Monthly Archives: April 2015

How’s the market?

First quarter was exceptionally strong

Anyone hoping for or expecting a correction in the Sydney property market was left gob smacked after the first quarter of 2015. Respected analysts have rushed to increase their forecast for the year with price growth set to continue. It would be fair to say the Inner West market experienced growth of over 5% in the quarter alone. Annualised, this is suggesting 20% for the year, which seems hard to fathom.

With interest rates set to be low all year and the NSW economy performing well, it does not seem as though there is a trigger to stop this boom market anytime soon. The sheer strength of the housing market has seen the RBA issue warnings about an overheated market. In times like this, its important to remember that the bigger the party, the bigger the hangover.

The real winners from this market has been the banks, investors who were in the market before the boom begun and baby boomers downgrading. The losers, and there are losers in a boom, are clearly first home buyers. To a lesser degree, young families looking to upgrade also find transaction expenses have risen exponentially with the market. Unlike first home buyers, upgraders own an existing dwelling which acts as a hedge against the higher prices they will need to pay on their purchase.

We saw some standout results during the quarter that really demonstrated the market’s strength. 24 Coleridge St Leichhardt is a 2 bedroom semi on 150sqm that sold for $980,000. What made this result such a standout is the fact a superior semi just next door sold for $926,000 in December 2014. A historic shop front residence in Palmer St Balmain sold $1.4 million after 80 inspections and 6 offers were made in just 14 days of marketing. Offering 2 bedrooms and abundant potential, the huge buyer interest saw the final result exceed expectations.

The question many are asking now is when will the boom stop? There is little need to question the current market conditions given the strength is so obvious.

Buyers are well advised to note that the boom finishes when it finishes. It won’t stop because one thinks it should or wants it too. Conversely, sellers will be tempted to overplay their hand in this environment, and many are likely to get away with doing so. It’s important to carefully track events and to look for any change in conditions when you are thinking of buying or selling. No one is expecting the market sentiment to change in the next quarter, but that does not mean that it won’t.

In 2014, the Federal Budget and the uproar that followed spooked the market. It’s good to note that the 2015 Budget will be delivered in May. Already the public have been softened up with messages in relation to possible tax changes on negative gearing, superannuation and GST. It would take a significant policy to change buyer confidence, but an alteration in any of these areas could do so.

The despicable practice of deliberate under quoting has been in the news throughout the first quarter also. The recently reelected Baird Government has promised a crack down on the tactic designed to bait buyers into bidding at auction with the suggestion of a below market price. The Department of Fair Trade has already prosecuted a couple of agents as part of the crackdown.

Given under quoting has been such a widely used sales tactic across the industry, it could be said that it’s harsh to have publicly singled out just one firm for adopting the practice.  Understandably, many buyers that have been burnt by the tactic will have little sympathy for any agents caught under quoting.

It was interesting to note that agent’s price guides across Sydney suddenly became more realistic once the first prosecution for under quoting took place. The auction system relies on multiple bidders. Now that agents have to quote buyers the same price that they told the sellers, less buyers will be sucked into bidding at unwinnable auctions. The illusion of dozens of buyers at the auction will be removed. Only buyers prepared to pay a fair market price or better will be inclined to bid at the auction.

Best wishes

Peter O’Malley

Single households to rise. Demand for one bedroom units to soar.

Written by Louis Christopher SQM Research 

The number of households in Australia is projected to increase by 4.3 million over the next 25 years, with people living alone expected to be a significant driver, which will add to demand for more affordable housing.

According to new projections from the Australian Bureau of Statistics (ABS), the number of households will rise to 12.7 million in 2036, an increase from 8.4 million households in 2011, with the ageing population behind a big increase in sole-person households.

Indeed, as the population ages, the number of Australians living alone is projected to experience the most rapid increase of all household types, rising by up to 65 per cent over the next 25 years to be between 3.3 and 3.4 million households by 2036, up from 2.1 million in 2011, the ABS said last week.

At the same time, couple-only families are projected to experience the largest increase of all types of families over the next 25 years, jumping to 3.8 million families in 2036, up 64 per cent from 2011. This is mainly related to the ageing of the population, with baby boomers becoming ’empty nesters’ as their children leave home, according to the ABS.

So much so that the number of couple families without children is projected to overtake the number of couple families with children and become the most common family type in Australia, possibly as soon as 2023, the ABS said.

So what does this all mean for the property market? Even more pressure on housing.

As the population grows, more and more people will live in single-person households rather than live together under one roof. This will boost demand for one and two-bedroom units in particular as the need for smaller dwellings rises with the median age of Australia’s population. The median age is forecast to rise to 40.1 years in 2036, up from 37.2 years in 2011, while the proportion of the population aged 65 years and over is projected to be 20% in 2036 compared with 14% in 2011.

Developers here will have a big opportunity to cash in on this ageing trend and build even greater numbers of high-density accommodation to house sole person households. And while developers will still build housing estates with pools and playgrounds, we can expect to see even more estates with golf courses and health centres.

More generally, Australia’s population is projected to increase by 45% to reach 32.4 million people in 2036 from 22.3 million people in 2011.  That represents population growth of almost 2% a year, which will still mean ongoing strong demand for houses. Most of the population will remain concentrated in the bigger cities of Sydney, Melbourne and Brisbane. So unless there is any drastic change by governments towards solving the housing unaffordability crisis, younger Australians will still struggle to own their own home.

But will our golden oldies be able to afford their own accommodation? Not necessarily the way housing costs are going. The ageing of the population will mean comparatively fewer people are in the workforce, with one in five being aged over 65 in 2036 rather than one in seven in 2011. We can expect to see more seniors renting and more reverse mortgages being taken out as inevitably, some baby boomers will struggle to find their own funds to buy a home and will opt to share ownership with a bank or forgo the dream.

Tenants out, furniture in. The true cost of staging.

When selling the investment property, it’s frighteningly easy to lose thousands of dollars. Agents often suggest to landlords that the tenants are moved out and furniture is hired in. The logic is that a better presentation results in a better price. And in some instances, this is so.

However, it’s imperative that investors realise that they lose money before they (hopefully) make money when they boot the tenants out on the agent’s advice. When a landlord moves the tenants out and hires furniture, the income stops and the expenses accelerate.Before moving the tenants out for the sales campaign, run the numbers to see if it makes sense.A lot of investors accept they will forgo rent for the duration of the selling campaign. It is the unaccounted vacancy period where the real financial pain can kick in.

The average campaign is currently running at about 28 days, and this is in an extremely buoyant market. In a normal market, the average campaign is more like 50 to 60 days.Add another 7 to 14 days in vacancy whilst the property is prepared for the market and the lost income meter begins to rack up an uncomfortable deficit.

The average settlement period once the property has sold is about 56 to 70 days. The fact the property is vacant during settlement is often overlooked by landlords when selling. The total lost income escalates to between 80 and 100 days rent (11 & 14 weeks) once everything is done and dusted.

This lost income needs to result in a higher sale price by at least 11 to 14 weeks income to have justified moving the tenant out. The decision to then lease furniture means the selling price must be even higher again.

Hiring furniture can cost anywhere between $5,000 and $10,000 for a sales campaign. Add this cost to the income that has been forfeited and the selling landlord is down $10,000 to $20,000.

In many instances, moving the tenants out and doing works prior to marketing is the best commercial outcome for the landlord. In just as many instances, the landlord’s costs and commitment is rising for a negligible benefit. Knowing which solution applies to your circumstance can be the key to making, saving or losing $20,000.

Agents love a ‘committed’ vendor. In times gone by, agents encouraged vendors to spend thousands of dollars on unnecessary print advertising as a tactic to increase ‘vendor motivation’.

Now that the internet has decimated print, there has been an explosion in agents pushing the ‘benefits’ of hiring furniture. Coincidence or not? You decide.

 

A phenomenon that does not make sense!

It’s the phenomenon that makes no sense at all when you think about it. Real estate advertising revenues increase when the market is strong and decreases when the market is weak. If advertising really was the true cause of buyers buying real estate, wouldn’t it be smarter to spend more when conditions are weak and spend less in a boom?

In a booming market, like the one we are in right now, the buyers are going to arrive on your doorstep whether you run a massive campaign or not. That’s why it’s called a boom – there are substantially more buyers than sellers.

In a weak market, sellers are reluctant to spend big on advertising because they are worried the expenditure will be in vain. A weak market is when you need creative and carefully managed marketing campaigns to ensure the widest possible pool of buyers are exposed to your property.

Investment guru Warren Buffett’s famous quote ‘be greedy when others are fearful and fearful when others are greedy’ could apply to real estate advertising. Market widely when others won’t and don’t when all others do.

If an agent asks you to ‘invest’ thousands of dollars in an advertising campaign in this market, tell the agent that you are going to find an agent that already has buyers on the books. One that is more interested in the real estate boom rather than the Vendor Paid Advertising (VPA) boom.

Imagine paying a real estate agent thousands of dollars upfront to find buyers – in a boom!?!?