HtAG Platform Overview Video Pt.2

This is the second part of the HtAG educational video series. We will continue with the example from Part 1 and explain the following:

  • Contextual Interpretation of HtAG data in terms of strategy and personal circumstances
  • Deep dive into GRC (Growth Rate Cycle)
  • Combination of GRC and other metrics for property market assessment
  • LGA page overview
  • Interpreting the forecast graphs for median price & rent

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  1. Video Transcript

    This is the second part of the HtAG educational video series. We will continue with the example from Part 1. The fact [MD1] that rents will decline at a higher rate than prices, which we can see both from the year on year change in rent and price, as well as from the forecasted percent change in rent and price, means that I will have to have a higher deposit to minimize the reduced capacity of the rental income. I.e. to maintain the property, that is cover the expenses of keeping the property, such as mortgage fees, vacancy rates, council and utility fees.

    If the option of having a bigger initial contribution is not available, i.e. the bigger deposit, then I would have to consider whether my existing earnings, such as my salary, can cover additional costs of running the property without having an adverse effect on my lifestyle. So, in simple terms, considering the rents will decline from 515AUD to 493AUD, I would need to cover, in simple terms, the additional 23AUD per week from my own pocket in order to maintain the property, should this yield be representative of a neutrally geared property.

    We will deep dive into this later, but when it comes to property gearing, you have negative gearing, positive gearing and neutral gearing. Neutral gearing means that the rental income that you’re receiving from the property covers all the expenses. For argument sake, we will be assuming that a 3.32% percent yield for Camden will give us a neutrally geared property, which in most circumstances is is not the case. A rule of thumb is that you need at least 6-7% percent cash-flow yield to have a neutral property depending on the area.

    Let’s go ahead and assume that it is neutrally geared. This means that in 2022, if I’m going to plan my expenses in respect to my investment, it would mean that I would need to take from my pocket the difference between 515 and 493 AUD in order to maintain the property. So just by having this information alone, there are a few steps of decision making that I would need to do in order to see whether I want to even inquire further into Camden Council and try to search for appropriate suburbs, which are presented at a level below.

    The answer to this question will vary based on individual financial circumstances. Essentially, the answer also needs to be ventured alongside additional strategic considerations. Is the year on year and projected capital growth of the area rising or declining? Is the growth rate of the area rising? This means that the loss of declining rents or the loss from having to go into one’s own pocket to maintain the property will be offset by the immense capital gain.

    Which essentially is not the case in this example, but if you had a different area where the total return on the investment (which is the compound of return from rent plus return from capital gain) is positive, this would constitute a reasonable investment.

    On the other hand, however unlikely, if the year on year change for rents and forecasted rent is in negative territory, but the capital growth is plus 10%, we could have still have positive return on investment at the point of sale.

    To stress test this further, let’s go back to the forecasted values for rent. In reality, normally you sign a contract with your tenant for a one-year lease upfront. Let’s say you buy the property today, you lease it at the current median rent of 515AUD. However when your current contract expires, you are likely to be asked by the tenant to reduce the rent to the market value.

    You’ll have a choice to either decrease the rent or lose the tenant. Most will take the first option to maintain continuity and avoid downtime because of the market pressure. In the same manner, if the actual capital growth is positive according to the forecast, you’re not realizing that profit by holding the property, but the rent is decreasing and your cash flow is reduced.

    In other words, you may achieve positive ROI if you sell the property 2 years from now, but if you’re holding it, you may gradually begin transitioning into ever decreasing cashflow.

    Although this is a considerable thought from simply an accounting point of view, when you trying to benchmark different areas, you will not only look at capital growth and rent, but you also look at the total return.

    In an instance where the rents are declining, you will need to take money from your own pocket. However, even though the capital growth will not be realized in two years due to holding strategy, should it eventuate and thus grow 5% as an example, you can look at refinancing your property, extract the capital growth in the form of equity and leverage into other investments that potentially have a better cash flow.

    There are multiple pathways to leverage capital growth and cashflow and experienced property investment professionals are able to provide detailed advice on the right strategy for every circumstance.

    Bottom line, all of the information on HtAG portal and the way that it is presented, makes it easier for you to contextualize it in terms of your own situation and your own financial circumstance.

    Let’s now explore the growth rate cycle. Let’s assume, for argument’s sake that Camden, is in a declining stage of the cycle.

    This means that not only will you realize negative growth year on year and at the 2-year projection, but the area is positioned for additional decline, which means that you could wait another four or five years to actually realize any gain. Most real estate professionals would sideline this area as a potential investment in that case. However, on the other hand if it was at the bottom of the cycle, there could be some potential. Obviously, more information is needed in order to arrive to a decision than the growth rate cycle alone, so let’s now combine some of the previous observations with the GRC.

    Let’s first understand the significance of the growth rate cycle. Looking at this table alone, although it seems static because it only presents growth rate cycle icon, a lot of dynamical information is encapsulated with in it. These dynamics combined with the rest of the data can guide our decision making, if we have a clear understanding of the position of the area within a cycle, and of how long it can spend at a particular interval. The position is especially pertinent because:

    Being at a bottom – growth is imminent,
    Being in declining stage – bottom is imminent.
    Rising stage – peak is imminent.
    Peak – decline is imminent
    All of these, including timeframes, need to be assessed in order to make appropriate decisions. There are important implications as to how long an area will spend at a particular section of a growth rate cycle. These implications largely depend on what we call “output concerns”.

    That is what one plans to do with investment, and what’s achieved by investing in a particular area. So, for example, if the investor is buying in a particular area to renovate and “flip” the property, that is to sell upon renovation, the amount of time an area will spend at a particular quadrant of the growth rate cycle becomes highly potent. As such, even though at the current time of buying a property, an area could have a desired total return,

    (that means that combination of projected capital growth is at a desirable level), the forecasted growth rate could signal, that an area will plateau or maybe even further decline in the near future. Thus, having a negative effect on the investors’ potential to realize the desired return once he or she flips the property. So if the investor chooses to renovate a property or develop upon a piece of land (renovation or developments can take from six months to two years)

    and if the area is declining – yes, he or she will add value to the land or the property, but since the relevant property market is declining and is yet to reach the bottom, the decrease in market value will eat away into the gain, the investor can realize, by adding value to the property. To re-iterate, there are numerous ways in which you can actually consider all of this information.

    But considering each and every column individually as well as all of the columns combined is very important in order to decide whether one is going to drill down further or not. Let’s use the Camden council as an example. Let’s say that I’m a person who wants to renovate or flip or develop upon certain area in the council. I can see that the areas at the bottom of the growth rate are equal, but I also see that negative growth is projected within the next two years.

    This means that the area will stay at the bottom of the cycle for the next two years at a minimum. For argument sake, let’s assume two years. So if I’m really dead set on developing or buying into Camden Council simply because it matches my current financial circumstance

    I would time my purchase of buying in Camden Council at least until 2021. This decision is made on the assumption that after 2022, the area will rebound and start rising. As we can see, it is forecasting negative growth within the next two years meaning that it will stay at the bottom of its cycle or there about within the next two years after which Camden will turn a corner. This is why combining the information from the growth rate cycle feature with all other features becomes very important

    As it actually allows us not only to time our purchases appropriately but also plan and position ourselves for subsequent investments by being able to leverage our knowledge of anticipated market movements. This is why HtAG’s services are valuable—when you combine information from all features such as forecasted capital growth, forecasted rental growth, confidence feature and the growth rate cycle feature, one realises that not only can you time purchases as one does by using the property clock but you can also calculate anticipated returns with a degree of certainty. But how is it that we know purchase in Camden should be timed to this time in 2021 or there about, that is, how do we know Camden is positioned to turn a corner in 2022?

    Well, if I look at the price year on year change, Camden has experienced negative growth of -1.50%. However, if I look at the projected capital growth, it is positioned to experience a further 1.06% from today’s values. As the projected capital growth is compounded and includes both years 2021 and 2022, it becomes obvious from these two figures alone that the negative growth for Camden is slowing down when comparing the current year on year change with the forecasted capital growth change. For example, if the rate of negative growth for Camden remained the same in 2021 and 2022 as it has been from this time last year, the compounded negative growth in 2022 would be -3% which is 2 times -1.50%.

    As such, it is not only important to look at the projected capital growth figure but to also compare to the exiting year on year change to see whether the decline is amplifying or reducing, that is, whether the area will turn a corner in the next couple of years. Looking at the forecasted negative growth for Camden, if we average it out for argument sake, we can say that Camden will experience a negative growth of -0.53% per year (which is -1.06% divided by 2) and is less than its current -1.50% year on year negative growth.

    As the forecasted growth is a compounded figure, we can safely say that Camden has hit the bottom of its growth rate cycle and is positioned for a rebound.

    The fact that the forecast is marked with high confidence assures us that this will be the case. Looking at the information provided, this are becoming a very interesting prospect for long term investors. Although this might not be evident at this stage, it will become clear when we integrate information from additional features.

    OK. Before moving on to other options, I would like to summarize things that either need to be known or things that people need to consider when they begin using our service. If we take Camden Council into consideration, some of the questions that I would ask myself would be: will the property purchased in Camden be developed? As developments have an approximately two-year lag from conception to realization, the locality’s existing and forecasted rate of growth change becomes very pertinent for those who develop properties.

    The second question I would ask myself is whether the investment property bought in Camden will form part of a cash flow geared portfolio that needs to be balanced? Cash flow strategy suggest that most of the properties within a particular portfolio are geared towards an ongoing income stream from rentals as opposed to capital growth. As such, in case of wanting to balance a cash flow geared portfolio, assessing the areas investment grading becomes highly dependant on the locality’s projected capital growth. Edging towards capital growth also means that investors should entertain areas that are at the bottom of the growth rate cycle to maximise returns when the area sets out on a new cycle of growth.

    Inversely, the third question I could ask myself is whether deciding to invest in Camden will be done on the grounds of wanting to balance a capital growth geared portfolio with a cash flow positive property? In this instance the projected change in rents are pertinent as investors would like to see an increase in rents so that the cash flow potential of the area and the property invested in within the area balances the existing potentially negatively geared, capital growth focused portfolio. The main premise behind these questions is the need to balance a portfolio which is more or a less a personal tendency as opposed to advice.

    A balanced portfolio means that you can ride out the downturns in a more stable way. For example, a highly capital growth geared portfolio means that you will constantly have to dip into your pocket to service all of the negatively geared properties, which means that although you can leverage into additional properties with the realised capital growth, you individual financial circumstance might be impaired having an adverse impact on your everyday life. On the other hand, although the cash flow portfolios provide you with an ongoing income stream, such portfolios have the reduced ability to Fasttrack the expansion of your portfolio due to subdued capital growth.

    My personal opinion is that having a balanced portfolio allows you to do both essentially, although in a less aggressive way. Finally, the fourth question I would ask myself is what is the preferred or required timeframe for holding the property in particular locality? As stated previously, short term investment windows of less than one property cycle should take advantage of the projected market conditions and the growth rate cyclicity to best time the investment and take advantage of the anticipated market movements.

    If it is a long-term investment, on the other hand, the customer should potentially focus more on the total return, that is, combined return from rent and capital growth as well as on the overall historical movements and patterns of the area to determine the long-term investment quality of the locality. As long-term investments require a more holistic approach to decision making, aspects such projection’s confidence, current and projected yield, and current and projected capital growth should be taken into consideration to make the most appropriate decision.

    Returning back to statistics retrieved from a search for Camden Council, it can be said that although there are many things that need to be considered prior to deciding whether to invest in a particular locality, the table retrieved at home page provides our customers with a sufficient overview enabling one to decide whether to probe further and explore the area in more detail. In relation to Camden, since we are treating it as a case study, Let’s assume we are still interested in investing in Camden due to it being at the bottom of the growth rate cycle and decide to probe further.

    In order to do that, I would want to see how each suburb within the Council has been performing. To do so, all we need to do is click on the Camden, NSW hyperlink. This allows you to drill down into the second layer of statistical information. It opens up a new window giving you statistical information on each suburb within Camden Council.

    As you can see, if you scroll down, all of the suburbs forming part of the retrieved suburb ranking table are listed in the paragraph at the bottom of the page. The information retrieved in the ranking table is arranged in the same way as the information retrieved at home page when we performed the search for Camden Council at the onset. The only difference is that now the table highlights statistics for each and individual suburb within Camden Council although the columns remain the same.

    The table retrieved at home page however has a separate column for year on year capital growth change while the suburb level ranking table highlights this information within the same column, either right next to or under the suburb’s nominated median value. The red values signify year on year decline while the green values signify year on year growth.

    However, one can also see the pluses and minuses in front of the nominated values making it easily discernible, which is easily discernible. Now that we have been presented with the suburb ranking table, it is important to highlight the numerous ways of using it. There are many ways to arrange and filter the retrieved statistics. For example, you can filter by the confidence metric, by clicking on the confidence heading in the last column. This will filter the suburbs by either listing them from high to low confidence or vice versa.

    One can also filter by arranging the areas in terms of projected yield either by listing them in descending order, from high to low or vice versa. The same filtering process can be applied to all columns. One can even combine filters by choosing to sort out the table base on two different parameters. For example, we can choose to list areas by the confidence metric, but also by the projected capital growth metric meaning that retrieved areas will be arranged in terms of high confidence and highest projected capital growth. It is important to point our that the first metric chosen will have precedence which means that if we chose to sort by high confidence first, and then by projected growth, it will list suburbs based on giving higher weighting to the confidence feature as opposed to the capital growth feature.

    As mentioned previously, your investment strategy and financial circumstance will drive the parameters you give to your search and how you sort the suburbs within a particular council. Not to forget, combining different filters is done by first choosing an initial parameter such as confidence for example, than pressing the ‘shift’ button to also than chose an additional parameter such as projected capital growth for example.

    By doing this we can see that Narellan Vale, for example, has a median price of 646k with the projected capital growth and rents decreasing albeit being marked as high confidence. However, looking at the figures, it is important to note that the negative growth is actually slowing down as its year on year negative growth is higher than the per year averaged compounded growth. This means that the area is rebounding.

    However, can we say it a right locality to invest in? Well, the entry point is lower than that of top three or four areas in the Council. The yield is also higher, as it seems. Plus, the confidence is high, which means if I’m really interested in Camden Council, investing in Narellan Vale could be plausible since it will require us to dip less into our pocket to maintain the property while still buying in an area which is well placed for imminent growth. Since the area is also rebounding or will rebound past 2022, it makes it suitable for those with a long-term investment window.

    But considering that information alone although beneficial for understanding how Narellan Vale is behaving is however not prudent because by simply moving down or up the list of the table that has been sorted with parameters of interest we imposed at the onset of our search, we can see areas which are of better investment quality. Spring Farm for example is showing a much higher capital growth while its rental yield is very close to that of Narellan Vale meaning that we would not have to dip into our pockets substantial more than if we bought in Narellan Vale.

    Its entry point is also very close to that of Narellan Vale.

    So, on face value, Spring Farm looks like a better investment area than Narellan Vale due to its forecasted capital growth as all other metrics seem to be very close between the two areas. However, as mentioned previously, this will all depend on your strategy and current financial circumstances meaning that there might be an even more suitable suburb. This again returns us to the filtering of suburbs. Let’s say we are restricted by the amount of money we can spend on our next investment.

    Let’s say we can only invest in areas and properties that have cost around 600k. Let’s do that.

    This is where we return to the median price filter at the top of the page and where we put in our maximum limit. When we type in 600k, we can see that there are no areas in Camden Council which are at or below the 600k threshold. This means that depending on the statistics we saw previously, we can either put our limit or chose to abandon this Council altogether. If we increase our limit to 700k, we can see that as opposed to having 3 pages of listings including all suburbs in the Council, we now have only one-page listing only those suburbs with 700k median price ceiling.

    Our search can than introduce additional parameters or completely new ones. We can filter it by minimum gross yield for example. Let’s say the minimum desired gross yield is 3%. When we apply the minimum 3% gross yield filter, we can see that the table expands now including all areas. This means that all suburbs in Camden Council have a gross yield of 3% or above.

    So, there are many ways one can filter through the provided ranking table introducing parameters that best fit one’s circumstance. We can filter by median value or by gross yield. Looking at the filter options above the ranking table, we see that we can also by confidence. Let’s say we only want to see high confidence areas in Camden Council. Filtering by high confidence using the filter above the ranking table, we retrieve areas that are marked with high confidence only which is different to arranging the list in descending or ascending orders as we did when we clicked on the confidence column heading.

    We can also filter by the number of bedrooms. Interestingly enough, filtering by 3 bedrooms for example only retrieves areas that are marked medium to low confidence. Considering this I think it is safe to say that the demand profile of Camden Council is one of in which 4-bedroom homes dominate. We will however get to the demand profile page later.

    Overall, we can filter by using the filters provided above the ranking table but also by arranging the table in terms of precedence of different columns. As mention previously, we can also sort the table by giving two or more columns precedence over others. Finally, we can also sort by dwelling type by switching between units and houses. As we can see, Camden Council overall does not have many suburbs that contain units as a dwelling type.

    This means that there have not been many units sold historically in Camden suburbs which is why we cannot retrieve any information for units at the suburb level. This makes units less than a favourable investment option in Camden Council based on statistical significance.

    As we can see, the unit’s button has been disabled meaning that it does not let us switch from houses to units due to the statistical insignificance of this dwelling type.

    You can also use the suburb search here if you already know which suburb you are interested in within a particular council. Essentially, however, all of the information is presented here and you can benchmark the suburbs and councils based on the information retrieved and in reference to your circumstance, both financial and strategic. Moving on from ranking table page, we than arrive at the forecast page. The forecast page provides an additional dimension to data as only seeing numbers on a page can seem to static because it is divorced from the historical behaviour of the particular area.

    As such, although the projected values do give dynamics to statistics by anticipating movements of a particular area, it is always good to present statistical information in different formats as it can lead to new realisations and improve decision making. Presenting information in different ways can improve sensemaking.

    What we are traying to say makes sense when we move to the forecast page which as we can see provides us with various graphs. The first graphs retrieved are for Camden Council in general which is evident by the ‘overall’ note in the suburb filter. These graphs as such a representation of Camden Council statistics retrieved initially at home page presented in a different format.

    As we can see, the data for Camden Council spans back all the way to quarter 1, 2008. As we crawl the web to collect data on residential sales, we can see that there is not much data of statistical significance on the web for Camden before 2008. This mean that our forecasting algorithm takes into account data for more than one cycle, in this instance approximately 12 years, to project values for Camden. How much historical data HtAG’s algorithm considers will depend on the age of the area so to speak and when the area has begun to generate statistically significant number of sales.

    In case of Camden, if we consider the general consensus that one property market cycle is in between 6 to 10 years, it is safe to say that there is a substantial amount of data points collected for Camden to ascertain patterns in movement of the area. Looking at the graph, the bars signify the number of sales. As you can see, when we hover over the bars, we get provided with the exact number of sales for the specific period. As we can see, the number of sales in Camden substantially increased at around 2014 to 2015 mark.

    Which was then followed with a median price increase. The line represents the median value change, with actually median values stopping at this point of the graph which is quarter 3, 2020. The last section of the graph represents the projected values, both for the number of sales and associated median value. Considering that Camden council is market as high confidence, the projected values will have a 5% or less error rate.

    We can use this information to calculate the additional loos or gain should the price indeed move within the 5% error rate boundary. As such, one the one hand we have the projected values which can assist us with future planning and benchmarking different areas while on the other we also know the risks associated with our projection meaning we can account for it in our planning and benchmarking also.

    We have the same representation for rental data. Looking at the bottom graph we can also see two different metrics and interpret association between them. The bars signify the rental demand or number of rentals while the red line signifies the changes in the median rent values. As we can see, median rents are set to decline for Camden within the next two years. The same can be said of the number of rentals which signifies an overall drop in demand for rental properties. All of this information is pertinent when deciding to invest in Camden as it enables us to determine the effect a potential drop in rents and rental demand might have on our financial circumstances in the future.

    Overall, to adequately interpret the graphs it is useful to know that the x axis represents the number of sales or rentals depending on which graph we are referring to and is associated with green and grey bars of the graphs. The Y axis represents the timeline, i.e., quarters and years. The x axis to the right provides information on values, that is, range for median property values and median rental values and is associated with movements in the red and blue lines on the graph.

    Overall, as mentioned previously, these graphs encapsulate the statistical information for Camden Council that we retrieved at the home page however presented in a different format. This page contains filters also, so we can retrieve the same style of information for all suburbs within Camden Council. If we use the drop-down menu option, we can see all suburbs listed and hence can pick and choose a suburb to our liking which we earmarked at the ranking table page for example.

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