Is COVID-19 the start of the next property Armageddon? Or is this just another property market cycle?
While the circumstances that are affecting the property market are unprecedented, the caution in the market is not. Affordable Housing and Cash Flow Positive Property expert, Ian Ugarte, gives his property market predictions to streaming news service, Ticker TV.
Want more? Read the full interview below …
TICKER TV: Owners of investment properties have had a serious fright from the sudden dip in income from their investments. With Morgan Stanley predicting a fall in property, investors are growing increasingly worried about how to service their debt, particularly if properties are negatively geared. Let’s bring in Ian Ugarte from Small is the New Big. Ian, thanks so much for joining us.
IAN UGARTE: No worries. Thank you for having me.
TICKER TV: Now, as we say, never has been a tougher time in the property market. It’s been coming for a little while, of course. We’ve seen it drop off over the past couple of years, but it feels like we’re in a bit of a fright right now, obviously, but we don’t know where things are going.
IAN UGARTE: Yeah. I mean, I think the consumer in general have been saying for many, many years that it’s due for a massive downturn, but they said that in ’60 and ’72 and ’88 and 2004 in 2008. This is just another property cycle that is moving. And of course there’s a lot of fear in the marketplace. We’ve never been to this place before. And so I presume that’s why people are feeling what they’re feeling right now.
TICKER TV: I guess when we have a look back though, during that period, we had huge growth in jobs. We had huge growth in salaries. We’ve now had a period of time where we’ve had no growth in salaries and the property market’s been artificially held up by overseas buyers, we’ve been told, and obviously the mining boom that came through as well. What is the savior of the property market on the other side of this crisis?
IAN UGARTE: I think the savior of the property market is the supply and demand. It’s a rule that’s never been beaten before. And every year up until 2028, the prediction is that just in Sydney alone, we’re 30,000 front doors short every year. So across Australia, we’re about 800,000 front doors short in the next six, seven years. And so from the position of supply and demand, we need housing. We need people to be in a house that’s comfortable and affordable, and that will be at least the stability of the market moving forward.
TICKER TV: So much of the supply and demand though, the demand has come from foreign investors or a lot of immigration that we’ve seen as well. The belief is that immigration won’t be the same number that we’ve seen recently because the first priority will be to get Australians back in work. We’ve seen the JobKeeper payments have now been stopped for foreign workers as well. Do you think that that will have any impact on the demand side of things?
IAN UGARTE: Yeah, so the demand from my perspective is not from the purchasing entities, it’s that those people that need somewhere to live. So that creates a demand for someone to purchase. But if we are short houses and that’s an issue, yes, immigration will slow down in the short term, but it’s a short term thing. I mean, even if we look back to 1918 with the Spanish flu, there was still a two to three year recovery that things flattened out, but there was a demand that happened after that point in time.
So whilst we will have housing in the short term that’s still short, there’s still a demand for people to live somewhere. We’re still going to see a property cycle that happens, and depending on which cycle you want to travel along, you’ve got an 18 year cycle where we’re talking we’re in the mid cycle of that and that the recovery will be happening within, I think, a very short period of time, but others are predicting two to three years.
I’m predicting actually much more of an extended election-type V return. So instead of being six weeks, we’re looking at lightening up now and lightening up the load. We’re still seeing people wanting to attend live inspections. So that’s starting to open up around the country. And I think that if not a V return, we’ll have a W return and that’ll depend on whether we have a second hit of COVID. So I’m actually pretty buoyant and confident about the market. I know that a lot of people are saying that it’s going the other way, but even in most media reports at the moment, they’re actually not seeing any massive indications because of the time lag of sales.
TICKER TV: Really, really interesting in terms of the W-shaped economy. Because as we know, we’re going to get some hope and then who knows what’s on the other side. I mean, it is so hard to predict, even 24 hours from now, right now, when it comes to markets and things like that too. But what about those, we mentioned in the intro about people who own properties negatively geared, et cetera, people who have four or five houses have just been paying off the interest let alone the head. Talk to us about those people and the impact that that may have on property investors, as opposed to people who are buying to live in their house.
IAN UGARTE: Yeah, I think we’ve had about a 30% increase in inquiry around people particularly that have negative geared investments. We’ve never been a supporter of negative gearing. We’re always about positive gearing or at least neutrally gearing your property. We just don’t see that the downside of loss is an upside moving forward. So if you’ve got positive cash flow, then you’re covered. It means that regardless of what the property market does, regardless of what the property prices do, if you’ve got cashflow coming in.
Our inquiries increase because with the strategy we use, we start to create micro apartments within existing dwellings, using unknown and unused policies across the country. And by doing that, these negative geared investors are turning their property portfolios around really quickly. I mean, sometimes we turn them around within 48 hours and no one loses out of what we’re doing. Because by creating the micro apartments, we’ve got 60 to 80% of people that are looking for accommodation today are singles and couples, and 60 to 80% of the properties that people own are three, four and five bedroom houses.
So if we can create better use of those properties, we’ve got 12 million empty bedrooms tonight in Australia. So what we find is that people save one third to one half off their normal weekly rent by coming into one of our micro apartments. And they’re not squished. They’re actually nicely, self-contained, their own bathroom, their own kitchenette area and got their own space. They share one communal area, which they can go to if they don’t want to, or they can go to if they want to.
And so then on top of that, we as investors actually do better. We get a positive cash flow, and we’re now taking the pressure off the housing market. And that way the government can concentrate on what they need to do and spend money and the resources of low socio, where we can actually just hit the middle third of the market and get them comfortable, get them out of despair, insecurity and fear, and in some confidence and certainty and get some choice in their life.
TICKER TV: Very much. So now I’m interested in the name of your business, Small is the New Big. Talk to us about what that approach means.
IAN UGARTE: Yeah. Well, you can’t really see this on camera, but I’m about five foot one, so I’m not the tallest person in the world. I talk about doing big things. Can we take the bigger size houses and create a smaller amount of micro apartments within those houses and create a bigger outcome, not just for us, but for community, for the people, for the government. And again, no one loses out of what we do. I’m a big affirmer, I advise councils, I advise state governments about how we can actually create policy. Stop spending money on housing. You’ve got enough money being spent on housing. You just actually have the mum and dad investors that can utilize their properties much better. And by doing what we do, we don’t actually have to get rid of negative gearing, by default people will move to positive gearing and in the end they will actually have something set up for their family into the future.
TICKER TV: Is that what you want to see? Do you want to see the negative gearing? Is that what you’re suggesting?
IAN UGARTE: I don’t want to see the end of negative gearing. I want negative gearing phased out by default. And if we can get rid of negative gearing, because think about negative gearing. By negative gearing, what we’re doing is we’re actually paying banks a profit, mostly, in interest so that we can make a loss on purpose. And then we go to the government and we ask for our taxes back. That costs the government a lot of money. So if we can create a marketplace where eventually all investors are actually getting a small return on their properties, and its wealth for their family and their kids into the future, and the government is spending less money on giving tax back, then perhaps then we will pay less for the $200 billion that they’re putting out in the marketplace. And we will have less tax in the future.