Monthly Archives: May 2015

Low stock levels help drive prices higher. Why winter can be a hot season to sell

Common wisdom suggests that spring is the best season to sell. Many confuse a strong presentation with a higher price in the assertion that ‘spring is the best time to sell’.

What is often overlooked is the vast amount of stock that is always held back for the spring market. Regardless of the season and the presentation, it’s preferable to sell with less competition not more.

There is normally an under supply of listings in winter and abundant supply in spring.

Post Easter, stock on market is always low. Any current buyer will tell you that the lack of stock this year is more acute than ever. In 2013 and 2014, the Sydney housing market experienced its strongest gains for those respective years during winter. In both years, the prices and clearance rates eased in spring, debunking the ‘sell in spring’ myth.

The lack of stock in the current market has seen price rises accelerate in the Sydney market. It’s now common for every listed property to have multiple genuine bidders, highlighting the booming nature of the market. Sellers are clearly winning in this equation as prices continue to hit new highs on low stock levels.

Aside from the season, another reason stock is so tight at present is a fear amongst vendors of selling and being locked out of the market. Many people looking to sell and buy in the market have a distinct fear of selling and being unable to buy back in. There is a very real concern that house prices could continue rising after they have sold and before they have purchased, causing a self-inflicted financial loss. This has seen many inter-market traders hold back from listing until they have secured a home elsewhere.

Buying before selling brings it’s own set of challenges too. Whether buying or selling first, its crucial that a plan has been devised in advance of transacting. One of the safest ways to buy and sell in the same market is to get a delayed settlement on the first transaction. This allows time to get the second transaction done.

Whether buying or selling in winter, you can expect to see strong competition at every property listed in the inner Sydney market. There is every indication to suggest that winter will be a hot market again in 2015.

 

 

Update: New laws to protect home buyers from under quoting have now come into effect in NSW

The laws should act as a guide for other States looking to clamp down on the practice of under quoting (bait pricing).

The agents favoured trick of telling the owners a high price and the buyers a low price, with the hope of engineering a sale in the middle, will be fully exposed under these new laws.

In a subtle but effective change to the law, agents must now increase the price guide if an offer is made above the agent’s price guide. The agent is unable to continue marketing the property at a lower price that what has already been offered

We have already seen many instances where price guides have been increased mid-campaign to be in line with the offers and buyer feedback. This ensures that those buyers who are unable to win the bidding, do not enter the bidding on false pretences.

As a result of these laws, you can expect fewer bidders at each auction, as the buyers who are unable to win the bidding are priced out of the bidding prior to the auction.

Is it a bubble? How high will it go and will it crash?

This is the big question about the Sydney property market that everyone is asking but few want to answer. Are house prices in a bubble?

In late 2012, we were told that housing affordability was poor and property was essentially over valued. House prices then shot up 30% over the next 18 months. Has this latest growth taken the market from fair value to being over valued? Or was the market actually under valued in 2012 and is now simply trading around fair value?

The current strength of the market has caught many respected analysts and forecasters by surprise. The bulls in the market may be winning now, but that is not to say that the bears in the market have it completely wrong either.

To make the right decision when trading in this property market, it is crucial to be aware of some fundamental principles which will play a role in determining the market’s fortunes. These principles will also guide you in determining and identifying any unsustainable price bubble.

Interest rates – Let’s cut to the chase. As interest rates have continued to go down, Sydney house prices have gone up by an almost uncanny ‘similar’ amount. May’s rate cut suggests they won’t be going up anytime soon.

For example, at the beginning of 2012, average interest rates for home loans were around 7.5%. But in May 2015, home loan interest rates have fallen to 5.0%. This is a 33% drop which translates into a drop of 33% in home loan repayments.

However, this extra money has been diverted from the bank to the vendor in the form of higher house prices, because Sydney house prices have increased by more than 30% over that same time period.

If rates keep going down, provided other fundamentals remain in tact, you could expect more house price growth. Each rate cut seems to stimulate the property market further – not that this is the RBA’s intention or desire.

If Sydney was to experience a market correction, RBA boss Glenn Stevens wouldn’t have much sympathy. He has been fairly clear in expressing his concern at the current level of Sydney house prices.

Investors – Sell in boom, buy in gloom they say. Well it’s now a boom and there is no doubt about that. The major problem facing property investors now sitting on huge paper gains is, what to do with the money if they did sell? Selling and buying in the same market gives them no gain at all.

Currently there is no sign of a mass investor sell down in the market as it stands. Therefore housing stock is likely to remain very tight, which creates strength in itself. Incoming investors now need to tread very carefully. The price surge has seen entry prices sky rocket as rents have stagnated and/or declined. The net yield for incoming investors to the

Sydney market is only around 2%.

Australian dollar – As the AUD goes lower, the Sydney housing market becomes cheaper for expats and international investors. As one segment of buyers pull back from the market, another enters. Whilst a 2% net return may not appeal to most investors, Sydney house prices have hardly risen to an expat living in the US or the UK once currency movements are factored in.

Markets within markets – Be careful about simplistic commentary relating to National markets. Commentary such as ‘Australian house prices’ or

‘NSW home sales’ may not tell the true story. London house prices are not a true reflection of prices in broader England.

Just as New York prices don’t reflect prices in the broader US market. Sydney may now have decoupled itself from the rest of the country in similar fashion. Unlike previous booms, the price growth has not swept up the Eastern seaboard to Brisbane. Even Melbourne has lagged behind Sydney, experiencing only about half the growth Sydney has.

To demonstrate the markets within markets theory, certain price points in Sydney are looking overly strong whilst others are still showing relative value. The sub $1.25 million market is much stronger than say the $2.5 million plus market. The value on offer is unrelated in these two price brackets, even though they are within the same geographical market.

Government intervention – Based on Australian’s enthusiasm for property (and negative gearing), the market could react badly to any policy change in the property sector. Since Superannuation funds have been able to take on debt, a lot of that money has poured into property, contributing to the buoyant environment. Small changes in policy can have a rapid impact on the property market, both positively and negatively.

Take the First Home Owners Grant during the GFC as an example. A small incentive set the market alight during a financial crisis.

Unemployment – the National unemployment rate is tipped to rise but the NSW economy is powering along. Unemployment concerns don’t seem to be hanging over the Sydney market like they are in other capital cities.

If there was one segment of ‘Australian house prices’ that was in a definite bubble, it was the mining towns. As the mining boom winds up, house prices in mining towns have been hit severely. Lots of investors who bought property in boom mining towns are now suffering with overpriced real estate that they can’t sell.

So yes, there was a bubble that has now crashed in Australian housing, but it was in country mining towns and not in metropolitan Sydney.

Sydney never goes backwards – In every boom, a mentality seems to emerge that some people term ‘ignorant confidence’. A common trap in a boom is to think that prices will never go down, but they always do – eventually. Even in Sydney you may ask? Yes, of course!

Don’t get caught peddling or believing some of those baseless ‘real estate facts’ which are bandied around.

Claims such as, Sydney house prices never go down – they just level out. Or, property doubles every 7 years. This type of thinking can set you up for a total misread of the market.

As amazing as it seems, prices will probably continue to rise for some time yet. This is good for those in the market and not so good for those trying to get in.

Like a good thriller movie or book, we are going to have to wait for the end to see how this market plays out. The reality is that no one can predict the finish with any great certainty or confidence.

Picking the peak of the market is a guessing game, even for the experts.

The boom will finish when it finishes.

Boomers compete with first home buyers

In a trend likely to escalate in years to come, baby boomers are downgrading and selling their family residence as their children leave home. In an ironic twist though, it seems that many baby boomers are downgrading to the type of dwelling that would once have been sold to first home buyers.

Conventional wisdom once assumed that when boomers retire and sell their family home, that they would move to coastal areas.But this is not happening. Boomers are now choosing to work less hours rather than fully retire. This has led to them downgrading their primary residence to smaller homes and units to allow them to stay in Sydney.

Like the current generation of first home buyers, boomers also want to be close to the CBD, Sydney’s Harbour and all the attractions that Inner City living offers. Boomers are not battling the kids for the TV remote anymore; they have become fierce competitors against their grown up kids in Sydney’s hot property market.

The recent sale of a one bedroom house at 111 Trafalgar St, Annandale was a clear example of the clash between first home buyers and baby boomers. Over 50 parties inspected the property in 12 days with 6 offers being submitted. First home buyers were only able or willing to make offers in the $900,000’s. Baby boomers downgrading, took the bidding up to $1,050,000.

Until recently, it would have been reasonable to expect that a one bedroom house would have sold to a first home buyer and/or renovator looking to further improve the property. First home buyers are the ultimate losers in this current boom. Many of them are learning that trading down in a booming market is easier than getting started in one.

On 1st January 2012, the NSW State Government altered the First Home Owners Grant, to assist first home buyers to get into the property market. Assistance for first home buyers was removed from existing dwellings but increased on brand new dwellings. The aim was to create a building boom to increase overall supply, which it did. However noble the State laws are in their good intentions, unfortunately they clash with Federal laws relating to foreign investors. Foreign investors are unable to purchase existing dwellings but they can purchase brand new dwellings. That is, the same dwellings that the NSW Government had incentivised first home buyers to buy.

Whether it be a cashed up baby boomer downgrading, a local investor speculating on the market going even higher, or a foreign investor, first home buyers have never had it so tough. As prices escalate, they are being forced to make bigger commitments to housing loans every month if they want to get into the market.

The property boom has now spread to all price ranges in Sydney. However, it’s strongest at the ‘affordable’ end of the scale. Given that baby boomers, first home buyers, investors, foreign buyers and renovators are all chasing similar dwelling descriptions, the ‘affordable’ stock will keep drifting towards an ‘unaffordable’ price tag for first home buyers.

Many boomers do offer financial assistance to their children to help them get into the market. It’s a wonderful gesture, but it’s worth noting that boomers are doubling down on the property market.

Tricks agents use to increase vendor motivation – How to spot and avoid them

If you want an above market price for your property, agents have a number of tricks to bring you back down to a more normal market price. Some of these tactics are subtle while others are more transparent. Either way, when you know what they are, you stand a better chance of protecting yourself.

The pre-auction low offer – if you are expecting a huge price on auction day, an offer well below your expected price often surfaces about a week before the auction.

The agent does not expect the offer to be accepted because it’s more a case of causing the vendor to second guess their price expectations and be grateful when the price exceeds the bargain hunter’s low ball offer.

Move the tenants out – the more financially committed the vendor is during a campaign, the more likely they will accept the highest bid on the day.

Encouraging tenants to vacate in the name of an ‘improved presentation’ increase the vendor’s financial exposure to the campaign.

Deadline – sellers are often encouraged to auction their property because the deadline (the auction date) can pressure buyers to act.

However, as the deadline draws closer, the pressure of the situation subtly shifts from the buyers to the seller.

While buyers can wait for other properties to come onto the market, the seller is publicly on the chopping block on auction day.

Don’t let a reported clearance rate of 80% fool you into a false sense of security. Many properties are withdrawn or fail to sell at auction, so the ‘result’ conveniently goes unreported. The real clearance rate is always significantly lower than the figure advertised.

Furthermore, the agent clearing a property and the vendor achieving the best possible price are two separate outcomes.

Hire furniture in – when an owner hires designer furniture for 6 weeks, it creates both an expense and a deadline for the vendor.

Upselling advertising – agents are addicted to Vendor Paid Advertising (VPA). They often tell each other in training courses that upfront VPA ensures they get a committed vendor from the start. VPA comes in many forms.

In the past it was full page newspaper ads, then it was real estate magazines and flyers. Now the latest craze is ‘premium package” internet campaigns. If an agent really believes in these advertising methods, ask the agent to carry the cost and risk of the strategy.

You may find the agent can quickly deliver a buyer without either of you having to commit to a massive upfront expenditure.

The greatest losses often occur at the time of greatest gains. It’s a reality that vendors are resilient and careful when the market is flat yet more relaxed and amenable to expenditure in boom markets.

If you stay resilient and careful in a boom market, you can be assured of the best possible net result.