17 Mar Property investing fear busters + Don’t fall foul of FOMO + Not all property markets going well
Highlights from this week:
- Why more people don’t invest in property.
- The real impact on investors from tighter lending policies.
- “More growth is on the way” – Core Logic.
- Why it is not all plain sailing in the Aussie property market.
- Technology has changed how agents, buyers and property sellers work.
- Why too much information can be as dangerous as not enough.
- The reason why some investors are still paying too much for a property.
Too much information is not good – Meighan Hetherington
Kevin: I started selling real estate in 1988 and quite often reflect back on just how much has changed in that period of time – in that relatively small period of time – that I’ve been in the industry, probably no more so than the Internet. My guest to discuss this, Meighan Hetherington, who is a buyer’s agent and probably hasn’t been in the industry as long as that but certainly has seen a number of changes along the way.
Meighan, the Internet has changed so much about what we do, hasn’t it?
Meighan: The Internet is a really interesting one, but it’s actually what provides us, which is that instant access to a lot of information that we didn’t use to have access to, I think, that has changed the way that we think about things and the way that we access information.
Kevin: When you say “we” there, agents used to be the gatekeepers of all that information. We had that from the very early days, not as much as we have now, of course, or that is available now, but that information is available to the general public, which has changed the way agents work. We used to guard all that information and that was the power the agent had.
Meighan: It was, wasn’t it? To be able to say what something sold for and how that compared to a property and what the market was doing was something that we had to work very hard as agents. I’m a young one in the industry; I’ve only been here since 2002. But it was something that was really quite sacred, the information that we had and who we shared it with and how we shared it with them.
I think the thing now is the access to information is much greater and people can get information from all sorts of sources. It’s then working through that information and working out what’s relevant, how to apply your knowledge of what’s actually happening and interpret it.
Kevin: And that’s how the role of the agents changed, of course, because now the agent is no longer the gatekeeper of the information; the agent has to help the consumer…
Meighan: They’re the interpreter.
Kevin: …Interpret that information.
Kevin: And a classic example of that would be the number of online portals that are now available for consumers, and that information is taken and then massaged to give you an online appraisal of what you’re property is worth.
Meighan: Yes. A database appraisal.
Kevin: Yes. I want to talk to you about that because it’s called desktop valuation. It’s really a quite popular way for people to assess the value of their own property, and they’re actually even promoted by some of the banks. There’s one major bank that will actually have that stupid ad on television that I’ve talked about where the agent is standing there like a dummy…
Meighan: They’re not very helpful. They really don’t put a good slant on what the information is that the agent provides.
I think the online portal that provides an automatic valuation is only as good as the data that is input to the system that is then used through a series of algorithms to arrive at a number and often with an error range, if you like, and often those ranges can be very great.
But say, for example – and there’s a number of portals – if you log on and say automatic valuation, you come up with…
Kevin: We could mention there’s PriceFinder, there’s CoreLogic, there’s APM – they’re the major ones.
Meighan: The main three.
The challenge is that if the information that exists about the properties that are pulled in as the comparable property… So the valuation method they’re using is comparable sales methodology. It is – to an extent – a reliable methodology to use and that’s what the banks use, but it all depends on the data that is actually drawn into the system.
If a property hasn’t sold for a number of years or there’s been a significant renovation done on a property, then the information that is actually held in that system about that property could be very out of date and quite irrelevant.
For example, a three-bedroom house that was sold 10 years ago for a price might have a land value that’s quite similar and a land size that’s quite similar to the subject property. But if that property has had a significant renovation, it’s been transformed into a five-bedroom house and the pool has been installed and the ducted air conditioning and it has lovely stone finishes in the bathroom, then that property may no longer be a comparable property to look at. So the data may be quite out of date if a property hasn’t sold recently.
Kevin: And to go even deeper, some of them actually will look at the location of that particular property, and it depends how far back it is from a main road as to what sort of rating they give it, what sort of valuation they give it. Plus, the other properties in the area, what’s happened to those. If you get one of those off-the-shelf type sales where a property may have sold for much more than the median, it will actually drag the median up, and that impacts all of those valuations.
Meighan: It does. And I think the other things that an agent will really bring to the table – and particularly a buyer’s agent – is to look a little deeper than what’s on the screen, and that’s looking at is there overland flow that might affect the value of the property. Is it right next-door to an Energex transformer? All of these things will have an impact on the property. Is there a view? Could that view by impeded? All of these you cannot put into an algorithm unless that information has been input by somebody and it’s used within the algorithm.
Kevin: Yes. Quite often someone will call an agent to come out to do – well, they think they’re doing a valuation; they’re doing an appraisal, the possibility of listing their property, mainly because they want to know what it’s currently worth.
But to think that an agent can walk in with five minutes’ notice and come up with some kind of a reliable valuation of property, it’s simply not going to happen. Valuers who train for years have to come out and they’ll spend at least an hour and a half looking at the property, making notes about it, and then they’ll do their research, a lot of which is ringing agents but looking up on some of these portals, as well.
Meighan: You have to be realistic with what it is that an agent is providing. An agent is giving you an indication of what the average buyer in the current market, who’s not under duress to purchase, would pay for a property. So a market appraisal, if you like, is what a willing seller would sell for if they’re not under duress and a willing buyer would be prepared to pay not under duress. What I mean by duress is if there’s a financial imperative for them to do something in a short timeframe.
An agent is using their experience of talking to so many different buyers, taking buyers through different properties, listening to the objections that buyers have about certain things about properties – whether that might be room size or layout or aspect or orientation – and bringing all of that information together in their knowledge base – their head – and saying, “Well, here’s where I see the things that people will like. Here’s where I see the things that people might have a problem with. Based on that and the other comparable sales, I think it’s sort of in this range.”
But to ask an agent to walk into a property and in 10 minutes give you an idea of what it’s worth, they have a bit of work to do after they see a property to be able to give that range.
Kevin: It’s the hardest thing for an agent to do. I always went into it with a great amount of trepidation when I had to go and do an appraisal or a presentation of any kind. Once you get to the conversation about the price, it’s always difficult and that’s why many agents are actually accused of buying the listing, in other words, over-inflating the value. Because there are two things I do know, and that is that every seller wants more than their house is worth and every buyer wants to pay less than what it’s worth. So you’re always going to have that bit of a gap.
Meighan: There’s a fabulous cartoon about that, isn’t there? Where the owner thinks their property is a mansion, the buyer thinks their property is a tent, and then the bank is there as well.
Kevin: And then the agent is sitting in the middle wringing his hands and wondering what the hell this is all about.
I did a search on a friend’s property recently on one of these portals. I know what he wanted for it, and according to the valuation, it was something like a million dollars out.
Meighan: Less than half by the look of it. Yes.
Kevin: It’s actually worth, I think, what he wants for it because of the amount of work that he’s done it, but it’s lumped in with all the others in the area where the median is so low. I doubt that he’ll get it, simply because he’s probably over-capitalized, but it’s worth every bit of what he wants, but he’s just not going to get it.
Meighan: Well, it’s worth what the buyer is prepared to pay at the end of the day, and if there’s not a buyer that sees the same value in it as he sees, then that is market value.
Kevin: These conversations that you have with agents about valuations, what’s your opening gambit to an agent where you have a client who wants to buy this particular property but you know that it’s overpriced but they really want to pay for it? How do you talk to the agent?
Meighan: I talk about comparable sales. It’s very important that I have a discussion with an agent around what has sold, where the comparables were superior and inferior, and then bring back to that agent the information that I would like them to have a discussion with the owner about.
Agents don’t often set the price of properties; it’s often the owners that set the price, and the agent’s job then is to bring the market feedback. The agent can give them advice, but it’s the owner’s property and it’s their prerogative. They can put whatever price they want.
I have always said my whole real estate career, asking price is irrelevant. What we want to know is what are the comparable sales? How does the property that we’re interested in buying compare to those comparable sales? And how can I, as a buyer’s agent, represent my buyer in the best way to get the lowest price that I can using that information?
Kevin: As always, Meighan, great talking to you. Thanks for your time.
How effective are the regulator’s brakes? – Andrew Mirams
Kevin: There’s a lot of talk about the regulators are doing and how much they’re pinning down investor lending, and without investor lending, obviously, we’re not going to have investors. Without investors, we’re not going to have rental properties. So, I’m just curious to know if the regulators have really changed investor lending all that much. I want to pose that question of Andrew Mirams, regular contributor for us in the show. Andrew, of course, from Intuitive Finance.
Andrew, can you answer that question for me? Have they really changed investor lending that much?
Andrew: Good day, Kevin. Yes, it has changed quite a bit.
Kevin: Has it?
Andrew: In the last couple of years, we’ve had a fair bit change going on in our markets where just all the lenders are being scrutinized a lot more. And to be honest, a lot of it is for good. We don’t want boom-bust cycles, so really they’re looking at just trying to moderate the markets and make sure people aren’t over committing themselves. So things have changed.
Kevin: How are they doing that? Are they doing it by restricting the banks in terms of how much they can lend to how many people?
Andrew: Yes. Some of the things they’ve done… When we talk about the regulators, we’re talking APRA (Australian Prudential Regulation Authority, ASIC) and the Reserve Bank, and they’re called the Council of Financial Regulators. They’re all basically looking and saying, “We need to make sure we have a balanced market.”
So what are some of the things that they have been doing? The first thing they took the bat out to was high LVRs. Investors who are buying off the plan or buying investment property at 95% and 97%. The first thing they said was “No. We think that’s dangerous. That’s fraught with danger. Any little market movement, you’re going to be sitting on clients with negative equity.
And that’s probably happened in some of the mining towns in the boom-bust cycle we’ve seen in outer Australia, in WA and Queensland, where people have really leveraged in when things were going well and now a lot of those clients are sitting on negative equity.
That was the first thing they changed – the maximum loan-to-value ratio for how much lending you could get against a property as an investment, and that’s now limited back to 90%, and even some lenders went beyond that where they had larger exposure and limited that back to 80%.
The next thing the lenders did was start to then look at some postcodes and where they might have exposures and things like that. Again, this is being driven from the top down, so they’re saying, “Look, where do you think you have exposure? You need to start limiting that.”
The banks then started to look at a whole range of postcodes across the country, not probably by surprise, Kevin, where we a lot of cranes up on corners and a lot of development going on. And the banks have now said “You know, we have a really high exposure in certain postcodes. It’s a bit like a house of cards that if one was to fall, gee, maybe we’re at risk with all these things, and if people all walk away from them, we have a real issue in holding that sort of property.” So they started to restrict then on postcodes. The banks have probably done that themselves, just looking at where they may have exposures.
What a lot of the lenders were doing and what APRA in particular asked all the lenders then to do was “Here are six scenarios. Send us in your lending calculators.” What they were able to ascertain was there was a massive difference. There were hundreds and hundreds of thousands, and you’ve heard me speak, Kevin, about getting to the right lenders first and things like that in the past.
APRA came out a bit more than a year ago, probably the start of 2016 or late 2015 and said on the record, “We don’t want lenders to compete on servicing calculators. They should be competing on product and price.” A little bit anticompetitive because some of the niche players can’t compete with the big banks, but they’ve come out and said that.
So what they did was a lot of those niche lenders and the ones that were investment-friendly used to factor in and service debts on actual debts. Now, they’re all made to service over the balance of the remaining term.
So, if you take a 30-year loan with 5 years interest-only, you have to service it at 25 years, so it’s actually now a shorter term, and then they buffer up the interest rate, of course, so work on and better average rate of 7.5%. If you can’t afford to pay your loan off over 25 years at that rate, now the lending is restricted.
That’s probably been one of the biggest things, and that really affects our larger portfolios. If you start putting principal and interest across some significant portfolios, that have a real impact.
Kevin: Just on that point, Andrew. That buffer that you’re talking about there, is that easy to find out? If I’m doing a calculation as to how much I should go to the bank for, that buffer that I will need to allow for, how do I find out what that is, and does it vary?
Andrew: No. That’s something that, again, I guess we know as brokers and bankers know, because a bank will know their own one. Brokers, we all know what they are because we have access to those tools. But the mom-and-dad client – and we’ve been seeing this a lot in the last 12 months – they just can’t understand why they can’t get money when it’s not really costing anything, because we have record low interest rates. If you have some debit at interest-only, largely your rent and costs and everything are a paying for the loan.
When we have to deliver the news that sorry, we can’t get you another loan, clients look at us quite puzzled, saying, “Hang on, it’s not costing me anything.” When we take them through the calculations and explain that it’s anywhere between 7.25% up to 8% the banks are servicing at, so almost double your actual interest rate, over a shorter term, and now there are some other restrictions around your income source and things like that, it has quite a significant impact in such a short period of time.
Kevin: Andrew, let me take you back a little bit. We talked at the start about those regulators and LVRs and the postcodes. Is it also determined by the style of property? In other words, are they getting very nervous about units in some of those postcodes?
Andrew: It’s pretty well documented, I think, in a couple of our more popular cities, but even in Perth, we’ve seen the downturn in Perth through the mining boom finishing and then the amount of development coming to fruition there. Melbourne and Brisbane, there’s probably a whole lot of property coming to the market.
There are a couple of other factors that probably affect that. That’s our overseas and non-resident buyers who have gone to the Foreign Investment Review Board, been approved to buy a property here but now just by virtue of finding some errors in probably the way that the Australian lenders would look at the way they need to prove their income versus some of the overseas borrowers not being able to meet those criteria and some of the measures that were being taken to meet that.
Those are now being restricted, so that probably means that some of them won’t be able to complete the purchase when the units come to fruition, and that’s going then also have an impact on the rest of the markets because where there’s a ripple, a wave appears.
Kevin: Andrew, we’re out of time but it’s great talking to you, mate. Thank you. And obviously, there’re a lot of levers there that get pulled that will change how lenders lend to both investors and to owner-occupiers. It’s a fascinating conversation.
Andrew, thanks for taking us into so much detail there. I appreciate your time.
Andrew: Our pleasure, Kevin. I still think there’s a little bit more to come through 2017, so it should be interesting.
Kevin: All right. Interesting. We’ll touch base with you in the weeks and months ahead, just to keep an eye on that. Andrew Mirams has been my guest. Andrew, of course, from Intuitive Finance, and you can see a lot of additional posts on our website as well – RealEstateTalk.com.au – from Andrew and Intuitive Finance.
Andrew, once again, thanks for your time.
Andrew: Pleasure, Kevin. Thanks.
Property investing fear busters – Michael Yardney
Kevin: There’s no doubt about it. Property certainly is a brilliant asset class for creating wealth. That’s what this show is all about, of course. We talk to successful investors. I often wonder why more people aren’t doing it. Maybe they’re sitting back and waiting for the market to change or to improve.
If you’re sitting there listening to this now and maybe you’re wondering why you’re not in the market at this stage and what are the things that are holding you back, Michael Yardney joins me to discuss this point.
Good day, Michael. It’s a frustrating question I know I’ve asked you on many occasions: if it’s so good – and we know it is – why aren’t more people doing it?
Michael: I guess it’s because they are scared. In general, I think the fear falls into a couple of categories: making a mistake and losing money, or some of them actually just believe that they don’t have the know-how or the knowledge to do it successfully.
Personally I’d be more afraid to end up relying on my savings or superannuation or the government to look after me for my financial future in my golden years, Kevin.
Kevin: Michael, give me a bit more detail about some of these fears.
Michael: I think currently at the stage of the market where the markets are more mature, some people are concerned “What if my property doesn’t go up in value? What if the cycle turns? What if my property goes down in value?” I think it’s important to understand that it will. At some stage the market will slow down and all properties – even good investment-grade properties – will track down a little but.
Yesterday, I actually discussed this with a client, Kevin. I said to him, “You’re right. The Sydney market is very strong and it’s quite possible your property is going to drop. It could be 5% or 6%. Imagine if it drops 10%. We’re only back to where it was last June.”
It’s not going to happen overnight, and good quality properties where the markets are deep and where there are lots of people buying, selling, moving house, moving up, they don’t drop much in value at all.
That’s just the way the market works. Don’t be scared of it, Kevin.
Kevin: Analysis paralysis is another one, too, Michael. We can spend a lot of time educating ourselves, analyzing the market, and waiting for it to be right. Do you see that as a bit of a problem?
Michael: It is a fear, Kevin, because people fear they don’t have enough knowledge, and the answer is you never will. In fact, the beginning investor who thinks he knows it all is probably more dangerous to himself than the person who recognizes that they need to know more.
But there’s a happy medium there, so I think it’s important to get going knowing that you don’t know it all but having some good people around you who can help you with the bits of information you don’t know.
Kevin: Michael, another thing – and this happened to me – was some of the advice that I was getting from other people, especially as you incur more debt. Well-meaning people –like parents and brothers and sisters – say, “Wow, do you really know what you’re doing? This is a lot of debt that you’re taking on here.”
Michael: Kevin, the fear of debt has been one of the biggest things that’s stopped people getting involved in property investment. I know in all my seminars I say, “Hands up anyone who’s scared of debt,” and most people giggle a bit but don’t put their hands up. Then I say, “Hands up somebody who knows somebody who’s scared of debt,” and they all put their hands up and have a bigger giggle, because we know that that’s one of the common things that holds us back.
The question is what sort of debt? You can have good debt, which is against appreciating assets. You can have necessary debt, which is non-tax-deductible debt but debt against your home. And you can have bad debt, which is debt against depreciating assets – doodads, toys, things that go down in value. But good debt against appreciating assets in my mind isn’t a risk at all.
Kevin: Michael, I can hear many people saying, “You make it sound so easy, but gee, there are a lot of ongoing costs involved in property investment, as well.” This could be one of the reasons that holds a lot of people back as well, Michael.
Michael: Yes it is. You’re right, Kevin. It’s nice having the rent come in but you have all of the outgoings – the insurance, the maintenance, the strata fees, vacancies. And that’s what scares people a lot: the vacancies. “What if the rent doesn’t come in?”
These can all be handled, though, by a sensible financial structure, by having an offset account or a financial buffer, and a good mortgage broker can help you with this to make sure that you don’t overcommit yourself.
Yes, it’s important to recognize it, but once you do, you can then work within your financial parameters so that you don’t overcommit, Kevin.
Kevin: Michael, let me ask you a question just in closing out – and this comes from left field without notice. That is, what about the skill that you need to become a landlord? What have you found in going from sometimes being a tenant to being a landlord? Is it a mindset shift?
Michael: Many people are not made out to be landlords, Kevin. In fact, most successful property investors know how to do it. Those who fail are the ones who get too emotional about it. First of all, some try to be cheap and do it themselves, and they get themselves into trouble. You shouldn’t be dealing with tenants. You should have a property manager to protect you.
But the other thing is expect that you have to have repairs, expect that the hot water service is going to blow, don’t be disappointed when the tenant moves out. Don’t take it personally. It’s just a business.
Get a good professional there to protect you, having a good property manager. Just understand that there always will be outgoings and don’t get emotionally involved in the little ups and downs of being a landlord.
Kevin: The other thing, too, Michael, I find is you have to delegate to your property manager. You have to give them the opportunity to manage it for you if they’re good. But you cannot abdicate. You still have to be involved to a certain extent. As you said, you have to be prepared for some of those things that are going to happen.
Michael: Yes, you do. Interestingly, this week, I had a discussion with somebody who was upset because they have to carpet and repaint their property and they hadn’t got the money for it at the moment. I said to them, “But remember when we first set you up, we actually got you a financial buffer. How much is in there?” And he said, “I have $60,000.”
I said, “That’s exactly what this is for, John. Don’t be upset that it’s going to cost you $6000 to do this, because every five to seven years, you’re going to have to put in new carpet, and every ten years, you are going to have to repaint it. It’s just the cost of doing business.”
And because he had the money there – which he didn’t want to touch, but that’s what it was there for – he’s okay now. He’ll get a good tenant because he’s got a well-presented property, and life moves on.
Kevin: Good talking to you. Michael Yardney from Metropole Property Strategists.
Michael: My pleasure, Kevin.
Not all smooth sailing – Cameron Kusher (Core logic)
Kevin: The monthly CoreLogic Home Value Index reported a further rise in the value of capital city dwellings in February, with values rising 1.4% over the month, with Sydney continuing as the overall capital gains leader. Joining me to talk about the report and what’s happening in the property market around Australia, Cameron Kusher from CoreLogic.
Cameron, thanks for your time.
Cameron: Thanks, Kevin.
Kevin: Sydney, how it continues to grow, is that a surprise to you, or did you expect this?
Cameron: Probably didn’t expect it to accelerate to the magnitude we’ve seen, but we did expect that with really low interest rates and obviously the investor segment of the market coming back, you’d continue to see growth. But over the last year values are up 18.4%, which is the fastest annual rate of growth for Sydney since the end of 2002.
You can obviously see why people are a little bit concerned with this, given that this grown phase is more than four and a half years old and we’re now getting the highest level of growth we’ve seen in more than a decade.
Kevin: Yes. I think it’s been something like how many continuous months – like 58 months or something – we’ve had this growth?
Cameron: It has been. The growth phase has been running for 58 months and we’ve seen values rise significantly, and even if we go back a little bit further than that from the previous growth phase – which started in the end of 2008 – to now, values in Sydney are up about 105%.
Kevin: The legislators, of course, and politicians are really rubbing their hands together – well, not so much rubbing their hands together in glee but in worry saying, “How can we slow this down?” What are some of the triggers that they could pull to pull it back a bit, Cameron?
Cameron: If we look at what was happening 12 months ago, the market in Sydney and Melbourne was actually slowing, and what we were seeing at that time was that they were cracking down on the investor lending. APRA had brought in the 10% cap of credit growth annually, and that was slowing things down, but we also had interest rates 50 basis points higher than they are at the moment.
Given the experience 12 months ago, I’d say that they’re probably the two main areas to really target. Higher interest rates, now, the Reserve Bank said that they don’t necessarily want to lift interest rates and they’d maybe even put them lower if it wasn’t for the Sydney and Melbourne housing markets. But also more focus on the investor market and slowing the level of demand there. The 10% cap, maybe it needs to be lowered to 6% or 7% to try to slow this thing even further.
Kevin: It’s great for homeowners but it’s a great challenge for prospective buyers, isn’t it? The affordability of getting into the markets, particularly in Sydney and Melbourne?
Cameron: It is. And the challenge is not servicing the debt for most people, because you have the lowest interest rates we’ve seen in generations, so once you can actually get into the home, the servicing of the mortgage – at least at the moment – is relatively easy. The challenge is saving up a big enough deposit to actually enter into the housing market.
If you look at Sydney at the moment, the median dwelling price – and that’s the combined houses and units – is $795,000, so a 10% deposit is $80,000. You have wages growing at the lowest level on record, so it’s difficult to see how people can actually save up a big enough deposit and keep chasing the market at the moment to enter in if they don’t already own.
Kevin: We talk about a booming market around Australia, but there are different markets, aren’t there? You look at Perth and Darwin, where it’s been particularly slow. In fact, I think according to your report, they actually slipped back in that quarter, did they?
Cameron: They have. Perth values fell 0.9% over the last three months, Darwin down 6%, and they’re both down at least 10% from where they were at their previous peaks. While Sydney and Melbourne are booming, Perth and Darwin are really struggling.
Then if we look at the other cities, Brisbane and Adelaide, you’re continuing to see just fairly moderate rates of growth, and there’s definitely been an acceleration in growth over the last 12 to 18 months in both Hobart and Canberra.
Kevin: We’ve had growth over the last 58 months, as you pointed out. What’s the growth been in real terms, say, in the Sydney market in that period? Have you have any figures on that?
Cameron: In terms of the real growth, we only calculate that each quarter in terms of inflation-adjusted growth, but if you look from when this growth phase started, the values are up about 75% in Sydney. If you adjust for inflation, they’re probably up around 55%. In Melbourne, they’ve increased by about 47% or 48% over the same period of time.
It really is all about Sydney and Melbourne, at the moment, in terms of the growth we’re seeing, and all the other capital cities have lagged significantly behind.
Kevin: I want to talk to you about stock levels in just a moment. Before I do, can I just swing the attention to the rental market because that’s obviously a double-edged sword, isn’t it? When we talk about affordability of getting into a house, but we also have to make rentals affordable, too. What have the rental returns been like in Sydney and Melbourne with these rapid price increases?
Cameron: They’re historically low. Obviously, you go around Sydney, go around Melbourne, go around Brisbane and see all the new apartment stock coming online. Most of that is ultimately going to end up as rental accommodation. At the moment, the rental yields in Sydney for a house is at 2.8% – that’s a gross figure – 3.7% for units, and in Melbourne, it’s 2.7% for houses, 4% for units.
They’re gross figures, so the net figure is actually going to be significantly lower than that, and increasingly the challenge at the moment is also to ensure that your property is actually occupied for 52 weeks of the year with so much more stock coming online.
Kevin: We’re seeing great results from auctions around Australia, too, and rapid selling times. What about stock on market? What’s happening with that?
Cameron: It’s quite low, and this is another driving factor of what’s happening in Sydney and Melbourne. We calculate our listings on a 28-day basis each week. At the end of last week, in Sydney, there were about 21,000 properties for sale, which is 11.3% lower than it was 12 months ago, and that was already fairly low 12 months ago. In Melbourne, you have about 28,500 properties for sale, so more than Sydney, but the amount of stock for sale is 5% lower than it was 12 months ago.
You have this combination of low cost of borrowing, strong population growth in Sydney and Melbourne, a very rampant investment market at the moment, and you have little stock to choose from, so people are making bids over and above the asking price at auctions or the listed price for private treaty sales and pushing values higher just because they need to get into the market because there’s very little stock out there.
Kevin: How much of an influence is FOMO or fear of missing out? How much of a factor is that in the market currently, Cameron?
Cameron: I certainly think it’s a big factor at the moment. I think people figure if they don’t get into the market now, it takes them 6 to 12 months to actually find the property they want. They’re going to have missed out on all that growth and they’re also going to have to find all that extra money.
The way I like to think of it is this: the common wisdom in real estate is you sell and then you buy a property, but if you sell now and it takes you 12 months to find your next property, in Sydney, if you did that 12 months ago, you’ve missed out on 18% growth and you have to make that up somewhere. So I really do think there is a bit of a case of fear of missing out going on at the moment.
Kevin: What’s your view going forward for the rest of the year? What do you think growth is going to be like, Cameron?
Cameron: Look, I think there’s still going to be growth. I do think that there’s just going to be too much pressure on the regulator to find more ways to slow this rate of growth in Sydney and Melbourne. So we do believe that over the second half of this year the rate of growth is going to slow, but it’s going to be because APRA gets in and makes some changes to the housing market and lending policies rather than just a natural slowdown in the market.
Kevin: Always good talking to you, Cameron Kusher from CoreLogic. Thanks for your time, Cameron.
Cameron: Thanks, Kevin.
Don’t fall foul of FOMO – Rich Harvey
Kevin: Rich Harvey, is on the line. Good morning, Rich. How are you?
Rich: A very good morning, Kevin
Kevin: Interested to read during the week that you’ve put a warning out to buyers about making sure they don’t become wounded bull bidders. What do you mean by that?
Rich: Indeed. We see a lot of frustrated buyers going to auction, particularly in the Sydney and the Melbourne markets, which have a larger percentage of auctions. We see buyers might have gone to five or ten auctions, they’ve missed out, and they walk into that next auction and then they end up paying over the odds for that property without regard to the true market value.
It’s like they use the bidding card as a fan. They just can’t stop raising it up the top, and they end up just paying way too much for the property. It’s just another word for a frustrated buyer. We see it all the time. There are a couple of different demographics, but often you’ll see younger families and they’re dragging the kids around and particularly the last couple of weekends, there have been heat wave conditions, and people just get over it. But they end up paying anywhere from $100,000 to $500,000 more than they need to on a property just to get into the market. It’s quite dangerous territory for some people.
Kevin: Rich, to go one step further, let’s have a look at Melbourne today. There are 1400 auctions. Assuming that there are probably two, maybe even three, bidders at each auction, we’re talking about thousands of people who are going to walk away unsatisfied after today. That feeds that fear of loss and that feeds that frenzy, doesn’t it, to go out and buy something?
Rich: Actually Dr. Andrew Wilson sent me some figures on the weekend and also CoreLogic gave me some great numbers. I asked them, “What’s the percentage of properties going to auction versus private treaty?” In Sydney, around 23% of listings went to auction last year and 77% were private treaty. In Melbourne, it was around 30% auction and 70% private treaty. And in Brisbane, it was around 6% auctions and 94% private treaty.
People shouldn’t have a fear of missing out at auction. There are other properties available for them. They just have to be patient and hang on.
I think a lot of the public aren’t aware that there’s a hidden property market. I think particularly what we as buyer’s agents promote as one of our key benefits for our services is getting access to that off-market property. And there are quite a few of them. We’re finding, particularly in the higher price ranges, there’s a disproportionate percentage of off-markets available, and it’s a really great market you can tap into to get a property.
Kevin: How do you do that as a buyer’s agent? How do you tap into it? How could the consumer do it?
Rich: It’s harder for the consumer to do it. It’s easier for us as buyer’s agents. We just have a really extensive network and a really good relationship with agents. We bring a qualified buyer to the table, we get advance notice. Because we’re in the industry, we know what’s going on.
We don’t collude or do anything at all unsavory. It’s very much a straight professional relationship. It’s simply relationship building and it’s time spent. If you spend a lot of time doing something, you get very good at it.
So as buyer’s agents, we have a lot of access to properties that people wouldn’t otherwise find.
Kevin: What would be your suggestion, Rich, to people who may have chosen an area – should they be then cultivating that relationship with the agents in that area?
Rich: Correct. That’s right. It’s just a matter of maintaining those relationships. You have to be the squeaky wheel that gets the oil there and gets noticed in those areas. That’s the key.
Kevin: Are you going to many auctions? Are you bidding today?
Rich: We had one we were going to be doing today but it got sold prior, unfortunately. We have another two this afternoon. So fingers crossed, we’ll try and get those two today.
Kevin: Did it sell to your client?
Rich: No. It went over their limit, unfortunately. You just have to know when to walk away.
Kevin: That’s a good point. You obviously worked with your buyer and you set a limit. You don’t need to tell us the property, but can you give us some comparative figures?
Rich: It was a one-bedroom in Randwick. I believe it sold for around $780,000, where we were willing to go to about $760,000. We were close but we’re not that close. Also the client just had a limit, unfortunately. The property is probably actually worth that, but some of these clients just have a budget and they just can’t go over that.
Kevin: It’s worth it because someone paid for it. That defines its worth, doesn’t it really?
Rich: That’s right.
Kevin: Were your clients restricted on finance, or were they investors?
Rich: They’re investors.
Kevin: So they had a very hard view on what it was worth.
Rich: That’s right. Exactly. Yes.
Kevin: Do you find generally, Rich, that investors take a much harder line at that because they look at it as a business as opposed to someone who’s going to become emotionally involved in buying a home?
Rich: Absolutely. With investors it’s all about the return on investment and the yield and the growth factor you’re going to get, so you have to buy well. For the home buyers, it can be more emotional. It doesn’t mean there’s any less attention given to it. But for the home buyers, they can ride out the cycle stuff a little bit more, so there can be a little more of a flexible factor in the price that they pay.
Kevin: Thanks, Rich. Great talking to you, mate. Thank you.
Rich: Thank you.
Kevin: Rich Harvey is the president of the Real Estate Buyers Association of Australia.