Monthly Archives: January 2016

The property market in 2016

Dear Readers,

To successfully navigate the housing market in 2016, it’s advisable to be aware of the factors likely to impact the market in a meaningful way. We suggest you keep an eye on the following indicators in 2016. Banks/APRA – A theme of 2016 is likely to be the fact that credit is cheap, but it’s not as readily available as it was from 2012 to late 2015. APRA have enforced, and continue to enforce, tougher lending standards on retail banks for residential investment. In the short term, this may weaken the market. In the long term though, prudent lending ensures the sustainability of the market. It is very clear that the days of easy money from the banks are over. Interest rates – Most pundits expect interest rates to remain stable during 2016.

The December 2015 increase in interest rates by the US Federal Reserve could signal the bottom of the global interest rate cycle. Back home in Australia, banks increased lending rates for residential investors as part of APRA’s regulations. There was an expectation that the RBA may offset this with a rate cut, but that’s looking unlikely. Whilst we are unlikely to see significant movement from the RBA, retail banks have been adjusting their interest rates independently of the RBA in recent years, meaning rates will play a role in 2016.

Employment – The level of full and part time employment plays a huge and largely underestimated role in the performance of real estate markets. Both Sydney and Melbourne’s unemployment levels over the last few years have remained low, resulting in stimulated spending on consumer goods and housing from the high participation rate. Sydney continues to enjoy a golden period of construction and employment not seen since the Olympics in 2000.

Brisbane was tipped to follow the Melbourne and Sydney property booms over the past 3 years, but it didn’t, so it continues to disappoint property investors. A stubbornly higher than normal unemployment rate in Queensland, caused a lower participation rate, which was a big part of the reason real estate prices in Brisbane did not follow those in Sydney and Melbourne. AUD/International money – The Australian Dollar began 2015 just above US80c and now begins 2016 just above US70c. As the dollar goes down, our real estate becomes cheaper for foreign investors and expats.

Expats are likely to offer some support at the upper end of the Sydney market. Developers will continue to target foreign investors with ‘high rise off-the-plan’ apartments. The Federal budget – Expect a stinker of a Federal Budget soon. When it comes, it may very well hurt sentiment in the real estate market. Joe Hockey’s ill-fated budget of 2014 knocked confidence out of both the economy and the property market. The question now will be whether the Government calls an early election in March 2016 with the aim of unleashing a tough budget come May. Conversely, they may play it safe on the budget front this year and push through the tough one in 2017.

Property and money markets are very attuned to what happens in the Federal Budget. State economy – As the Nation at large battles to deal with the end of the mining boom, the NSW economy continues to go from strength to strength. This is a clear example of why generic reporting terms, such as ‘Australian House Prices,’ are nonsense. The Perth and Sydney property markets are at polar opposites, yet both form part of the ‘Australian House Price’ narrative. There are markets within markets when it comes to property.

The NSW economy is performing well and promises to support the real estate market, even as other markets struggle. Off-the-plan apartments – Talk that banks are beginning to baulk at lending against off-the-plan purchases can trigger wider problems. Excess development in apartments is a potential risk, particularly if investors at large are forced into selling existing stock to fund off-the-plan purchases. Rental market – As prices skyrocket, rents have stagnated. This has been just another reason for investors to cool on residential investment for the time being. If rents were to rise as prices stagnate, expect investors to re-enter with enthusiasm.

First home buyers – If there is oversupply in the apartment market across Sydney, first home buyers will enjoy a long awaited opportunity to enter the property market via distress selling. It feels like 2003 all over again! First home buyers will play a crucial role in ensuring over supply does not become endemic.

We hope that helps!

The leopard’s new spots – Expensive internet ads

Real estate agents love a ‘motivated vendor’. Why? Because a motivated vendor is far more likely to sell, even if the price is below their expectations. Unmotivated vendors are more likely to reject lower than expected offers. You may have heard the saying, ‘the best time to sell is when you don’t need to.’ It’s this lack of motivation in the seller that causes indifference, inadvertently creating an advantage of sorts for themselves, over the buyer. The buyer and/or agent need to pander to the seller’s demands when the vendor’s motivation to sell is low. Unmotivated vendors can be a nightmare for many real estate agents if they are ambivalent about selling, but the agent only gets paid if they do sell, which creates conflicting motives for the seller and their agent.

Sometimes, strong market conditions deliver agents easy negotiations, resulting in both the vendors and buyers being happy with the end result. In normal trading conditions, real estate agents are often left to deal with a gap between the vendor’s ‘sell price’ and the buyers ‘buy price’. If the buyer is focused on a fair market price and the vendor wants an above market price, then the agent will usually work on the party they can exert the most pressure on, the seller.

When a vendor signs with an agent, they are exclusively signed to that agent’s firm for the duration of the agreed listing period. This arrangement provides the real estate agent with a degree of control, particularly if they have a motivated vendor. A buyer is free to wander in and out of as many real estate agent’s offices as they choose to, during their search for a new home. Therefore during negotiations, real estate agents have a lot less influence on buyers than they do on sellers.

Two types of motivated vendors There are two types of motivated vendors. The first is the ‘pragmatically’ motivated vendor. They may have bought elsewhere, be in control of a deceased estate or be selling a long held, yet profitable investment. Pragmatically motivated vendors accept the best market price and sell. They are motivated enough to sell so that the agent does not have a particularly difficult time ‘controlling the vendor’. This allows the agent to focus more on attaining each buyer’s best price, confident that the vendor will accept the highest offer. The second type of vendor is an ‘artificially’ motivated one. They ‘were’ only motivated to sell if the price was right. Strangely enough, they find themselves having moved the tenants out of their investment property, committed thousands of dollars towards hiring furniture and spent several thousand more on internet ads. Internet ads which cost several thousand dollars! When did that happen? How did that happen? And most importantly, why is that happening?

Real estate agents may have been weaned off newspaper ads (very, very reluctantly), but they are now embracing a new form of advertising like there is no tomorrow, expensive internet advertising. Expensive Internet ads ‘Bigger photos equal more buyers’, sellers are assured. ‘Make your property standout amongst the crowd. You cannot sell a secret’. The cheap lines that agents used to sell needless newspaper ads are now being used to sell unnecessarily expensive internet campaigns.

‘Vendors…If you are not on page 1 of the buyers search you have erected a signboard in the forest’ screams the real estate trainer hired to increase the amount of ‘Vendor Paid Advertising’ (VPA) sold by agents. Negotiators call it the ‘sunk cost syndrome’. If you can get someone to invest upfront – emotionally or financially – in an outcome, they are substantially more motivated to want a return on their investment. The sunk cost syndrome allows agents to sell unmotivated vendors a poison pill in the form of increased exposure. Once the vendor swallows that pill, they have unwittingly increased their motivation to sell, tenfold. Agents therefore now love expensive internet ads for exactly the same reason they loved expensive newspaper ads. The real estate industry still proudly spruiks the idea that campaigns which utilise print marketing have higher clearance rates than those that don’t. That’s a really weird conclusion to draw when you consider that home buyers rarely look at print ads now!

What is not said by the industry, is the fact that vendors cajoled into spending money on a print campaign have needlessly spent good money on bad advertising. While their agent has caused them to become more motivated to sell, they have also caused them to pay for advertising in a medium where buyers don’t look anymore! To ascertain whether expensive internet ads work, let’s look at them from the perspective of a buyer. As a buyer, would you accept or reject homes based on the size of the home’s respective ads or photographs? Do you like homes that are on page 1, more than homes listed on page 3? Are you more or less likely to inspect a home because the internet site allows you to go on a video tour? If you are like most buyers, and the answer is less likely to inspect the home because you have now seen inside, then why would you pay to run a video tour ad in the first place? A few probing questions uncover some surprising answers! Agents now buy subscription packages from advertisers, which force them to run expensive web campaigns. The rules are simple. Either the consumer or the agent pays upfront for these ads, but pay upfront they must, regardless of the outcome of the sales campaign. It is easy to see then, where an agent’s passion for selling vendors this type of expensive internet advertising is derived from.

Stockbrokers love big real estate websites – they are ‘high margin businesses’. That is, they have low costs and high incomes. Their cost base has barely risen as their volume of business and income has exploded in recent years. ‘Rightmove’ the premier real estate site in the UK, has seen its share price rise four times in the past five years based on this very same model. Rightmove’s defacto sales people are real estate agents in the field talking to homeowners about the benefits of Rightmove. ‘Zillow’, the number 1 real estate portal in the US, is attempting to replicate elements of the Australian model of VPA, amongst other strategies. Many of the major shareholders in Zillow are Australian. They appreciate the profitability of a dominant real estate portal where real estate agents act as unofficial advertising salespeople for the portal. In Australia, the real estate industry’s greatest fear is ‘digital disruption’.

Industry forums are full of agents who fear their ‘Uber’ moment is imminent. And it may well be if they continue to unnecessarily charge home sellers thousands of dollars for expensive internet campaigns, when inexpensive internet campaigns work just as well, if not better. The leopard may have changed his spots from newspaper ads to internet ads, but vendors should be aware, he is still a leopard.