QA: Affordability, Yield vs Growth, Market Cycle Timing & More

Question 1: Does affordability correlate with capital growth?

Is there a link between housing affordability and capital growth, and do more affordable properties grow more or less during periods of higher borrowing costs?

Jeremy starts by defining affordability, explaining it can be measured in different ways, such as median house price relative to median income, or relative to household surplus cash after living expenses (referred to in lending as HEM, the Household Expenditure Measure, a minimum living expense benchmark used by lenders for loan serviceability). He notes that what a borrower declares as living expenses is often lower than the benchmark lenders use, and stresses that individuals should understand their own cash flow surplus, since that surplus is what can be directed into investments.

Turning to the data, Jeremy shares a chart comparing capital growth in the cheapest 10% of the property market against the most expensive 10%, alongside interest rate movements since around 1990. High interest rates in the early part of the dataset appeared to favour growth in the cheaper end of the market, while a later period of falling rates appeared to benefit the more expensive end. After partitioning the data by significant urban area (comparing the cheapest and most expensive properties within each city, rather than just city-wide averages), Jeremy concludes there isn't a strong or consistent pattern. He notes that affordability is included as a metric in DSR version 3, but it's one of the weaker correlations to growth and requires several adjustments to be useful, since simply comparing incomes to property values isn't sufficient to capture true affordability.

Question 2: Is assuming a 4% rental yield over the long term flawed?

Assuming a 4% rental yield for a typical long-term investment property seems flawed, since rental growth doesn't keep pace with value growth.

Jeremy agrees that during a period of rapid capital growth in a "hot" market, yields will typically fall since rents don't rise as quickly as prices. However, he clarifies the original assumption was intended for a long-term hold, not just a short growth spurt. Looking at historical yield data for houses across Australia's significant urban areas over the past 20 years (the longest period reliable yield data is available), Jeremy notes a slight downward trend, but says it's not possible to know from this data alone whether yields will keep falling or eventually recover.

He explains that if the trend continued indefinitely, yields would theoretically turn negative within about a century, which is untenable, so the more likely explanation is that the trend will balance out, either through slowing capital growth or accelerating rents. He describes this as a self-correcting cycle: as yields fall, some investors exit the market, vacancy tightens, rents rise, and investors return, increasing supply again. Overall, Jeremy maintains that 4% remains a reasonable long-term assumption, while acknowledging the recent downward trend in yields.

Question 3: How should investors interpret contradictory market metrics?

Two markets, Bushland Beach in Townsville and Andergrove in Mackay, both show a Market Cycle Timing (MCT) metric below 20, typically read as a signal to sell, while their DSR scores sit around 70, above average. How should this apparent contradiction be interpreted?

Jeremy explains this is a common point of confusion, particularly in recent years when MCT has been low nationally due to widespread capital growth. He clarifies that a low MCT does not by itself indicate a sell signal, only a low overall DSR score does. MCT is just one of many variables factored into the DSR, and there will always be some individual metrics that point in a different direction to the overall score, since no market has ever had every single variable aligned. The DSR combines all metrics, both favourable and unfavourable, into a single overall assessment. He also notes the DSR reflects investment potential over a short-to-medium timeframe, generally two to five or six years, and a low MCT specifically indicates the market isn't about to enter a fresh boom, though it doesn't preclude an existing boom from continuing.

Damien adds that decisions to sell should also factor in personal circumstances and capital gains liability, referencing the kind of "should I sell" analysis they've conducted for clients in the past, which sometimes concludes that holding is still the better option if the tax cost of selling is too high. Reviewing the specific data for both suburbs, Damien shares that Bushland Beach (houses) has a DSR3 score above average, a typical value of around $818,000, a yield of about 4.1%, reliable data, strong vacancy and rental growth figures, low days on market, and average stock on market. Growth has been around 8% over the last year, 58% over three years, and 82% over five years, though Market Cycle Timing remains low. Andergrove, by comparison, has a noticeably weaker DSR3 score of 58, though with higher yields and reliable data. Its growth has slowed to around 6% over the last year, but sits at around 83% over five years. Given the stronger DSR3 score, Jeremy and Damien both favour Bushland Beach over Andergrove between the two, though they caution that at current price levels, entering either market now would suit a shorter-term, more aggressive investor more than someone seeking to buy near the top of a cycle.

Question 4: Is selling and reinvesting different from drawing on equity?

With reference to Expert Busting Series episode 12 on long-term growth, how does selling and reinvesting in a new market differ from simply drawing on equity from an existing property to fund the same purchase, if borrowing capacity isn't a constraint?

Jeremy explains that the recording in question predates the 12th of May federal budget announcement regarding proposed capital gains tax changes. He clarifies that the reason to sell rather than simply draw on equity is that selling allows the investor to hold two properties that are both growing well, one in the new market and one that would have replaced the underperforming original, rather than one property performing well and one that has already peaked. This logic holds regardless of lending restrictions; the real comparison is between the opportunity cost of holding an underperforming asset versus the cost of reallocating that equity (including capital gains tax, agent commissions, and stamp duty). If the opportunity cost is meaningfully larger than the reallocation cost, selling is the better option.

Jeremy walks through a hypothetical example: if a held property is expected to have no growth over the next five years, but a replacement property is expected to grow 80% in the same period, that's an 80% opportunity cost. If reallocating the equity would cost $150,000 in taxes and fees against a $400,000 opportunity cost, selling remains worthwhile. He notes this analysis has changed somewhat with proposed 2027 capital gains tax changes, but the underlying method (comparing opportunity cost to reallocation cost) is unchanged. Damien adds that when a property's growth has clearly flattened and its DSR score has weakened substantially, the case for reallocating becomes stronger, whereas if lending isn't a constraint, a more passive hold-and-wait approach is also reasonable, provided the investor accepts reduced future growth potential.

Question 5: What if a booming market has a temporary lull before booming again?

Also regarding Expert Busting Series episode 12, could selling a property that had nearly doubled in three years (and appeared to be flattening) mean missing out if that market later resumes growth after a pause? Would the capital gain after tax be sufficient to enter a new growth market?

Jeremy explains that capital gains tax doesn't take a large enough share to prevent reinvestment, since the highest marginal tax rate is 47.5%, and only after applying relevant discounts and indexation for inflation, meaning an investor keeps the majority of any gain. He notes that prior to the proposed federal tax changes, the effective capital gains tax rate for a high-income earner was roughly in the 23% range; under the newer proposed rules, that could rise closer to 40%, a meaningful but not prohibitive increase.

On the question of a market pausing before resuming growth, Jeremy considers this highly unlikely, particularly directly following a rapid doubling in value. He notes that historically, once a market has run hard, any subsequent slow period tends to last considerably longer, such as seven to eight years, rather than a brief two-year pause before resuming. He reiterates that the decision ultimately comes down to comparing the forecast growth of the property being sold against the forecast growth of a prospective replacement market, and weighing that difference against the cost of reallocating equity. Damien adds that exit timing can also be shaped by personal circumstances, such as approaching retirement, adjusting work hours, or drawing down superannuation, and that the proposed tax changes may affect strategies that previously relied on selling in lower-income years to reduce tax exposure.

Question 6: Should an investor rotate out of Perth once its upswing ends?

Referencing Expert Busting Series episode 11 ("Apples and Oranges"), is selling a Perth property and rotating into a new market once the current upswing ends the right strategy, considering the proposed capital gains tax changes and opportunity cost?

Jeremy and Damien review Perth's current metrics: a strong DSR3 score, a typical value that has roughly doubled over the past five years and grown around 72% over the past three years (up around 25% in the past year alone), tight vacancy rates, reliable data, and yields of around 3.9%. Market Cycle Timing for Perth has been low for some time, suggesting the market isn't set for a fresh boom, though Damien notes there's still some momentum from demand. Their overall guidance is that Perth still has some room to run, so it isn't yet the right time to sell, but once the market does peak or level off, investors should weigh where else to reallocate capital and factor in their personal capital gains tax liability and circumstances before making that decision.

Question 7: Is buying near vacant land in a new estate still a good long-term strategy?

Buying land in a growing new estate area, using Treeby in Perth as an example (where land prices reportedly rose from around $350,000 to $600,000, with house-and-land packages now around $1 million), seems like a good long-term investment if held for at least 10 years to capture the growth. Is that a sound strategy?

Jeremy reiterates a general principle discussed previously: supply works against capital growth, while demand supports it. New estates carry two specific risks. First, they're typically located near vacant land that can continue to be developed for years, adding ongoing supply. Second, they tend to have a low land-to-asset ratio, meaning a smaller proportion of the purchase price is attributable to land (which appreciates) versus the dwelling (which depreciates). He illustrates this with an example: a $600,000 property with $200,000 of land value has a land-to-asset ratio of roughly 33%, which he considers low; he would prefer to see that ratio closer to 67%, with land making up the larger share of the purchase price.

Jeremy also cautions that early entry into a growth story looks good only in hindsight, and there are just as many examples of new estates with little to no growth as there are standout performers. He adds that most of a property's total growth over a longer holding period tends to happen in a shorter window, often two to four years, with the remaining years comparatively flat, so holding for 10 years doesn't guarantee steady growth throughout.

To test the Treeby example against the data, Damien pulls up recent figures: Treeby has recorded around 77% growth over the past three years and close to 90% over five years, compared to Perth overall, which has recorded close to 100% growth over five years. While Treeby has outperformed markets like Sydney and Melbourne over the same period, it has underperformed the broader Perth market. A brief look at recent listings shows small block sizes for the prices being paid, reinforcing the low land-to-asset ratio point, and the hosts note that in older suburbs with larger blocks, more of the purchase price goes toward land, supporting a higher land-to-asset ratio and, historically, better capital growth outcomes.

Closing

Damien and Jeremy close by inviting listeners to leave further questions in the comments for future Q&A sessions, encouraging viewers to subscribe for updates on new episodes and upcoming platform updates.