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

I'm James Kirby.

Welcome aboard everybody.

While we're sitting at what seems to be the end of a rate cutting cycle, and nine times out of ten that would be bad news really in terms of housing or investor certainly in terms of residential property market, because you might find that the momentum may stole a little where people can't borrow more than they were.

Planning to, et cetera.

That sort of energy that went into the market through rate cuts will dissipate.

But I think this time around it's slightly different.

We're not in a conventional housing market.

We have chronic lack of supply, we have a rental crisis, and I think we are into a period where this initial rebound we've seen in house prices, particularly apart sort of different matter is going to steam on.

I might be wrong, I could be challenged.

My guest today is the ideal guest for what's going on right now.

It's Max Shiffman of the Interpack Group.

He's a developer of folks.

We haven't had many developers, and we had Charlie Buxton on a few months ago.

It's always interesting to get their opinion.

How are you, Max, Thanks for coming on the show.

Yeah, great to be here, James, thanks for having me.

Great to have you.

It's interesting how quickly the momentum in an investment market or the sort of the overriding narrative can change.

So here's some top economists now I'm thinking of that.

Let's say Paul Bloxham at HSBC talking about how high rates will move from here.

I want to talk to you specifically.

Our listeners are as investors, they just want to get a picture, a helicopter view of the market, and you, as a developer, quite outspoken in public policy, and one of the things you're saying is that both housing and even apartment promises are not going to be delivered.

As we expect.

Just for the general listener, what are the issues that you're alluding to there.

Yeah, so there's been a lot of talk about housing targets.

Housing has clearly become a major issue for a lot of cohorts, particularly younger people, and so you know, the politics means that politicians now need to be talking to it to be seen to be doing something about it, and the best they seem to come up with is setting all these lofty housing targets around the place, but it at a state level or at a federal level with a federal housing accord, and in my view, not doing the things you'd actually have to do to reach those goals.

So there's a disconnect between you know, let's be optimistic and call it good intent and the actual result.

We have a proof already, haven't we really that there was this initial housing target, the million houses over five years, that was two hundred and forty thousand houses a year.

Just a few weeks ago we had the first year, You're one hundred and seventy thousand built, which means, of course it pushes this target out unless they actually accelerate then, but they're going to build, I mean, cut of the chase.

Maybe it's I'm about to have targets at least you aspire to something.

Yeah, look, that's a good thing.

I mean, I'm supportive of having targets, be it federally or at state level or at a local level.

I think that's a good thing.

But again, a target without doing the stuff you need to do to reach the target is kind of pointless.

And that's the thing that I've been banging on about the last couple of years.

I mean from an industry perspective, when they first announced, you know, these targets, so you know, the big target is the one point two million homes federally that was announced as a target back in initially October twenty twenty two as a million homes, and they opped it to one point two.

And my commentary at the time was, We're not going to hit a million based on what I'm seeing in the data and new supply and approvals, let alone one point two.

And that's proving to be the case.

Put it to be the case.

But additionally you're saying, see, I think people are on tell me if I'm wrong, But I think a lot of investors think, okay, you know, fixed apply of houses houses standalone houses going literally twice as well as apartments in recent years in terms of price action price increases.

So the issue then is apartments.

And then there's a sense that apartments won't quite flood the market, but that the state governments around the country are bending over backwards to make it happen that there will be more apartments.

But you're saying the apartments won't come on stream either.

Tell us your view of things in that area.

Yeah.

So the thing about apartments is people assume that apartments are cheap.

I think that's probably the starting point or cheap relative to housing, and in many parts of the world that's true.

I mean, for example, you go to New York City, very dense city, everything is expensive, but owning a brownstone in a great part of downtown is much much more expensive than buying quiple an apartment.

So apartments can deliver a relative affordability when you've got a very high underlying house price.

The disconnect is in an Australian context, building apartments is the most expensive type of construction.

It uses a lot of structural materials because it's very large.

It's highly regulated because you've got a lot of people in the same space.

You want to make sure they're protected from noise and fires and things like that.

There's a lot of regulation design that goes into it.

There's been concerns around the quality of building, especially when you go to high rise and then you've got a labor force, which is very expensive.

And you know, the example I give people, and I'll use this here is you go to many parts of the world and any reason they're building apartments for a lot less than what we are is because they effectively have slave labor.

Like it's a really weird way to look at it, but it's actually the truth.

You go to Dubai or Singapore or any of these.

People are working seven days a week and they're working in all sorts of conditions.

You could see that from other countries, Yeah, exactly, in from other countries living in camps, being worked to the bone, and they're making more money than they would at home.

But it's not exactly what we would call a good way of living.

And so you contrast that with how we're prayed in Australia.

We have the CFMU.

Has been a lot of discussion in the CFMU and labor costs, but it's the fact that we have this enormous push into infrastructure projects around the country, Victoria being the epicenter, but currently that's sort of migrating a little bit north with the Olympics happening in Queensland.

But every state is embarking on huge infrastructure projects.

And what that's meant is the labor force.

The labor pool, because unemployment has been so low, has been pulled into all sorts of directions and those projects have been paying substantially high on what the private sector was paying previously, and so that's just elevated the cost of any sort of type of construction labor and that's fed straight into housing costs, particularly in apartments.

We have the most overlap in the sorts of trades that would be building the structural components as you might do in a tunnel, for example, in the mid of Melbourne.

Right, So this is and is it true that there are.

Sites all over the major cities Brisbane, Sydney, Melbourne owned by developers ear Marsh for apartment developments that are not happening, that there is an exceptional amount of space kind of tied up old factories and warehouses, et cetera.

Is that true?

I mean, on its face, yes, So there are tens and tens of thousands, if not hundreds of thousands of theoretically approved dwellings around the country, across the major cities, but there's a big difference between having an approval and having a project that's feasible.

Is the gap between the I mean, there's always a bit of a gap between approvals and commencements, But is that gap bigger than we're used to.

Yeah, So the number of approvals that aren't being activated is sitting it around record highs, and it's yeah, And it's that feasibility equation because when you factor in the cost of delivery and then you work out as a developer at the end price would need to be the cohort that would pay that sort of money for these projects is very small, and in many cases you're competing with substantial numbers of apartments in and around the same area that are costing as listful as half of what you'd have to deliver a new dwelling for.

So obviously the market's not going to pay that sort of premium, So those projects will sit there really for quite a long time.

And that assumes underlying values go up and people have more borrowing power, which may not be the case with interest rates.

Why do the apartments you're about to build costs more than half the ones that are around the corner.

Well, look, it's just it's time.

We obviously had a lot of inflation during that sort of post COVID period, So the number that's obviously floated a lot of the time is about fifty percent cost increase, and whilst the rate of inflation has dropped, it costs aren't dropping.

Some people sometimes mistake inflation dropping as things going and becoming cheaper.

It just means they're getting more expensive less quickly.

So the cost of construction isn't reducing.

And so we've got this step change in construction costs and it impacts everything.

It impacts the suburban rail loop Melbourne and impacts every apartment building in the country.

It impacts our house and land package.

In the business that I'm in, everything is impacted by the increase in construction, which filters into what a developer would need to charge to an end consumer.

And yet you have this glut of apartments in certain parts of the country which are because they're not high demand, as sort of dragging the whole market backwards.

I would go to a break because we want to talk some specifics which I think our listeners will find really interesting, and you're in a great position to answer it just quickly.

The glot of apartments.

Are you thinking of some black spots?

Basically where are they?

Well, one that's commonly discussed is in and around the South Bank in Victoria and Melbourne, where you've had a lot of investor style apartments built and the records that I keep seeing.

You know, there's circa eight thousand unsold apartments across Melbourne.

There's a big chunk of them there, and so people are still able to buy an apartment that's you know, within a decade old.

It's not particularly old, but that's selling it a possibly a lower price than what they originally sold it for when they first built it, and then the replacement cost of it is probably double what it was ten years ago.

Interesting.

I'm looking out of them right now.

Max.

That's where we are, so I think surrounded by perhaps thousands of empty apartments, or at least apartments where the investors will be taking a long time to make a book.

Okay, folks back in a moment.

Hello, Welcome back to The Australian's Money Puzzled podcast and with Max Schiffman.

He's the CEO of Interpac.

It's a developer, an interestate developer.

I think most of your action is in Victoria and Queensland, is that right, Max?

Yeah?

Northern New South Wales?

Done?

Yeah, Okay, I'm going to just kind of throw a few random questions which I think our listeners would like to hear.

What you have to say basically about it, and I mean we take it from the first part of the show that certainly on the supply side you see issues breaks basically on both apartment and standalone houses.

That's the first thing.

From an investor point of view.

You mentioned some areas that are oversupplied, but then again, more generally there's a lot of pent up.

There's pent up demand and there's also pent up.

We should be liked by the developers to build, but the numbers aren't stacking up for them.

Can I ask you a few random questions which I've been wondering.

One from an investment point of view, one bedroom apartment they were once upon a time a sort of entry level first step for investors into the market.

Some have said that with the work from home they are finished as an investment.

Where do you come from on that one?

Look, they'll always be demand for small dwellings and they are as costly as a one bedroom, so I think they're not going to disappear entirely.

Not everyone works from home, even despite some of the conversations being head at a state level at the moment abounding train that, but certainly from an investment point of view, to maximize the addressable market of people you might be attracting.

You'd want to have a bit more space, So that could be you know, at least having some sort of you know, study or working in your core, a little zoom room.

I'd certainly be saying, you know, a two bedroom apartment's going to have a lot more flexibility and longevity than a one better if I can get.

It, Okay.

Also, I was just thinking in terms of natural consequences.

If it's the case that there are apartments unsold and at the same time there's this demand, and in parallel we have like oceans of empty office space at record numbers, at recession type levels, a natural response people might say, well, you know, a lot of those office box are going to be turned into apartment towers.

Is that pie in the sky.

Apparently it's very difficult to do so is that?

Yeah.

Look, there's been a lot of discussion around that, and I know people that have done studies of some of the buildings that lie empty or partially empty around the major CBD.

So there's a couple of challenges with converting commercial buildings and retaining the structure and turning it into residential.

The regulation is a big part of it.

So the floor plates are usually bigger than what you'd have for residential building, which means you don't have a natural light, which is very important from a regulatory point of view.

But it's also things like retrofitting services so you might not have enough lifts to service a lot of apartments versus say commercial building, but also things like just water so all the bits and pieces you need, the heating, cooling.

So by the time you work out where you have the right floorplate, it's going to be limited to certain size of buildings, and then you work at how you retrofit all these bits and pieces.

It is just cost prohibitive.

So you know, it was Hassle that did a study of the city of Melbourne and identified several hundred buildings that could potentially be converted, but it hasn't happened because again, the cost of buying the building, doing all the retrofits, beaning all the regulations and working at the end price means it would be substantially higher than what the mark it would pay for those completed apartments for the most part.

Okay, interesting, all right, that's a very clear answer on that one.

I'm bouncing around here.

But I think the listeners will be keen to see where you're coming from us.

They say.

We had him on the show.

From core Logic recently and he's a really interesting report where he looked at the price action around the Sydney Metro line, where you would think logic would suggest that the prices along a new line would be doing very well.

This whole idea of capture land capture along railway lines and people similarly in other parts of the country buying apartments or houses on the basis of proximity to new lines such as the Gold Coast light Rail or the Melbourne Metro project.

But Tim found they were doing worse than the average suburb for the last two years.

He had an explanation, but I was I'm wondering what you your explanation might be.

Yeah, well, I think because I did read the article on I think he's right about the fact there would have been some very early speculation, you know, after the project was announced.

I mean, often property values follow infrastructure investment, so you know it can be a sound investment strategy.

I guess, you know.

One of the things that I was thinking about was just the time frame you'd have to be sitting on a piece of land there.

I mean Metro was announced what twenty twelve, So.

You want to be buying in two thirteen to get the lift, That's what he suggested.

Really yeah, I mean you want to, but you want to be almost there before there's any announcement because you get this run up and then you've kind of got a weight for the project to happen.

And what kills feasibilities for development is actually time.

So invariably these projects run lace, they run over budget.

They you know, as part of the planning for the precincts around them, they start to decide, hey, we want to have more contributions towards open space and local infrastructure, all the bits and pieces, which ramps up the cost of delivery.

And so what you find is probably this early ramp up where prices get to a point before people have really thought through what's actually going to be a acquired Then you get a bit of a tapering off and I think that's exactly what we've seen and I was thinking about how that might apply, for example, with the suburban rail loop in Melbourne, because there is going to be a lot of discussion around building up those precincts.

I've been a pretty noted skeptic of the feasibility of the whole project, but I'd be surprised if there was a similar dynamic in Melbourne because in Victoria they've released or they've got this windfall gains tax which takes some of the uplift from a reazoning.

And so if anything, that's a barrier to people wanting to buy into these areas because you have this unknowable tax that might be charged at some point which takes any sort of uplift from holding the land away.

So it takes incentive away.

And probably one last thing on that, I was thinking through the other dynamics that might happen in some of these precincts.

And so obviously developers might want to come in and start planning to build apartment buildings, But if you're a person who wants to have a home near a train station, the last thing you want to do is then buy a house when you know you're going to have all this development around.

So I suspect that's pushing traditional home buyers out of these precincts as well, and they're buying just on the periphery, which I think showed was performing better.

That's right, the peripheries of the that's right.

So it wasn't the immediate catchment area of the lines that were doing well.

This is the last two years, folks, the last two years, it.

Was beyond that.

Okay, before we go to questions, I just want to ask you, so it seems to me listening to you this morning, that if I am interested in investing in property, it seems to me I needn't worry an awful lot about an oversupply of even apartments coming down the line, because the supply seems to be blocked at so many levels.

And I could make the assumption.

That the current numbers, being the rental vacancy ratio has been you know, one to two percent are going to stay.

Do you see anything to challenge that notion?

No, short answer is I think you're spot on.

One thing we know is population growth is continuing pretty much underbated in Australia and that's going to keep putting pressure on house prices and rentals and we're just not keeping up.

And so particularly as we try and shrink wrap the city's forced that densification, the more that's going to limit how much new housing is put on stream.

So yeah, I don't think it's going to be a great time for renters anytime sooner.

Nor do I see there being any material reduction in underlying pricing.

And do you think if rates did start a lift with that in any way cool the increase in housing prices.

Short ans Yes, I mean interest rates are definitely a factor.

And because we've had that cost dynamic I was speaking about previously, we've needed a step change in buyers capacity and expectation for what they're prepared to pay for a new dwelling of any kind, And so if we start seeing interest rates shoot up again, that's just going to dampen the entire supply story further.

Yeah, further.

I mean we've come off the very bottom, you know, we've bottomed out in twenty twenty three, twenty twenty four, bally improved.

There have been some slide improvements in new approvals and starts this year.

But I think if we've seen straights go back the other way, it's going to put a handbrake.

On it all.

Does it happen straight away or does it happen gradually?

I think it's changed.

It used to take a bit longer for things to sort of filter through.

But the media cycle now everyone knows the moment, the rbas they do.

It's true at anything that's.

Right, So it's very volatile.

And even the we've seen, even from an inquiry perspective, where even the weeks where there might have been an expectation of a rate cut and perhaps it was deferred for some reason, that weekend straight after tends to be a bit more subdued.

Then it sort of goes back to bit of normality.

But people need the time to kind of absorb the news.

I shudder to think what it'll be like when we start seeing straights go up again, particularly when everyone was expecting them to keep dropping for so long.

A rapid impact on sentiment.

Really interesting.

Okay, we have some questions I've saved for Max, so stay with us.

Hello, Welcome back to the Australian's Money Puzzle.

James Kirby here with Max shiftman of the Intrapac Group, property development group that are active across the country in mostly on the East Coast.

Okay, I'll try and paraphrase these one from Ben.

I wonder how important two prices is maintenance or non maintenance, as it may be.

Of investment property.

I have a mate who is starting a side hustle of buying a rundown houses, fixing them up and flipping them.

He isn't doing much work just to fix up to jobs that should have been done over the last fifteen years and haven't been.

Is this an issue or just a tiny problem?

The maintenance and general standard of Australian housing stock a broad question.

Max flipping every six months, that sounds adventurous to me.

Yeah, I think you should wait a year at least.

But what do you.

Think, Oh, you want to get that CGT.

Don't want to get that discount?

That's right.

Look the whole house slipping thing and I sort of felt like we'd gotten through that phase.

It was a big phase when every TV show was about the flippers who would paint a wall and suddenly make one hundred thousand dollars.

Look, my very simple estimation of that is it only works in the rising market if the market's flat.

By the time you work out you're holding costs to stamp duty is spending the money, You're unlikely to make a big return unless the house was terrible and you spend all your labor effectively improving the place.

Yeah, I think it's a pretty fraught business model.

Okay, I hope that's clear, Ben.

And of course some of this is advice.

This is information only, as you would know.

Okay.

The last question is not on property, but it's useful and I'd like to just read it.

It's from Drew Veesh dh or you v s H.

I hope I pronounced that properly.

I am considering dollar cost averaging as a strategy, which may be better than investing all my money at Well, what is your recommendation for all the James's in the world, all the druvsions in the world.

It would be on how to approach investing.

And he puts an amount here, and he talks about ETFs dollar cost averaging any day of the week at Vision.

It's extraordinary over a period of time, and I've watched for a long time, and I remember, I remember we had an investment conference at the absolute bottom of the market in two o nine, the most miserable period in my personal history ever of the share market.

And it was done about fifty percent at the time and seemed to be going nowhere.

And Lawrence Freeman, who once upon a time owned Channel ten and once upon a time was one of the first fund one of the first real contemporary modern fund managers in Australia.

He stood on the stage and he said, dollar cast averaging always works, and I remember thinking, yeah, it does, but gosh, I've never worried about it so much.

But you know, in the fullness of time, it did work.

So I would totally back it, and I would be very careful putting everything in at once to one area except max.

For you, I want to ask you this one.

You can't devote.

You can't avoid that with property, can you.

But I can leak up my I can put my one hundred grand and split it into four or five and put in every month or something.

But property that's hard, isn't it.

For the investor.

It's a big hit.

Do it or don't do it.

It's a jump or don't jump.

There's no middle ground.

You can't sort of dollar cost average on your property.

You're either in or you're out.

I mean maybe if you buy the neighboring house and the markets change, perhaps you could do it that way.

But you don't have that liquidity in property obviously.

So yeah, yeah, it's unlike the share market.

You can buy and sell something immediately.

There's a lot more friction in property, so it needs to be a little bit more mid to long term in terms of your thinking.

What's your view, just broadly, before we go for the first time investor, the early investor in property, what's the minimum period they should be thinking?

Really, look a year at the minimum?

Oh yeah, right, okay, Yeah, that's about as short as I thought you were going to say short.

That's the absolute shortest.

But yes, property is a long game, and especially if you look at the cycles, I think we're seeing a lot more volatility than we used to, but it's still nothing compared to the share market.

But you guys would be thinking.

You guys have be thinking ten years from the day you acquire something or even sign the paper on something.

You're thinking ten years, I imagine, are you?

Yeah?

Yeah, some of our projects fifteen twenty years.

You have to think very long term, and you know that you'll go through two three cycles in that and you've got to set yourself up accordingly.

And so if you'll call an investment strategy, it's not being highly leveraged and it's not maximizing every dollar.

It's taking a reasonable approach to debt and having enough equity there to ride through, and I think that should apply to any investment.

Okay, terrific point, and thank you very much, Thanks very much Max for coming on the show.

Thanks for having me.

It's great that was.

Max Shiffman of the Interpack Property Group with some really interesting insights there for investors on the market and from a whole owner's point of view, that's not great to hear some of his observations on supply, especially I thought apartments even but obviously from an investment point of view, well it would seem to be a green light basically.

Okay, let's have some more questions the money posit at the Australian dot com dot au.

Talk to you soon.