Pete Wargent: property advice home truths from London

Pete Wargent, a former chartered accountant with ­Deloitte in London, runs a property advisory service from Brisbane.

Peter Wargent in his office in Brisbane. Picture: Lyndon Mechielsen

Pete Wargent began his career as a chartered accountant with ­Deloitte in London. These days he is based in Brisbane running a property advisory service with interests across Australian and in Britain.

Looking at the property figures going the wrong way just now, is it one of those periods where the best advice might be to hold off?

There are always a lot of moving parts and certain parts of the market are looking fragile.

So I’d say it’s a good time to be cautious. But generally speaking, property works best as a long-term investment and anyone who is trying to second-guess where the bottom of the market might be will run into trouble.

Tell us a bit more about those fragile parts of the market?

The biggest change since the end of 2014 is this incremental tightening of lending standards. If you go back to a decade ago, interest rates were much higher but lending was much looser. As interest rates went down, far more people were interested in property as an investment than was normal. So policymakers are trying to counter-act that.

A key area of focus is serviceability and even debt-to-income caps. If people can borrow less then that’s going to naturally cool price growth and, in some markets, house prices are now going backwards.

Investor lending is already flat — would Bill Shorten’s plans on negative gearing and capital gains tax be damaging against that backdrop?

Well, yes. In fact, in recent weeks I co-authored a report with a group called RiskWise Property Research on the potential impact on the ALP’s proposed changes. When those amendments were first proposed (by Shorten and Chris Bowen), the property market was red hot. But that has now passed and we’re in a period of hyper-lending tightening. The impact of changes to negative gearing would further limit investor lending. There could be some unintended consequences. In fact, our reports showed that hundreds of markets across the country would be affected negatively.

Do you think Labor, and the wider political class, misunderstands the property market?

Yes (laughs). Our report wasn’t pro or anti-Labor but it did show the impact of the policy. The ­Coalition’s view is to make incremental changes, which they ­already have — they disallowed travel expenses, the building and equipment depreciation for second-home buyers are now gone. They also make changes that don’t have to be permanent like policies around investor lending.

But a change to capital gains tax is meant to be a multi-generational change. They are much harder to implement if they need to be changed.

What do you think of much publicised forecasts that national house prices will fall 10 per cent peak to trough?

There are a lot of sub-regional variations and in some markets that’s already happened. Outside Sydney and Melbourne, a lot of markets have been underperforming for a decade. So, as a ­median figure, it’s not unreasonable.

But there are a lot of people trying to second-guess how we’re going to go on lending standards. Nobody really knows. But the economy, especially the services sector, is doing reasonably well, unemployment is trending down. The macro picture is not too bad. But how significant will lending standards be to the market? That’s a key question.

Property bulls believe our immigration levels will buoy the market under almost any scenario. Do you agree?

No. If you look at the biggest housing booms you find population growth is pro-cyclical. Immigration was at breakneck speed in 2011-12 at the peak of the mining boom. But the opposite tends to hold true too: it doesn’t prevent a property downturn.

What should you do in this market if you’re a first-home buyer?

My view has always been that if you can purchase and you have a long-term time horizon, then it’s a good time for you to buy. A lot of first-home buyers have been forced out in previous cycles waiting for prices to fall significantly, which never seems to happen.

But if you’ve managed to save up a deposit then, if it were me, I would buy.

What’s the outlook for the regional property market?

I think it’s fair to say that the people mostly badly burnt have been those investing in towns that are dependent on mining and ­resources.

To investors I would say that if you’re going down the regional path, the best place to buy is the urban regional areas. They may not be capital cities but they’re within a 200km radius. So places like Geelong and the Central Coast are interesting places to invest. If you go more remote than that, the risks can be a bit higher.

The biggest property story across the country just now seems to be the Brisbane overbuilt apartment market. How’s it looking?

It’s a really interesting one. We flagged the problem in our reports to hedge funds two or three years ago. It’s interesting how things are evident when you’re on the ground (laughs).

I think we’re probably through the worst of it now. The numbers of new commencements have dropped dramatically and there is a lot of interstate migration, which is helping to fill up the units. The market is still soft, but it’s rebalancing.

What was your first big investment?

I’ve always been drawn towards investments that are tax-­efficient and investments I never have to sell. So my first major investment was in the FTSE index back in the UK.

I’ve had similar investment principles since I’ve been in Australia. At one stage I worked in the resources sector for a while so I developed more of an interest in that area of investing because I was familiar with it. I learnt some important lessons there and I was using margin loans like a lot of people at the time.