important distinction, and it's really clear when you go back historically and you look at say when these projects were first announced, which was way back in twenty twelve, that the first phase was announced and it commenced back in twenty thirteen, it's really clear that the suburbs along that catchment well and truly outperformed the broader Sydney average.

And I think to your point, James, that was probably the speculative outcome where we did see a lot of people getting into that marketplace well before Phase one it opened and before Phase two was even really announced, So I think there was an early phase of growth and that kind of pushed prices up to provide quite a premium for those suburbs along the Metro catchment.

And then we've seen a bunch of other things happen around interest rates going up from the middle of twenty twenty two, and affordability challenges becoming a lot worse, and this, as I've said before, this real deflection of demand towards the more affordable end of the marketplace.

Yeah, I didn't know that.

I did assume that might be the case.

So it's way back that basically investors made money on these areas.

It was in the announcement and pull announcements phase, even though the risk was there, I suppose that these projects might never get done, or at the very least they would be very late in coming through.

Now, one thing is when if you do know those parts of Sydney that jumped after the announcement and in the early phases of this big metro project at that time, were they doing better than the city average?

Yeah?

Absolutely, And it doesn't really work for the podcast.

But if you look at the graphs and the report, which you're going to look at it on our website, it's really clear.

We just tracked prices historically over the past twenty years or so, and there is this really clear anomaly where values did rise a lot more substantially than the broader Sydney average in that phase one catchment.

And I think that's probably quite intuitive when you think about investors, they probably are looking to get in early to ride that wave of capital growth.

But of course I just say that there is a risk to that that some of these major infrastructure projects they don't go ahead they take a lot longer, they have massive cost blowout as we know, so there is a bit of risk, which I think is all.

I mean, that's that's the thought of investing, isn't it.

It is.

I'm just thinking if you had been gambling as such that you were going to make some money by the airport link, for instance, in Malbourne, well I could take a lifetime really before before that comes to pass.

And because it remains unclear, it probably remains a speculation at this point whether that's ever Actually, that's so much that's ever going to be done.

Everything gets done eventually, but like you know, will it be done, will be done when you and I are still around?

That's the question too.

Yeah, I think.

I mean the Melbourne Metro, which is, as you said in the introduction, James, that's due to be opened either late this year, early next year, sometime around there.

It's a much smaller project compared to the Sydney Metro, spent buying kilometers of track, a couple of tunnels, five stations, but it'll be really interesting to see how that pans out.

We haven't seen the same.

Level of a speculative response in Melbourne like what we saw early in the case of Sydney, and we know that Melbourne's been quite a softer market overall through the past five years, so it'll be interesting to see if there is a bit of a jump once the new Metro Melbourne does open up.

Given the fact that price points are actually pretty low, I don't think we're going to see the same affordability barriers that we've seen in Sydney that have probably been a big part of the underperformance around the Sydney Metro.

And then, as you say, this project has a long way to go, expanding into the suburban.

Rail loop and the Airport Link.

There's a lot of discussion around whether or not this is money well spent in Melbourne.

Right, really interesting.

I'm going to come back.

We're going to come back after the break and we're going to look at whether the Sydney story is a one off or not.

Back in a moment.

Hello, Welcome back to The Australian's Money Puzzle podcast.

James Kirby here with Tim Lawless of Cautality, head of Research.

That's the property research group previously known as core Logic.

Okay, Tim, the hot seat, So you mentioned how the Melbourne Metro U certainly alluding to the fact that it could be different than Sydney, because the's a couple of things right.

First of all, the prices are in absolutely trans cheaper.

First of all, by that they're more accessible.

But also isn't it the case that we're in a part of the interstrate cycle that we should see more cuts.

So that would suggest that maybe the Melbourne story, and I'd like to deal with the Gold Coast as well, but the Melbourne story might be different.

What do you think?

Yeah, I think Melbourne could be different.

And when you look at the historical trends, big infrastructure projects and large amounts of capital investment generally have led capital growth or at least been the catalyst for capital growth and housing markets.

I mean, you can look at any number of projects around the country historically, be it big transport projects like the M one connecting Brisbane of the Gold Coast, or the major gas projects in Wa and the NT really drove employment and investor activity as well.

So I think the Sydney Metro case is quite the anomaly, the fact that we did see a major investment in capital flow coming to a big project that hasn't really driven prices higher.

So Yeah, I think Melbourne is probably going to be a market that will stick with the trends and we'll probably will see some further growth along that those transport investment projects.

Can I just ask before before we go in something things I do want to break down.

Did you expect as an experienced researcher that the Sydney metro suburbs that have lags the market, did you expect it they would at least keep up with the market in their first years post opening.

Well, that's a good question.

I'm not sure how to answer, because I look at the trends and it was really clear even before I run the numbers that the metro catchments were going to underperform the Sydney market because I could see that where the growth was very much headed.

But if I came into this completely naive, absolutely, I'd be very surprised that the metro markets underperformed the broader Sydney average.

Given productivity improvement, the improvements to commutability and liveability, there's a lot of amenity along the metro line.

All those sort of things that a typical investor would be looking for should have driven fro the rate of gain.

And then you said about Melbourne.

You said, we haven't seen the speculative action there that we saw equivalent in those Sydney suburbs.

That's very interesting.

Can you tell us any more about that?

Well, yeah, I think most of your listeners would be aware.

Melbourne's been sort of flying under the investment radar for some time now, or it's been disincentivizing investment activity through a whole bunch of things like higher taxes, that there's been demographic trends up until recently as well.

So Melbourne is simply hasn't seen the level of investment demand that we've seen in other really strong markets.

But we're starting to see some early signs that is changing, you know, interstate migrations coming back into positive territory.

We're seeing more and more positive media headlines that investors are targeting Melbourne now because of the low purchase price that strongly yields, and probably an outlook for meeting the long term stronger capital gains as well.

So all those things I suppose added.

Up tell me that those suburbs along that the Melbourne Metro and maybe broadly the rail loop are going to be fairly reasonable investment options, right.

I think the Sydney example is probably a bit of an anomaly.

It's interesting that you say that, and just looking across you mentioned that the Sydney one to say you're starting to say that it's anomalous, which is so shouldn't you would think it shouldn't be repeated.

What did you think of the theory that the net migration numbers has turned positive in Melbourne at last.

But there's a working theory slash joke that it's because not as many are leaving because they can't afford the suburbs they used to go to, particularly in Queensland.

The numbers actually suggest that there's less departures.

Yeah.

Absolutely, they do show that there's definitely more people coming back as well, and a bit of a boomerang after the pandemic.

And I mean, here's some context, James.

If you look at the difference between Sydney and Melbourne prices, it's about a fifty four percent different in the median value.

We haven't seen a gap that wide since about nineteen ninety nine.

So I think that's reflective of both Sydney being extraordinarily expensive, maybe overvalued, but Melbourne being undervalued and a real opportunity.

I think Ultimately we will see those two markets rebalancing a little bit, and that'll be driven by Sydney showing maybe a flatter market over the medium the long term and Melbourne picking up just to narrow that gap.

Nineteen ninety nine, of course, for those of you who can remember, and perhaps some of you were not even born, but nineteen ninety nine of course was the super peak of the Olympic run up.

That's not an event, that's a property issue.

Basically, Sydney prices went bananas in the run up two two thousand and the Olympics were on in two thousand and then, if I recalled him, they drifted for quite a few years and to a mid two two or five, two or six.

Yeah, well, well Sydney went for an extra ordinary growth run.

It actually pecks in two and two thousand and three, and then it went through a period of just where Sydney prices were flat right, and that was a real catch up.

For the market.

Sydney again, I think it probably.

Just overshot the mark of what you might describe as fair value and it languished for a long time.

I wasn't really until about twenty and twelve, well, two thousand and nine after the GFC we saw a pretty decent bounce from first home buyers twenty twelve to twenty seventeen.

It was a real change for Sydney and that's where price is really rocketed.

So it kept going right past the Olympics for a year or two.

It kept going after the Olympics.

Do you think I'm just thinking up loud, but about Brisbane do you think they might have a similar performance.

Well, Brisbane's a really strong market and a big part of that absolutely is just strength of the economy, really strong migration rates from inter state and of course all the big infrastructure projects that they've got a pretty hard due date that I don't think we'll see Brisbane canceling the Olympics game.

It's going to go ahead.

We need to build the stadiums, we need to build the roads and the infrastructure, and it's going to happen by a certain date.

We can already see some of the retric coming out of the Queensland government about you know, the language is what we're going to be stealing workers from other states and that type of thing.

Right, So, yeah, without a doubt that.

This is going to be a market that I think overperforms over the coming years as we see the strong economic conditions and strong migration fueling that market, albeit against a backdrop of affordability.

That's it's nowhere near as as expensive as Sydney.

But it's a lot more expensive than Melbourne now.

Yes it is, and whether Melbourne will ever catch it, we don't know.

Interesting you say about the about not that Melbourne was expected to catch up with Sydney, but as you say, the price differential is that its widest.

I got this right since nineteen ninety nine.

It's a long time ago.

Yeah, that's right again.

Yeah, I think logically, given this is Australia's second largest capital city, it's got a very diverse and large economy, it's got migration coming back.

Yeah, I think there will be a rebalance.

It's hard to say to see.

Melbourne overtaking Sydney from a pricing perspective, and maybe even Brisbane's seen a structural change.

But I think Melbourne at the moment is quite undervalued.

Okay, just before we go to the break, I did want to ask you about rates.

The theory at least the market's not just theory, but the pricing and the money markets now is likelihood seventy percent likelihood, up from about thirty five percent likelihood that we will have a red cut on Melbourne Top Day.

Where do you think we are on the rate cycle.

Mate, I think we're getting pretty close to the bottom of the cycle.

If we see another rate cut in November, I mean, that's the great news, but I mean that the financial markets are jumping around.

There's a lot of volatility here as the data flows come through.

It was only a couple of weeks ago there was hardly any chance we'd see a November rate cut, given the high inflation indicator we saw for August, with the relatively soft labor market out come for September.

I think his driven Reneeds speculation we'll see a November eighth cut, But if we do see a cut in November, that kind of probably means we may not see one early next year either.

So it sounds like the RBA is probably getting pretty close to what they might describe as a neutral rate.

If we get down around that sort of three point three percent mark for the cash rate, I don't think that the cycle's got much further to go than that.

And so our listeners should be aware that if you're getting a mortgage or an investment mortgage.

Perhaps we're getting close to as low as they're going to go as well.

Obviously, Yeah, we're definitely hearing a lot more talk about whether or not to fix at the moment as well.

Haven't her to talk about fixing for a long time.

You can definitely rate sort of lower than variable rates by more than twenty five basis points.

So yeah, I think more people are starting to do the numbers and weighing up the pros and cons.

Yes, very interesting.

Okay, have you any way of is that anecdotal or have you any way of quantifying.

That anecdotal at the moment?

James, So definitely observing, observing the market and listening to the people that they.

Travel around the country.

So it'll be interesting to set.

I mean that the housing finance data from the ABS, it's pretty lumpy, I think comes out quarterly.

Now we're looking at June quarter now, so hopefully the September quarter data gives us a little bit more really tangible evidence.

So keep that in mind, folks.

We may welcome back to that in some form about fixing.

It's been a long time since people were fixing because it's been a fair wire since the start of this cutting cycle.

But of course logically, if as Tim says, we're coming to the end of the cutting cycle, well then it's going to stall, and then it's going to history.

Was suggest goes back up again, and if you fixed at the right time, of course you could have a real competitive advantage.

We'll be back to that, Okay, back in the moment with some questions.

Hello, welcome back to The Australian's Money Puzzle podcast.

I'm James Kirby and we're talking property today.

It's a Tuesday, of course.

Now Tim Lawless is with us from Cautality.

He's been on before or I'm sure you know, Tim, very experienced doyen of the property research world.

There's a male and a female doyen.

Did you know that you're a doyen with an E N and then the female one is E nn E.

You'd be a doyen after very careful how I pronounced that I got it wrong one time and I was corrected by one of our listeners.

You see they're very quick.

This is Billy.

I love the podcast is Billy, but I must lament lament your recent characterization that land tax is a tax on realize gains.

This is not correct and it muddies the water, and by the lengthpece correspondence from him on that, but he wraps up by saying property investors should be marching in the streets to protest that they are being charged both transaction taxes such as stamp duty and an acid tax such as land tax, as well as income tax on earnings and capital gains.

And obviously overhanging all this is the new supertax.

So just to clarify, and I say, we will come to this properly on Thursday, but there has almost concluded.

He's last and hopefully final shape of the super tax, which basically means that over three million, it's a new fifteen percent tax.

It goes higher again as you go through the ranks, but the main one for most people most of the time, over ten million, obviously it goes higher again.

But the main one for most of our listeners to be aware of is that once you have earnings on assets over three million, that tax is going to double from fifteen percent to thirty.

If you recall, there is a it kicks in or tax on super kicks in at the moment at two and from July one.

Next year, you'll find that it doubles over three.

That's the bad news.

The good news is that it's not on realized gains.

It's on actual changes to prices as opposed to theoretical or paper prices.

That's the big one.

And he also clarified a since on capital gains in a very messy way because there was no official statement coming out from Jims and drabs, but it seems on capital gains.

Capital gains will be as we might have hopefully assumed.

It will be applied pro rata in the way that it always has in super on large amounts or high wealth amounts, and they will be proportionate to the new taxes.

What did you think of it all, Tim?

Where do we stand now?

Yeah?

I mean, at least this crazy talk of unrealized capital gains is taking off the table.

I think the reality James, I mean, who has a superannuation find of more than three million dollars.

It's a pretty small component of the Australian population and so I think it's very relevant for those very high high end wealth savers.

But overall it's going to get some certainty at the very least, and I think fair enough.

Tax reform is going to be on the agenda, but some of the suggestions personally, I was finding quite difficult to reconcile.

Yes, I think that was the issue.

I mean, people who would never have three million are never going to have.

Didn't like the idea of unrealized gains because that's a whole new bowl game and really on paper evaluations.

You know, if anyone who's a regular investor knows what you make on paper unless you sell it, you know, Tim, I can evaporate before your eyes.

Which leads us to a question from Jim, which is where are and how do all the people achieving three million superbalance in this new tax It's certainly not the low average or middle income of Australian says Jim.

Yeah, no, absolutely, I mean we're talking the average superbalances in the two the three hundred thousand area, so a median, I should say, so, so miles away from three million.

For what it's worth, there's eighty thousand people who will be affected with the earnings over three million.

It's not as much as it sounds by that.

I mean, if you're living off the income, let's say you had that in a very low yielding property or cash.

Well, you know, the amount you would make per year is not is really not an awful lot on low yielding, very conservative investments.

And I think this was the outrage if you like, about that could be applied to unrealized gains.

At least now it is actual realize gains.

And hopefully they will stick with that, and they will stick with what they've said, and they will get through parliament, which is always a risk.

You would think it would flow through parliament.

We don't know till it does.

It didn't get through before.

There's still some residual concerns that the Greens will not cooperate because they wanted that new tax where the tax doubles in super from fifteen to thirty percent on earnings on amounts above three million.

They wanted that to be two million.

We'll see where it goes from here or to be played out.

Okay, Hey, Tim Lawlers, thank you very much.

Very interesting, I must say, really caught my eye.

Great that you go off and do pieces of work like that.

You get a notion, you figure it out and sometimes you get a surprise.

Certainly that was very interesting on Sydney, So thanks Tim.

Hope to have you on again.

Many thanks James.

That was Tim Lowless, folks head of research at Cautality.

Always interesting and someone with a piglhicopter view on the market, which we love.

Okay, let's have some more correspondence the Money Puzzle at the Australian dot com dot au.

Talk to you soon.