'Pump and dump' warning for interstate property investors

0:00Hello, welcome to the Australian's Money Puzzle Podcast, I'm James Kirby, welcome aboard everybody. If you're an active property investor, you'll know the mood is changing in the markets quite quickly, I think. We're looking at higher interest rates, possibly three more rate rises from here. We're looking at higher construction costs due to supply issues relating to the Iran crisis. We're not promising. Also, I want to look at wasting your time on properties where there is under quoting Guayal. It's infuriating. I'm sure for anyone who's ever got caught in that, I want to look at that. I want to look at a few other changes that are basically eroding standards in the industry, which you may not be particularly keen to see and certainly if they affect you, you won't be keen to see them. My guest is Veronica Morgan. She is a property advisor, a voice in the property market, a unique voice, I think, and she's been on the show before. She's great to talk to.

1:00How are you, Veronica? I'm well. Thank you very much, James. Thanks for calling me a unique voice. I appreciate that. I mean it. Tell me, er, one of the first things I wanted to put to you because the last time we spoke was around the time the CGT and property gearing review was announced and you were very uncomfortable with some aspects that were going on. Specifically, people being hurriedly viewed like in, by buyers agents that were working on masks, getting lots of people to buy in lots of regional towns. And to some extent, there was also the flaws in it in both sort of almost cornering a market in a country town, then bringing a whole pile of people into it. That was bad enough, but you also were, we didn't have time to talk about it, but there are changes going on. Isn't there in terms of buyers agents and their stature, if you like? Tell me quickly, your problem with buyers agents, it used to be that people only bought in their own neighborhoods. Now, a lot of people listen to this show are encouraged to buy interest rates and it's a damn good idea as an investor to buy interest rates, but you see a flaw in what's going

2:02on. Tell us about it. Yeah. Look, it is smart to build a diversified portfolio. Like you buy everything around the corner from you, then that market tanks, then you're in trouble. There's also, you want to spread out your land tax obligations and various other good reasons. The problem is where buyers or investors are going to get the advice and who they're getting that advice from in terms of where to buy and how to buy. What has been happening because there's a very low barrier to entry for buyers agents, and that means that they just get a real estate agent's license, which is the same as the selling agent or a property manager has got nothing in there about property advice, about asset selection, about data, even, and there's a whole bunch of things that it just does not cover that a buyer's agent needs, but there's this also a simplification of the process whereby an agent can go and get their license in Queensland, which is the easier state to get it. And then by automatic, mutual recognition, they can go and then just get a license in another state, as assuming they even bother to get a license in another state in which they're

3:03buying, but that every single state in territory has completely different legislation, completely different vendor disclosure, completely different risk profiles. And that's not even getting into the local dynamics of understanding what's a good asset in any particular local area. So this is an absolute minefield, and consumers are just completely unaware of the risks that they are taking on when they engage these sort of borderless buyers agents. What's the specific risk to the investor of the borderless buyers agents? So you sit in Sydney and you want to buy in Queensland, you have no experience there. You go in with an agent who has just basically had a rubber stamped license off the back of their real estate agent qualification. What's the concern? The concern. So maybe not so much buying in Queensland, but certainly buying in regional towns or perhaps in another city, maybe in Perth, for example, and you're dealing with an agent who doesn't know the good areas or the good types of properties that don't understand the legislative process.

4:04So therefore, they don't even understand what information is actually required to be given to them by the agent and what else they need to know in order to avoid their client buying a liability that they're completely unaware of. They've been going off to sale for the sunset, and the client's the one stuck with this property, but not only that, they're actually making markets quite often. So they're pushing prices up in markets that really are over inflated because of this external investor activity, not underpinned by local owner occupy or local investor activity. So you've got all this stuff happening as the consumer who's engaged the buyer's agent is completely unaware of. I talk to sales agents across the country often, and I will ask them questions, particularly in non-city areas or regional areas, how many buyers agents they're dealing with, and this is becoming uniform because there's large investment houses, if you want to call on that, they've got to buy volume in order to continue their profitability. Right. So they're buying in these areas, they're not even inspecting the properties, they're doing an odd in the back of a WhatsApp video from the agent, the agents are laughing

5:08it, but how easy it is to sell, and easy to sell crap properties that they struggle to sell normally, and for more money as well. Can you name some towns, you don't have to name people, but can you name some towns where this is happening? Oh, absolutely, I can talk, there's Balorat, Bendigo, it's happened in Jolong. I have spoken to agents in Townsville and Tuumba. In New South Wales, I've spoken to agents in Tamworth, I've spoken to Agents in Wagar, I've spoken to Agents in Aubrey, I've spoken to Agents in Dubbo, that's, and I've spoken to agents in Perth as well, I mean, that's obviously Metro. Is this like a property version of Pump and Dump, really? Yep, that's it, you said it, exactly what it is. It doesn't seem to have been reported to any great degree. No, and I'm waiting for this to crash, because this is a wave, it's out there, there's been some random posts, I've seen some newspaper articles on it, as a lot of talk within the industry about it, but yeah, I'm waiting for this to actually suddenly, it's almost like it's going to happen, it's been having gradually, and then all of a sudden it's going to suddenly happen. That's the way these things happen, they're really unfold, and it's specifically a risk

6:10for investors, and it's specifically a risk for the investor who goes outside their home territory. Is that fair to say? Yeah. Okay, very interesting, it's certainly something that the point you're making and the concerns you're raising can only be amplified by the fact that interest rates are rising, and they are about to get squeezed along with many others. Let's have a break, we'll be back in one moment. Hello, welcome back to the Australian's Money Puzzle podcast. I'm talking to Veronica, Morgan, buyers agent, readers agent, and what will we say voice for investors who may be in danger, I think, in some of the practices that are happening, and I think she highlighted them pretty clearly at the start of the show, I'm amazed this hasn't come up more often, Veronica, what's going on, and even on our own show we haven't covered it much, but we're covering it today. That is the abuse, basically, of a system which has evolved so quickly around us, buyers

7:15agents, which are at core a great idea, and I use them myself, but they can be, of course, abused, the whole process can be abused, and so some extent a machine is created, which can capture a lot of buyers who may be a bit innocent, basically, ruling into this. I mentioned how rates are about to rise on top of this, Veronica, tell me just about your own sense in the market of the pressures around rate rising. They say that is the economists are saying three more rate rises, bringing us up to about almost 5% on the cash, that would bring us up to seven, sevens and eights on mortgages. One particular cohort I'm looking at very closely and always have is first home buyers, particularly those who went into the government scheme, the now famous 5% deposit scheme, which I like to call the 95% mortgage scheme. These people are 95% mortgages, what's going to happen to them if we have three rate rises? This is something that's very close to my heart. One of the other things that I do, I've co-founded Homebuyer Academy and we have a course to teach first home buyers how to buy property, and it is absolutely alarming.

8:18One of the things that we really try to encourage first home buyers to think about is that your first run on the ladder needs to be very firm, otherwise you're never going to reach the next run or it's going to collapse under you and you're going to be stuck there. So buying what's known as a quality asset, if you like, even with an investor's mindset is really important to make sure that you're not just buying anything to get onto the ladder and find yourself in a deficit from day one. And yes, we're already seeing, you know, it's certainly in Sydney and Melbourne, we're already seeing immediate impact of rate rises because there were the two softest markets really in the country. And so you're going to see that first and obviously we'll roll out. So we have seen this before where prices have really gone backwards. And for a period of time, look, they'll go up again at some point, but in that period of time where they're going backwards and rates are rising, that's very difficult for a first home buyer, particularly if they are in a situation where they're owing the bank more than the property is worth if they would have to sell it. And even if at 5%, they then had to suddenly sell it. The cost of selling would basically eat up whatever equity they got in that property anyway.

9:21And first home buyers are very vulnerable in this time. So those buyers who went in on the 95% mortgage scheme, it seems to me that not just that they are stressed with the fact that their rates are gone up, but they are stuck, they can't move. Hmm. If they do move, if they sell, they're probably going to lose their 5%, they may lose more than that. And I'm hoping and we certainly encourage some money spots, obviously, with our first home buyer students and it's very important they go and get good advice, but in making sure you start off with buffers in place, for example, that's going to help you. So if you know you bought a good asset that even if it falls in value a little bit, you're not going to plummet, you'll be amongst those with the first to take off again when prices rise again. And then that gives you a lot more comfort in your secure position. If you bought a bad asset that the bottom pool's out of it and everyone's trying to sell, you're in a real predicament, but if you haven't got buffers in place, you can't even write it out. So the flaws I imagine of that scheme was that they put the money in front of everybody and ask no questions really. It was there to be taken. In the Versa, we never had a scheme like that before.

10:22It had no limits. Anyone who rocked up and said, I'm buying my first one could avail of it and take a 95% mortgage. But there was no guidance on how to buy whatsoever. There never is. And that's really because our politicians don't understand. And in fact, to that end, if you think about it, so many of our first home buyer incentives are designed to help get them into brand new properties, whether that be a brand new house or apartment, right? Well, we know there's loads of evidence that says, particularly apartments, that brand new apartments, the first time resale is the number one loss making asset when you're looking at property, right? Yes. Probably closely followed by brand new houses. So there's a big huge amount of evidence and ongoing, even in the boom, people are losing money on apartments that they've bought, right, off the plan. So you've got government schemes at state level and they have been at federal level as well, encouraging people to go and get that to be their first run on the ladder. And so you start off with negative equity, you don't have hard to go. And so we've got a government that doesn't, or governments plural that do not understand

11:25there's a difference between getting on the market safely and getting into it with risk. So what you're seeing suggests that anyone who bought an apartment in this first step ever, but the 95% mortgage, they're really at the call phase. They are the most vulnerable cohort in the market. Okay. If they bought a brand new apartment. Yeah. And take a short break, folks, back in a moment. Hello. Welcome back to the Australian's Money Posit James Kirby here with Veronica Morgan. Great to have you on the show again, Veronica. You are very clear thinking, interview-eat, which is always a pleasure to deal with. Tell me about the budget and what's happening in terms of the government going to change. They are certainly going to change CGT. They are possibly going to look at negative gearing, cut into the chase, they're going to change the discount that we're all used to getting 50% off the CGT that we are due as investors are for a year. What do you think is going to happen and how are you preparing anyone in your area of

12:27clients for this potential change? Well, I don't know what's going to happen. Let's face it. I'm not going to put my voice out there so I think they're going to do this or that. Yes. I was actually surprised that it didn't come up in 2019. The unloosable election was lost over the capital gains tax, really, amongst other things. At that time, I thought it's interesting they're not touching CGT because I would have thought that would be an easier thing. I would have thought it was going to be easier too. But this time, would you take it that there is a different move this time, that the reaction is different? Yes, that much more pointed on CGT rather than negative gearing, which I think is appropriate to be quite frank. The tax reform is needed, so I think that they do need to look at it. I think where we've got a problem here is that it's being pitched as this will solve the problem. This will solve the affordability crisis. I think that is just basically kicking the can further down the road, another bit of investor bashing, and it's not really addressing the myriad causes of housing affordability in this country.

13:27Now, investment activity absolutely has contributed to it. Let's just not pull punches here. Let's be real. Right? We have to acknowledge that. It's not the only contributor, and I think that there needs to be a capital gains tax discount. If you remember what it was originally brought in for, it's to simplify the whole calculation of, yeah, exactly. Look, I've often thought 50% was too generous, quietly, just quietly, loudly now I'm saying it out loud. I've often thought it was too generous, and it was set in a time when inflation is higher than it has been is now. And so there's an argument that can be put forward to say that it's, but I also think that one year is too short. I think that that could be clever in how they structure these to encourage longer tournaments. I'm trying to invest in it. Okay. Yes, an interesting point. So rather than getting your discount after a year, encourage people to stay in the market and discourage property flippers. Yep. Okay. Maybe they will do something like that. It's wide open. No one is sure. And the treasure has been very coy as to what plans he has, but he clearly has plans. That's the point I think to make.

14:28Okay. I wanted to put a question to you. I came in and recently, which I thought would suit you from Luke. He said, here's something I haven't heard talked about in the short time between now and the May budget. Do you reckon there could be a bump in property prices due to it being potentially the last chance to buy an investment property that may be grandfathered into the old and favorable 50% CGT discount. A really good question, Luke. We often have a spike prior to tax changes. The issue here is we don't know precisely what the tax change is. Do you see how they can suggest that? Veronica. No. I think that it'd be a fairly bullish person who would take a punt on that and go on by on the premise of that. So I would think that the opposite might be more likely to occur, whereas people might actually decide to sell now in advance of that. So we're thinking maybe you're selling the next couple of years. They might say, you know, well, I'm not going to run the risk of it coming through being reduced and not being grandfathered and I've been caught out. So I would think that's more likely to occur prior to the budget rather than the other

15:32way around. I think, listen, in case you don't know this grandfather and what it means is that they would bring in the legislation, they would change the CGT, but it would only change from the day of the budget. And anyone who had bought a property prior to the day of the budget, the CGT arrangements that were in place when they bought their property would continue until that whole kind of cohort runs off. That's a typical way they do things now is it's standard almost. But there's been real debate about whether if they do this, whether they should grandfather it because if they grandfather it is a softer measure than it might have been. Good feeling from you. Do you think they'd grandfather it if they do it? It depends if they need the Greens votes to get it through because they're very loud and proud about not grandfathering. Yes, that's right. I've got to say, my, from my two-pins words is that they would not bring in such a thing and not grandfather. I think it would be outrageous in the overall scheme of things. Well, investors try to, best long term, they try to invest on the basis of policies that shouldn't, really shouldn't bounce around and if they did this, it would bounce

16:32it around. Okay, terrific. We're running out of time. Veronica, thank you very much for coming on the show today. Great to talk to you as always. Absolutely. Pleasure. Thank you, James. That was Veronica Morgan, folks, property advisor, real estate agent, buyers advocate, and also runs that buyer's academy, interesting operation, lovely to talk to her. Thanks for listening today. Keep the emails rolling. Thank you very much. The money puzzle at TheAustralian.com.au today's show was produced by Tiffany Dimack. Talk to you soon.