Issue 32 - 2022
The spring market is usually a season of peak sales volumes in the property market. Buyers are keen to secure a new abode in time for the next calendar year and vendors are keen to settle their affairs prior to Christmas.
In normal market cycles, a buyer’s appetite for fresh stock is high as spring approaches, given stock levels are low over the preceding winter period. But this is not a normal cycle and persistently low clearance rates over winter, sets up an interesting 2022 spring market. Buyers and sellers will need to stay attuned to the market conditions week to week and how each real estate agency plays the spring market on behalf of their respective vendors.
Spring Market promises made, promises kept
In boom markets, agents can over promise to vendors and the market will save the day. In a falling market, if a vendor comes to market overpriced, their property will languish. The gap between the asking price and the market price will widen in time.
One of an agent’s preferred tricks is to quote a price the owner is happy with and then commit the owner to a long-term Exclusive Agency Agreement. Over time, as the vendor’s motivation goes their price expectations come down.
The owner works out halfway through the campaign the agent overstated the price but is powerless to hold the agent to account, because they signed a lengthy agency agreement – locking them in.
The above-mentioned point needs to be countered with the market shifting quickly during winter as rates increased and buyer sentiment softened.
Solution – Sign a short agency agreement of 60 days or less, with a minimum or no upfront advertising expenses payable by you as the vendor. If the agent suggests you adjust the price down, you can make a reasonable assessment as to whether the agent is providing real time market intelligence or trying to correct their initial overquote. You are better positioned to make a reasonable assessment because you are not ‘locked in’.
Early response is fairly telling
As a vendor, avoid outsourcing the management of the campaign entirely to the agent. Stay attuned to it yourself. The early response to a campaign is telling. If it starts poorly in the first fortnight, it will probably continue that way if left unchecked.
There are ample fair-minded buyers in the marketplace, but there is not an excess of buyer demand. If you burn the best buyers early, it may be a long drawn out campaign.
Solution – Establish a fair and accurate market price for your property as the published Price Guide. Avoid overpricing and trying to beat the market. Those sellers that do manage to outperform the market do so through luck or excess buyer competition. In a falling market, you won’t attract excess buyer competition by being overpriced.
Heading to fair value, not from it
Understandably, buyers will base their offers on current market conditions, because that suits their agenda. Equally, vendors are acutely aware of how much they could have achieved for their property 12 months ago.
It’s worth noting that property prices are returning to fair value, they are not falling from fair value.
Solution – As a vendor, once you have established the current market price, you are best off deciding to either accept the best offer or withdraw from the market. Languishing on the market as prices fall won’t do you any good. If you have not received any offers after a month on market, you are likely to have overpriced for the current market.
As a buyer, aim to secure quality real estate at a fair price. If you are fixated on ‘a bargain’, you are likely to purchase a second-grade property. Remember, the best properties are the least negotiable and vice versa.
Renovation resistance
Given the inflationary challenges in the economy, just like everything else, renovations cost more. Add the rain delays, labour shortage and the inconvenience of having to oversee works, one can see why buyers are cautious. There is buyer resistance in the current market to doing wholesale works. Vendors would like to think that costed/quoted works will comfort buyers. However, this is an unwise play by sellers in the current market. Buyers are overstating the cost and effort in doing improvements. This overstatement is being reflected by lower offers at the negotiating table.
Solution – Vendors aim to repair/rectify any issues that buyers may use as leverage at the negotiating table.
Buyers may find better value in properties that require some work as the overall market is hesitant around undercapitalised properties. Inflation is here today, it may be here for a bit longer, but it won’t be around forever.
Investors will re-enter the market in the near future
Whilst there has been an excess of buyers in the past few years, the one buyer profile that has gone to the sidelines has been investors. As prices boomed and rents crashed, investors stayed out. Now as the market shows more value buying and rents are rising rapidly, investors will return. Higher interest rates are not the onerous issue for investors that they are for owner occupiers, given the taxation benefits for investors. This is an important point to remember when you read property doomsayers (simplistic) market predictions about higher interest rates leading straight to a market crash.
Lower prices make property more appealing for investors and those looking to make a value purchase.
If the stock market dropped 10% on a Monday, buyers will be ready to trigger a buying spree on the Tuesday morning. In the property market, when the market drops 10%, buyers tend to stand back and wait to see if it drops another 10%.
Solution – The best buying happens in downturns. The worst buying occurs in booming markets. Because investors respond to the yield on quality real estate, they often secure the best value in a downturn, whilst many home buyers are waiting for the announcement that the market has ‘officially bottomed out’.
If you find aspects of this newsletter contradictory, then we have achieved our purpose. The property market is not black and white, nor is it binary in the way it operates. The property market is a sea of contradiction.
If you are planning to sell, check out our recent article “7 Essential Tips for Selling in a Slow Market”
Buyers finding sellers not so keen to follow the data
Buyers following property market news, data and commentary could be forgiven for thinking they will find a range of ‘bargains’ on offer each Saturday. This expectation is at odds with reality though.
In many property markets right now, there is a standoff between sellers and buyers.
Buyers claim that sellers should come down because interest rates have increased and will continue to do so.
Interestingly, the average number of enquiries per property in the boom of 2021 was around 200. Over winter this year, enquiry levels are still running at a healthy 120 – 150 enquiries per campaign. Inspection numbers fluctuate wildly though depending on how buyers feel about the value offering of the respective property.
Sellers, particularly those that are price motivated are not responding to the buyer’s higher interest rate story – mainly because many homeowners have fixed their home loan rate much lower than the current mortgage market rate.
Whilst auction clearance rates tell us how many sellers and buyers agreed terms on a particular day and research firms tell us in which direction & how much prices shifted in a month, no data exists for the percentage of vendors that list and subsequently withdraw. And vendors withdrawing is the story of the market right now.
Since the GFC in 2008, the property market has operated in shorter cycles. Sharp market rallies in that period have been followed by corrections. The Sydney property underwent price corrections in 2008, 2012, 2018-2019 and now again in 2022. Each time the downturn finished with a robust recovery. And that’s what sellers withdrawing from the market will be hoping for again.
In many property markets right now, there is a standoff between sellers and buyers.
None of these downturns were as a result of rapidly rising interest rates though. Is this downturn different to recent ones? Many sellers think not and have opted to ride the conditions out on the sidelines.
Many buyers believe this downturn will be deeper and they have gone to the sidelines too, unless a property represents compelling value. Only time will tell who is calling it right.
For sellers that are looking to buy and sell their primary residence, the market conditions are less of a concern, provided they buy and sell at the same time. The amount you potentially drop on a sale can be made and saved on the purchase if the trade is done correctly.
The lack of stock over winter in combination with the high withdrawal rate by vendors has been frustrating for buyers trying to capitalise on circumstances. Conversely, it has protected vendors against sharper falls in property prices.
Spring is a time that stock levels tend to increase. How the market performs as stock levels rise when interest rates are rising will be instructive.
Australians are facing the sharpest interest rate rises in percentage terms since the 1970s.
For anyone under the age of 50, they have never experienced the RBA being so consumed, overwhelmed and near powerless against global economic forces, as they are now.
In the past 3 decades, anytime the economy was ‘off’, the RBA could, and would, jump in with a ‘prop up’ in the form of a rate cut. Why they continued to cut the cash rate in the late stages of the pandemic as property prices soared is beyond comprehension. Once the cash rate gets to 0.10% though, it does not take a Rhodes Scholar to work out in which direction the next move needs to be.
After all but promising the Australian public that interest rates would not rise until 2024, the RBA’s aggressive rate rises throughout 2022 will have a profound impact on the market psychology for years to come.
Just like conservative schoolteacher Walter White in the hit television show Breaking Bad, in the eyes of many, Philip Lowe and the RBA are Breaking Bad with these rate rises.
The reality is the RBA have little choice in how they react to current inflationary pressure. They simply must, and have, raised rates to fight inflation. However, there were comments, speeches and undertakings given to the public about interest rates staying on hold until 2024, that should not have been given.
For a generation of working Australians who were warned by their parents and grandparents about the perils of excess debt and rising interest rates, the cautionary message now has new meaning.
As RBA Governor Philip Lowe stated in recent interviews, property prices are not the RBA’s mandate. Price stability in the economy and employment are. When unemployment is at record lows and inflation is increasing to decade highs, increasing rates is the only path left to take, regardless of the impact on house prices.
Many Australians mistakenly believed the RBA would always be there to save the property market from the worst of events. Just as global events saw the RBA cut rates aggressively between 2008 and 2020, global events are now pushing them up.
The fact households benefited from the RBA essentially being forced into cutting rates lower in the decade leading up to 2020 caused many to overlook the fact that the RBA was not the sole determinant of where interest rates ultimately go. Market forces are more powerful than the RBA’s projections, a point being well made now.
The next 12 to 24 months will be rough for many household budgets. Once out the other side, market psychology toward debt levels is sure to be more cautious.
The winners from this will be first home buyers and those with cash in the bank.
