HomeBuilder extension announced
One of the government’s most successful schemes, HomeBuilder, has been extended, bringing the total level of expected ...
Phil once again is joined by Momentum Media’s managing editors of wealth Aleks Vickovich and mortgages James Mitchell to discuss the importance of challenging an audience to come up with their own ideas, sales strategists and the impact of foreigners buying up Australia’s properties.
They also discuss the royal commission, revealing their expert perspective on how this will impact property investors as in both the short-term and the long-term.
The managing editors also discuss their thoughts on regulation in the mortgage space, why it is important to understand the property market as well as their thoughts on how this will impact the future markets.
You will also hear about the impact of mortgage lending for the past year, how technology is impacting the market and understanding your superannuation.
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Announcer: Welcome to the Smart Property Investment Show, with your host Phil Tarrant.
Phil Tarrant: Phil Tarrant here. I'm the host of the Smart Property Investment Show. Thanks for joining us today. I hope you're enjoying your summer break or some reflection over the period between Christmas and New Year's, and up and through Australia Day. It's a time to recharge, readjust, reflect on a year past, and look at what you might be able to do with property in the years ahead, amongst many other things.
I've got two people in the studio today. I invited them back on the show reluctantly, but I've been copping quite a lot of badgering. For some reason, our listeners like listening to these two people. I've got them back in to help me have a chat about the market, just a bit of a chin wag on what's been going on in property and finance spaces. Colleagues, friends of mine, Aleks Vickovich and James Mitchell. Aleks is our managing editor here at Momentum Media, of all our wealth platforms, and James is the managing editor of mortgages. Guys, how are you going?
James Mitchell: Very good, thanks, Phil.
Aleks Vickovich: Thanks. Thank you for the reluctant invitation, Phil.
Phil Tarrant: It is a reluctant invitation, as you can see. Before we come on air, just for our listeners, there's a reasonable amount of banter, all in good jest. We've got two guys in the studio here who are in an enviable position in what they do every single day. They're connected into finance networks across Australia. They do the job well in terms of engaging with thought leaders, influencers, whatever you want to call them, in these spaces. They always do it with the eye of cynicism, which I expect all good journalists to have.
Aleks Vickovich: Keep the bastards honest, Phil. That's what it's all about.
Phil Tarrant: There you go. There you go. Let's just use that as a bit of a brief to sculpt our conversation today. What do you reckon?
James Mitchell: All right, keep the bastards honest.
Phil Tarrant: Keep you guys honest, I reckon.
Aleks Vickovich: Yeah, well we play a role holding each other to account as well. That's what newsrooms are all about.
James Mitchell: Yeah, that's true.
Phil Tarrant: Yeah. How do you guys get on? Just as an aside.
James Mitchell: We can't stand each other. No.
Phil Tarrant: I know that.
Aleks Vickovich: We take it out on the tennis court pretty regularly.
James Mitchell: Personally, how do we get on?
Phil Tarrant: No, no, no. Are you going to let me finish?
Aleks Vickovich: That's not good.
Phil Tarrant: You journos are always butting in. You essentially, mortgages here in Momentum Media, you’re Wealth. Mortgages, everyone knows what mortgages are, our listeners, wealth is like financial advice.
Aleks Vickovich: Yeah, superannuations, funds management.
Phil Tarrant: The sector which pretty much feeds our retirement or wealth creation from a not investing in property perspective. You do a bit of it, so. That's the balance, right?
James Mitchell: Yeah.
Phil Tarrant: How do you guys work together then to ensure that ... You've got your respective markets that you look after, there's a lot of commonality across it as well. Do you sort of meet up and just talk crap?
James Mitchell: Yeah, we do. We catch up once a week just in terms of what's going on. There's not as much crossover as you'd think. There's two completely different licencing regimes between financial advice and mortgage brokering. In terms of the people who are the product providers, the banks and then that sort of stuff, there's a lot of crossover in terms of what the banks are doing. I guess ...
Phil Tarrant: Amateur.
James Mitchell: Look at that. To take a phone call here.
Phil Tarrant: This could be interesting. It's actually a buyers agent .
James Mitchell: Oh, is it?
Phil Tarrant: Yeah.
Aleks Vickovich:It could be a new deal. Put him on the line. It's a new talk-back segment.
Phil Tarrant: Talk-back radio.
Aleks Vickovich: Yeah, Alan Jones eat your heart out.
Phil Tarrant: There we go.
James Mitchell: No, I mean in terms of what ... Our readers are mortgage brokers, so they're a distribution channel. With Aleks, it's a similar thing. He's got financial advisors. That's his thing. In terms of product providers, those cross over there, yeah.
Aleks Vickovich: I think we could write the same stuff every day and it would be of some relevance to our audience, but it depends what your style of media is. As you know, Phil, since you kind of set the strategy. We're all about niche publishing. Even for financial advisors, we've got six different publications here, depending on their specialisation, depending on their geography, depending on all these different factors. We believe that the reason that the Sydney Morning Herald failed is because you can't ... They've got a lot of readers, but they don't know who they are.
Phil Tarrant: Has failed or is failing?
Aleks Vickovich: You know, it's not what it was. Certainly, I don't read it.
Phil Tarrant: Newspapers are the backbone of a democracy.
Aleks Vickovich: Yeah, I don't know.
Phil Tarrant: We need them, don't we?
Aleks Vickovich: I don't know. You don't need them, no. You don't need them. It's just a medium. What you need are people who are helping the general public form their own opinions about what's going on out there.
Phil Tarrant: That's our job then, is it?
Aleks Vickovich: That's our job, and others. Yeah, our job is to ensure that people are informed. Also, and I think more importantly, and this is where media is going, help them decide what they believe in, to challenge them to come up with their own ideas. That's why I think media are heading in a more opinionated direction. Podcast, obviously, is a big part of that. I think it's very healthy.
Phil Tarrant: Are you opinionated?
Aleks Vickovich: I'm just a vehicle for the truth, Phil.
Phil Tarrant: Is that what it is?
Aleks Vickovich: Mm-hmm (affirmative).
Phil Tarrant: By the way, Aleks just launched a book called "G'Day USA." Reluctantly, I couldn't ...
Aleks Vickovich: "USA G'Day."
Phil Tarrant: "USA G'Day." I couldn't go down to the launch, which I do apologise. I had some other pressing things.
Aleks Vickovich: Not at all, mate.
Phil Tarrant: Aleks spent some time in the runup to the most recent presidential election where Donald Trump was elected, and he had some observations on what he saw and what his thoughts were. Where is it available, in the local book shops?
Aleks Vickovich: Amazon. Yeah, usagday.com, you can follow it from there to Amazon. Thanks for allowing me the plug, Phil.
Phil Tarrant: We talk about opinion, right? Podcasters, journos, we've been in this game long enough to be able to be aggregators and curators of information. Because of that, we can apply our thoughts or sentiments towards something. That's what I do in this podcast, what you do in yours.
Aleks Vickovich: Yeah, but you can only do it I think in this day and age if you're connected to that audience. You need to know them and you need to feel them, and it's not enough simply to provide information. You need to be an advocate on their behalf. That's what so much of the media is not anymore. If you look at the American election, one of my main conclusions in the book was that the media got it wrong. Not because they didn't have any research in front of them, but because most of them live in Washington, DC and New York. They haven't been in a shopping mall in 30 years. They've never met a real American or been around one.
It's very similar things that happened here with our media space. I think that's one of our points of difference, whether it's your Property Investment audience, which you're clearly a part of that community, you have a lot of personal relationships there. It's the same for me and James in our respective audiences. We don't see ourselves as providers of objective information, we see ourselves as players and as advocates.
Phil Tarrant: That's our role in today's modern media involvement and I think we do it pretty well.
James Mitchell: Yeah, I think so. Back in the day, journalists used to get out in the field. They'd be talking to the man on the street and getting his story, and sort of using that perspective to tell stories about broader themes which were playing out. Now, a lot of the stuff we see it's either a prime minister or a CEO and that's basically it. That's the lens we're seeing the world through when we see financial media now. In terms of what we do by getting the stories of the brokers, the financial planners, those types of business, and also all the events that we do, and Aleks and I get out on the road a lot and go and meet people in the industry from all across Australia. It's really, really important, because that's the reality. People can set policy, and can set agendas, and have all that sort of stuff, but it's the people in the field who really have the real stories.
Aleks Vickovich: Absolutely. If you spend all your time on Collins Street or Circular Quay, you're not going to know anything about the actual financial system. You're only talking to the owners of the system, you're not talking to the consumers. I think that's where you really need to have that heartbeat.
Phil Tarrant: Speaking of the owners of the system, when we last got together, go and have a listen to it, it's the third of November, we spoke a little bit about Aleks, my memory, product manufacturing, product distribution, vertical integration, conflicts within the financial system. I think we did a reasonable job on trying to articulate to our listeners. Some of our listeners are very mature investors, they've been around a long time and they're quite sophisticated. They're quite …
Aleks Vickovich: Sure. They certainly understand banks.
Phil Tarrant: They understand banks, right? We spoke a lot about that. Go and tune in on it. I think you'll enjoy the conversation, because we got into the insights, the conflicts between advice and product. Making sure that the product you're choosing for whatever financial mechanism you're choosing, whether it's debt or investment, is right for you, right for your circumstances. Not right for the person who's selling it for you. It's that way in wealth, it's that way in mortgages in many ways.
James Mitchell: Yeah, increasingly so.
Phil Tarrant: In terms of asset selection of property as well. Be careful who you're getting your advice from. I don't really want to go into that today, because we did a lot of that on the third of November. What I want to have a chat to you guys today about is just the state of the play of the market. There's quite a few things happening and things being ...
James Mitchell: There's a lot happening, yeah.
Phil Tarrant: Yeah, readjustments within the government in terms of their approach to legislating investments and financial instruments. There's a lot of heat right now on banks and some of their behaviour around the delivery of financial advice and financial products. We're talking about this Royal Commission. Aleks, mate, can you fill us in on what this Royal Commission thing is and how it might impact our listeners, or what they should be thinking about as they see this stuff coming through?
Aleks Vickovich: Yeah, I mean it is a really big deal that we're having a Royal Commission into arguable the four most important companies in the country. They're a huge proportion of the Australian Securities Exchange. All Australians in some way or form, or the vast, vast majority of Australians interact with or are customers of those four banks. It is major that we're having an inquiry of this kind. The basis for a Royal Commission under law is meant to be systemic illegality. Basically, real criminal stuff. Historically governments, particularly coalition governments, have said, "No, you don't really quite need something of that scale." We've had 40-something inquiries in the last 10, 15 years into the financial system in various kinds, including a widespread financial system inquiry only a couple of years ago, which former Commonwealth Bank CEO David Murray ran.
All of these, as far as the advocates of a Royal Commission, have failed to really get to a lot of the root causes. We haven't seen any senior executives prosecuted. We haven't seen anything of that kind. What we've seen is a lot of focus around distribution. You've seen some bank managers get busted and go to jail, you've seen some mortgage brokers get busted, but really I think what a Royal Commission can do is it takes the inquiry out of the hands of government. The government can't just appoint its mates to run the show. It's not a political act. It's separate. It's run by a former high court justice, Ken Hayne, who's a really respected guy. Importantly, it has prosecutorial powers, so basically it's got some guts to it.
Phil Tarrant: Is it a witch hunt, this thing, or is it a genuine look at the banking system, whether it's okay number one, and number two if it's not how does it get improved?
Aleks Vickovich: You could definitely see it as a witch hunt, and no doubt the banks have been trying to portray it as that until now, although now they realise that they've lost the public on this and they need to play ball. I think there are some genuine witches. I think we do need to look higher up the scale, because Australians have been ripped off in a lot of senses. We're not talking about just a few dodgy practises here, we're talking about money laundering. It's nasty, mafioso type stuff.
Phil Tarrant: What are they looking at then as part of the Royal Commission? This isn't just X bank is giving ...
Aleks Vickovich: It's not just banks.
Phil Tarrant: Inappropriate advice, it's much bigger than this.
James Mitchell: Yes.
Aleks Vickovich: It's the rot in the system which David Murray's inquiry didn't quite get to. It's banking, superannuation and financial services. From my perspective, I do think it's warranted. I can understand why ... It's expensive. It's $75 million it's going to cost the taxpayer, and hopefully end up with a good result. I think there does need to be some meaningful change. Having said that, all this stuff is politics. From my perspective, and I write about banks all day, just as James does, the only thing that's going to make the big four banks behave better from the perspective of consumers is more competition.
It's all about that business and the fact that we've got this four pillars policy, which basically means that they don't really need to compete and they don't really compete. They've all got a captive audience. Very few Australians change bank accounts, despite the level of service that they do or don't receive. I think the only thing that is going to really shake them up is if we see more banks in the mortgage space. James, correct me if I'm wrong, but the rise of non-bank lenders, Aussie Home Loans, Wizard Home Loans in the brokering space over the years, that was a really positive thing.
James Mitchell: Yeah.
Aleks Vickovich: That hasn't happened to the same extent on the retail side, in terms of retail banking. It's starting to happen on the wealth management side and the superannuation side as well. I think competition is the answer, but that's a lot harder to happen, because it's expensive to run a bank and to start a bank. In lieu of that, I think a commission ... You've got to think about the people who've been aggrieved, right? There's a lot of people out there who've been ripped off, who haven't really felt like they've had a sense of justice, and maybe this will give it to them.
Phil Tarrant: James, what do you see as the best case outcome from a Royal Commission and what is the worst case outcome for a Royal Commission?
James Mitchell: I guess like Aleks said, best outcome, to be honest, I don't feel too hopeful about it. I've just seen inquiries come and go, whether it's a Royal Commission or something else. A Royal Commission, like Aleks said, has that prosecutorial element to it. It's a lot more serious than just an inquiry where facts get shared and a report comes out and then we move on to the next thing. The major banks just have so much power in this country, and power over government.
Phil Tarrant: To be fair, the major banks saw us through the global financial crisis.
James Mitchell: Yeah.
Aleks Vickovich: Did they, though? What saw us through the financial crisis was the Chinese buying our bauxite and iron ore.
James Mitchell: Yeah, there was a few factors.
Phil Tarrant: A strong banking system, though?
Aleks Vickovich: A strong banking system is essential, but it's also the scare tactic the banks can use to say, "Hey, don't regulate us, don't change our situation." There's no doubt Australia has one of the best banking systems in the world, but it just needs a little bit more competition to it.
James Mitchell: The thing is, things are already starting to change. The Royal Commission will go on, markets will continue to perform, and innovation will continue to come into play. There's been some interesting stuff which is happening. If you set the Royal Commission to one side, the regulation ... I guess Royal Commission comes into that, but regulation has been the big theme of 2017, huge regulation in the mortgages space, all that sort of stuff. That's been playing out for probably a few years now. We've spoken about it many, many times on this show and on our own podcast, Elite Brokers, all about what APRA has done in the mortgage lending and how that's made it a lot harder now to get money from banks. The non-bank lenders have seen that as an opportunity, but you've also got some really smart third-party operators, mortgage brokers, mortgage managers. The same sort of innovation we saw in the early '90s where we had those big interest rates and people came in and said, "We can charge half the rate and still make money, and save..."
Phil Tarrant: The birth of your Aussies and your Wizards.
James Mitchell: The birth of your Aussies and your Wizards and all that sort of stuff. That stuff is coming around full circle now with the advent of technology and things like block chain solutions and all that sort of stuff, and algorithmic credit decisioning. Also, foreign capital. Australia has always relied on foreign capital, but now you've got groups ... For example, I know of a Sydney-based mortgage brokerage which is going to be launching a white-label offering not relying on major bank funding. They're relying on overseas funding and they're using an algorithm to do risk-based pricing. They'll be able to offer something vastly more competitive than what the majors can.
Phil Tarrant: It's the new evolution.
James Mitchell: It's the new evolution of mortgage management or mortgage brokering.
Phil Tarrant: I want to just stop there, because I want to have a good chat in about five minutes' time around the influence or the extent of international financing in the Australian marketplace, and the flow of investment, particularly property investment. Just sticking on the Royal Commission quickly, Aleks, I'm a property investor, our listeners are property investors. Some have large portfolios and some have small portfolios. What does this mean to me? Does it matter?
Aleks Vickovich: Yeah, it probably means that because of the next 12 months of negative headlines about the banks you can probably get a more favourable deal from whoever you're dealing with, and you should be trying to turn it to your advantage. The reason they're in this situation is because the government and the general public believes that they've gotten a fairly raw deal from companies that are as profitable as they are. We're talking about one month the largest bank in Australia is getting held up by AUSTRAC, the anti-money laundering and counterterrorism authority for potential money laundering, two months later it's recording the largest profit in its history. They're doing very well, but there's a mismatch to the level of service that people feel. In terms of an investor, I would say turn that to your advantage. They know that they're on the nose right now, and they need to fix it by giving people better rates and better service.
Phil Tarrant: In terms of mortgages, most investors, myself included, are aggrieved by the fact that our cash rate is ... What is it at the moment, 2.5?
James Mitchell: No, 1.5.
Phil Tarrant: One point five, sorry. It hasn't moved in ages.
James Mitchell: Eighteen months, it hasn't moved.
Phil Tarrant: As an investor, I'm paying 5.2 percent interest only on my mortgages. If I'm doing principal interest you can get really high threes or fours, right? There's a big gap between the cash rate and what you're paying in interest rate. Banks will tell you that it's the cost of funds, it's margin. That's where their profit comes from.
Aleks Vickovich: Yeah, and to be fair their profit is important. We're all invested in the banks in our super. We're just saying that a lot of people don't realise.
Phil Tarrant: Yeah, everyone is sort of on both sides of the fence, but from a mortgage perspective people sit there and think, "I'm getting gouged on my rates." You go rate shopping elsewhere, non-bank lenders, second-tier lenders, whoever. Is most of the aggrievement with the Royal Commission around mortgages, or is it around the delivery of ...
Aleks Vickovich: I think the biggest thing ...
Phil Tarrant: Manufacturing?
James Mitchell: It's about executive accountability more than anything, I think.
Phil Tarrant: Yeah.
Aleks Vickovich: Yeah, I think so. I think there's a range of problems ...
Phil Tarrant: Who have just chased big bonuses, yeah.
Aleks Vickovich: Senior people have not been done. Only people down on the bottom end of the chain have been done, and people just think that's unfair.
James Mitchell: And culture as well.
Aleks Vickovich: The inquiry will focus less on mortgages and more on superannuation.
Phil Tarrant: Yeah.
Aleks Vickovich: Super is something that is very poorly understood by the general public. It's not taught well in schools. It's something that I didn't truly understand before I wrote about it for a living. They're the two policies that Paul Keating brought in, and both of them sound like they're good in theory, and everyone supported at the time, but in my view have caused most of the problems. The first is the four pillars policy, which sounds like it's ...
Phil Tarrant: What is the four pillars policy, for our listeners?
Aleks Vickovich: The four pillars policy means that the big four banks can't buy each other. Basically, the ACCC, which is the competition regulator, will not allow them by law to buy each other. At the time, in the '90s they wanted to ... ANZ I think wanted to buy NAB, or the other way around. I can't remember which one. That was seen to be a problem, because it would end up with more monopoly and less competition. Arguably, yes, there's some sound logic into why you would regulate it. In the result, what has happened is those four banks are simply just untouchable. They're protected by law, and so they don't take the same sort of risk that a normal business takes. It's the same with superannuation.
By Paul Keating making it compulsory, it sounds great. Every employer in the country is forced by law to put in an extra 10 percent. People don't quite understand the fact that this is their money. While it's good that people have retirement income and that they're automatically saving for it, the reality for the busiensses that operate in that space is that they take no risk. It's a cash cow. It's mandated by law. They take no risk, they just feed off it, and it's money that doesn't belong to them. It's money that belongs to the people. It's the same thing. As soon as you mandate, that's where crony capitalism comes from. That's where you start getting all these leech industries who understand the system, and the consumer gets a raw deal.
Phil Tarrant: I've been vocal, not this year really, but I remember when I got my superannuation ...
James Mitchell: And it was less than the year before?
Phil Tarrant: It was absolutely ridiculous, the return I got on my money. It was just a retail fund, and it's a subsidiary of a large bank which has a red logo. You can work out who that it is.
Aleks Vickovich: It's 50/50.
Phil Tarrant: Yeah. I was livid. I got a 0.01 percent return on my money. I couldn't understand that. I was yelling and screaming from the rooftops, saying the CEO of this business should be sacked because he hasn't done his job.
Aleks Vickovich: The reality is it's hard to get a return through active funds management, but don't charge the fees that you're charging for active management in that case.
James Mitchell: The fees are shocking. I brought up my super and I looked at the statement, and every couple of days there's a fee coming up for something else.
Aleks Vickovich: It's not just the banks, though. The industry funds are arguably even worse, because these are meant to be not-for-profit funds that people have signed up to by way of their union or by way of the industry that they're a member of. These are meant to be not-for-profit funds, but every time you turn the rugby on or the AFL, depending on where you are around the country ...
James Mitchell: Sponsoring it, yup.
Aleks Vickovich: You're seeing some sort of industry superfund marketing all over the country. Now, what benefit does it have to the members of a superfund simply for it to have more members?
Phil Tarrant: All the execs are arriving in their Maseratis as well, right?
Aleks Vickovich: There's no benefit. They're also funding political campaigns of the Labour Party. There was a report just a few weeks ago that you can read about in our publications, ifa and Investor Daily, that just blew the lid on how bad this was. I mean millions and millions of dollars going from member superannuation accounts to the Australian Labour Party and its political objectives.
Phil Tarrant: You love it, don't you, Aleks?
Aleks Vickovich: I don't love it. As I've said, it's just as bad on the other side.
James Mitchell: It's a racket.
Aleks Vickovich: It's just not about one party being worse than the party, this is about the fact that superannuation is only meant to do one thing and that's provide retirement income. All of the bullshit around that is just no good, and that's what the Royal Commission will hopefully uncover.
Phil Tarrant: When we started this conversation I said you were a cynical journalist.
Aleks Vickovich: I'm not a cynic, I'm just too close to it. I know how it actually works, unfortunately.
Phil Tarrant: What do you do? I'm a listener of the Smart Property Investment Show, and as a result I'm therefore proactively investing in my education to be a better investor and take control of my financial future. That's the idea. Either I'm self-employed and I should be paying myself super, and if you've self-employed and you're not doing it be careful because you can get yourself bankrupt by not paying yourself.
Aleks Vickovich: You've got to have sympathy for that situation.
Phil Tarrant: Absolutely. Then if you're a PAYG employer, you get 9.5 percent put into, by your employer, every month or every quarter, into a fund which is all your rights and obligations to manage and administer however you like. I can chuck it in a self-managed superfund and I can invest in property. I can do that. A lot of people who listen to this show invest in property in a self-managed superfund, which is onerous and it's got its requirements, and it can be a bit of a pain in the ass. Everyone should know what their super is doing.
Aleks Vickovich: That's basically it.
Phil Tarrant: There's no excuse not to know what your super is doing.
Aleks Vickovich: And what they're charging you and what you're getting. Again, the problem is you need to have a proper functioning market where people are switching, where people are shopping around the way that you would shop around for shoes.
Phil Tarrant: You can do that with your super.
Aleks Vickovich: Of course you can do that, but the fact that they know that people don't allows them to get away with stuff that a shoe manufacturer would never get away with.
James Mitchell: Anytime you've got a group of consumers who don't understand a market or what it does, and especially when you've got a legislative thing which says ...
Aleks Vickovich: You've got to do it.
James Mitchell: Ten cents out of every dollar you earn goes to this thing which you don't understand, it's going to be a racket. I think there'd be people there just screaming it.
Phil Tarrant: So hold your super provider accountable?
James Mitchell: That's right.
Aleks Vickovich: Yeah.
James Mitchell: Just get educated. That's why this financial literacy ... It's funny, with financial literacy, people talk about it as if it's on various scales. It's easy for us to talk about financial literacy, because we're in this industry and we're covering it. We're basically financially literate, to a decent degree. There are a lot of people in Australia who don't understand how to read a gas bill, for example. You talk about ...
Aleks Vickovich: I've got no idea how to read a gas bill.
James Mitchell: You talk about things like superannuation and stuff like that, it's just going to be a huge knowledge gap there. I always thought financial literacy was a bit of a fluffy thing, it's not a great news angle for me as a journalist, it's not that exciting, but I'm increasingly finding it so important, for reasons like Aleks just discussed.
Aleks Vickovich: I think getting informed, but I think from an external point of view, and you touched on it earlier, James, one of the things that is happening that I think is going to make a real difference is this injection of foreign capital. That's something that can make real competition. One of the things they did last year was they made it easier for Australian companies to get a banking licence, I think that's a positive thing, but the reality is it's expensive to start any business in Australia let alone start up a bank. Although technology is making it possible, but the foreign capital entering in. I know, Phil, that for your audience this is a very controversial subject. Property owners and even homebuyers across the country are seeing foreign capital come in. It can be a potentially negative thing. It certainly doesn't make things easier.
When it comes to the world of big business, I think foreign capital coming in is a really big thing. Private equity, in particular. I remember when I was on Wall Street I would have conversations with people, big banks or investment banks or fund managers, and I'd say, "What would it take for you guys to enter the Australian market?" They'd all say the same thing. They'd go, "Do those four banks still run your country," and I'd say, "Yes, yes, but it's starting to change potentially." They'd say, "As soon as that changes, we're there." They see Australia as a really lucrative market, they see it as somewhere where they can very safely domicile and it gives them access to the Asian Pacific. They want to get their hands on that cash cow of super as well. With more players that are world capital coming in, that has a direct impact on fees, has a direct impact on the consumer outcomes. I'm pretty excited about that.
James Mitchell: Me too.
Phil Tarrant: Thanks for the segue into this, Aleks. There's two things we're talking about here. Number one is people buying Australian property, and then the other thing is that large, foreign international investment banks, or rather fund houses, are seeing Australia as a source for them to distribute money and make an earn off it.
Aleks Vickovich: Yeah, and provide services and products, yeah.
Phil Tarrant: The first thing is foreign buyers buying up Australian property. There's obviously legislation around this.
Aleks Vickovich: What's your view on that stuff, Phil? If I could throw a question back at you. I know it's your show.
Phil Tarrant: The market is the market is the market. We're in Asia here in Australia. I don't know if you guys tuned in to it, but I did a really good podcast with Bernard Salt about a month or so ago.
Aleks Vickovich: I heard it, yeah.
Phil Tarrant: He talks about the Dubai effect. You might remember this. He was chatting on one of our things once. The Dubai effect being Dubai is this hotspot of investment. It's a nice safe enclave in an area of disruption. You have obviously, if you look at Afghanistan, Pakistan, Saudi Arabia, Kuwait, Egypt, around this whole area is a lot of tension, a lot of conflict. People are tipping money into Dubai as a nice safe place to park their cash. It's got a strong, stable government. It's open for investment, it's open for development, all the great things. What Bernard Salt talks about is that Australia, primarily Sydney and Melbourne, are the Dubai effect. The same thing is happening in Asia, a very similar dynamic.
Aleks Vickovich: Interesting.
Phil Tarrant: There are good reasons why there's a lot of foreign money coming in property investment in Australia. It's because it's a nice safe place to park your cash. It's a growing economy, strong, stable government. Some would argue with that. We've had about 18 million prime minsters in the last four or five years. But, it's a good place to park your cash. That is the market.
Aleks Vickovich: I think some of it's a bit worrisome, though. I don't know if your readers have been following Sen. Sam Dastyari basically resigning because of his closeness to the Chinese regime. I do worry that some of this property investment in Australia is all about having a greater influence by what is still a Communist regime at the end of the day. It might be one of our best clients as a country, but it gives them a lot of influence. Particularly, the sale of agricultural land. I agree with you, I think an open market is an open market, but I understand why people are worried about this sort of thing.
Phil Tarrant: It's very emotive, but it's not this time. Ever since Australia was founded these inverted commas, foreign people coming in and taking up bits, which as expected is not rightfully theirs, and I think that's just a ...
Aleks Vickovich: Sure, but Aussies used to be able to outbid them every now and then.
Phil Tarrant: Markets ebb and flow. It's like that right now. It's calmed down a lot. You mentioned beforehand, James, how APRA regulatory bodies have tried to slow down investment lending in Australia and therefore soften the market a little bit, slow the market down. Legislation around foreign investment is still there. As long as the money coming into it is not dirty money. I've got a problem with that. It needs to be good clean money.
Aleks Vickovich: Some of it is.
Phil Tarrant: Some of it is. A lot of it is.
Aleks Vickovich: I think there was a new report from the OECD ...
James Mitchell: That's right.
Aleks Vickovich: Just out today, I think, or recently, that said there is a risk in Australia of dirty money, of corruptly obtained funds, specifically coming into real estate.
James Mitchell: Using real estate to launder money.
Phil Tarrant: You think about it, and going back to my chat with Bernard Salt, and go and check it out, he talks about the population growth of Australia as a nation, primarily our major capital cities, it's going to accelerate and continue to accelerate in the years ahead. There's going to be a lot more people living here.
James Mitchell: Yeah.
Phil Tarrant: As a result of it, foreign money coming in and stimulating construction investment. Great for building, great for construction, and everything adjacent to that, mortgage lenders. Everyone benefits from a growing nation.
James Mitchell: Yeah, that's right.
Phil Tarrant: Everyone benefits from it, as long as it is a fair, competitive playing field for people to secure property. It goes back to also the expectation, I spoke about it the other day on a podcast, the expectation of Millennials. Are you guys Millennials?
Aleks Vickovich: Yeah, we just kind of scrape in.
Phil Tarrant: You just scrape in. That your first property is going to be a $1.5 million house in Newtown. Come on.
James Mitchell: I don't know if that is the expectation.
Aleks Vickovich: I think it's the expectation of a majority of our generation.
Phil Tarrant: If you read the Daily Mail and The Telegraph and stuff, absolutely it's the expectation.
Aleks Vickovich: Yeah. What was that front page a few months back and they had a picture of a typical Millennial, the headline, the Herald was editorially backing this young individual, and the headline was, "How are we meant to compete against people with savings?" That's the mindset, like, "The world is evil, I shouldn't have to save, someone should buy me a house."
James Mitchell: Yeah, that's crazy. That's madness.
Aleks Vickovich: I know that your listeners or our listeners obviously find that ridiculous, since they've gone through the sacrifice of actually saving.
James Mitchell: I think that's crazy. In terms of whether it's the foreign investment thing or affordability or whatever, I think you've just got to get down to reality. There's a huge amount of people in the world, there's finite resources where the people are buying agricultural land to secure their food sources for their own country or they're buying up property and land. Not everyone on this planet will be able to afford a home. Not everyone in this country.
Aleks Vickovich: Particularly not a home that has a view of Sydney Harbour, right?
James Mitchell: No, definitely not.
Aleks Vickovich: It's one of the most beautiful places on Earth. It's expensive for a reason.
James Mitchell: Exactly. I think having any sort of belief that you're owed something other than the air that you're breathing is ridiculous.
Aleks Vickovich: Work hard.
James Mitchell: Yeah, exactly. You've just got to work hard and sacrifice.
Phil Tarrant: You can invest in an investment property for 200,000 bucks. You'll find great assets.
James Mitchell: Exactly. People always come up with these affordability reports, it takes seven years to save up to buy a property here. So what? When was it ever a year? I find it really frustrating. People think that ...
Aleks Vickovich: Yeah, I think that's the underlying part of this whole housing affordability…
Phil Tarrant: You send hate mail to James Mitchell at ...
James Mitchell: Yeah. I just don't get it. You know what I mean?
Aleks Vickovich: James wants to hoard all the houses. He's property portfolio is looking pretty good.
Phil Tarrant: I get it. I get it. Let's just shift away from foreigners buying up Aussie property to foreign financial institutions eyeing the Australian market. I think you did a report this week about some Wall Street outfit just bought a big chunk of La Trobe or something or other?
James Mitchell: Yeah, 80 percent of La Trobe. Blackstone is a massive group. They bought 80 percent of La Trobe.
Phil Tarrant: La Trobe is a non-bank lender.
James Mitchell: La Trobe financial is a non-bank lender. They also have a mortgage fund, so they do stuff in the wealth space.
Aleks Vickovich: And a super fund.
James Mitchell: And a super fund as well. La Trobe is a really smart operator. They've played traditionally in the ... In fact, with their mortgage products, they do investment, owner-occupied, vanilla loans. They're quite innovative. They do a parent to child loan for the inter-generational transfer. They also do non-conforming. Then we also saw earlier in the year, KKR, which is another American-based firm, buy Peppa. What's happening is you're getting these big American companies come in and there's not much they can do with the banks, because of the four pillars policy like Aleks was saying, but in terms of the non-bank space there's a big opportunity and they've got a huge amount of capital. Here's someone who's already playing in the market, who's a great distributor, and I reckon there's going to be some really interesting innovation come out.
Aleks Vickovich: Absolutely. It's huge that they're making this deal, just in terms of from our perspective. It's our job to provide analysis on the market and what's going on. For someone like KKR who is one of the most successful private equity outfits in the United States, they don't make emotional deals, they don't make deals based on political ideology, they make deals based on returns only. For them to make a bet on the non-bank lending sector is telling, and it is part of that conversation that I was talking about of them saying the big four banks in Australia are under pressure and there's a gap in the market. KKR, by the way, has done the exact same thing on the financial advice wealth management side. They have funded a group called Focus Financial Partners, which we interview them a lot and have a lot to do with them. They've got a billion-dollar war chest. They're going around Australia and just picking off independent financial advice practises.
Phil Tarrant: As a vehicle to push their funds through?
Aleks Vickovich: Not at all.
James Mitchell: Just to buy them.
Aleks Vickovich: They've got no funds management arm. Just as private equity. They're making a bet that these practises, these non-bank practises are going to take off.
James Mitchell: Yup.
Aleks Vickovich: We've been saying the same thing for quite a long time on ifa magazine. There is this kind of democratisation that's going on. The banks are going back to, as we said last time, to what they do best. They're leaving these other parts, which is a good thing.
James Mitchell: I think it's also a telling sign, obviously not just that the non-banks is where the market is shifting now because the big banks are getting so regulated, so there'll be more ... The specialist lending, the slightly higher rates because of the non-conforming stuff, all that is going to be more on the four. Also, we're at the bottom of the rate cycle. Do you know what I mean? Rates are going to start ticking up from now. If you're a big New York firm and you've bought a non-bank lender who's got a mortgage book of however many billion dollars and people are paying this rate, over the next few years as those rates start to tick up it's going to be increasingly profitable.
Phil Tarrant: A good pay day.
James Mitchell: A very good pay day.
Phil Tarrant: That said, property investors should be thinking about how they can benefit from this increased competition and shop around for rates.
James Mitchell: Absolutely shop around. Like I said, it'll bring in innovation. They're not just going to buy this group and then they'll have the same product suite. There'll be money spent on bringing out new product lines and that sort of stuff. This is where some of that risk-based pricing like I was talking about will start coming into the market. There'll be mortgage products in the next couple of years out, which people wouldn't have seen before, which will be based on how you've paid off previous debt, all this sort of stuff. It'll be calculated in a much smarter and new way.
Phil Tarrant: There we go.
Aleks Vickovich: It sounds exciting.
Phil Tarrant: It does.
Aleks Vickovich: Yeah, but I think that is the conclusion, right? When you move to an open market ... People think that financial services is some sort of capitalist free market haven. It's completely not. The whole thing is based on tide distribution, deals with government, mandated behaviour. It's not an open market. It's moving in that direction. An open market is a lot better for consumers, if they're informed, so that they can put pressure on their providers and get a better outcome.
Phil Tarrant: I know you've always been very pro independent financial advice. The platform that you lead, ifa, is very much that, Independent Financial Advisors. Keep flying the flag. James, I know from your perspective obviously the major banks and second banks are great partners of the work that you guys do.
James Mitchell: Yeah.
Phil Tarrant: Across the ...
James Mitchell: And the non-banks as well.
Phil Tarrant: Across the banks, but the platforms that you work across, it's always been very pro non-bank to try and get a bit of choice in the hands of customers.
James Mitchell: Absolutely. Definitely.
Phil Tarrant: I think that's probably really relevant for our listeners.
James Mitchell: Yeah, and pro broker of course.
Phil Tarrant: Pro broker, absolutely. What are they, 50 ... Has the new report come out, 50 ...
James Mitchell: Fifty-four percent of the market.
Phil Tarrant: Fifty-four percent of the market.
James Mitchell: Yeah, which is huge.
Phil Tarrant: More people get home loans or investment loans through brokers than through major banks. Whenever I've gone into a bank, which isn't very often, I never want to go to a bank branch. It's a nightmare.
James Mitchell: It's a pretty dismal experience.
Phil Tarrant: Yeah, it is not good. All right. Thanks, guys. Good fun. Let's do this next year, try in 2018, starting on a bit of a quarterly basis.
Aleks Vickovich: We'll have plenty to talk about.
Phil Tarrant: Yeah. You're my eyes and ears on the Royal Commission. You can come and do the Royal Commission report with Aleks Vickovich. I know you like putting your name to things.
Aleks Vickovich: Lovely.
James Mitchell: He'll be all over it.
Phil Tarrant: James, thank you, mate.
James Mitchell: Thanks, Phil.
Phil Tarrant: Remember to check out smartpropertyinvestment.com.au if you're not yet subscribing to our morning market intelligence and news, to make sure that you're one of the first to know what's happening in smartpropertyinvestment.com.au/subscribe. We're on all the social channels, if that's the way you like to get your information. Just search "Smart Property HQ," you'll find us. Follow us. Any questions for Aleks, James and myself about what we chatted about today or anything in general, [email protected] They guys will respond. If you want to come to the show, you're more than welcome. Last thing, please keep those reviews coming on iTunes. We're well up over a couple hundred now. My goal is to get to 300 in the next couple of months, so if you can help me out just by rating us five stars I'd really appreciate it. As I mentioned beforehand, it's just not me behind the microphone here talking. There's a big team who are cultivating, producing the Smart Property Investment Show. They do like your feedback, so please send that through. I'll be back again next time. Until then, bye-bye.
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