The Penny Drops!

May 14, 2012 Posted by Ian James

Ian James

It usually takes a while longer for the media and others to see what is happening in the market place. But realistically it only took a month this time around. Owner occupiers, upgraders, second home buyers, call them what you will, are flooding back to the market place. And there is not enough stock.

The talk from some data collection agencies about an abundance of stock is not incorrect just disingenuous. There are plenty of properties on the market. These are made up mainly of lower value stocks. Not lower priced, just the lower value of many suburbs. So when you look at raw numbers, most properties that are selling are selling below median prices for the suburb; this is because the market stock is currently skewed. And those that are getting “surprising” results are actually not. The fact that several people are bidding on a few properties and those properties that are not well located or poorly presented, or that are just not that valuable, fail to motivate the larger pool of “upgraders” is not at all surprising. In fact I would be surprised if these properties were to sell at a very good price.

To think this month’s RBA rate movement or the budget announcements have anything to do with the current market demographics is also a furphy. It was widely forecast by financial gurus that there would be a rate cut and this has been followed up by one that it may have even been leaked. It was also obvious to all and sundry that the banks were not going to pass on the full rate cut. This would have had little effect on the last four weeks sales results in Melbourne.

I don’t think Wayne Swan’s budget surplus is the key fundamental for owner occupiers coming out to the market place either. If anything, middle to upper class buyers would have retreated into their paid off houses, rather than coming out and looking to upgrade. But I do not think anyone is thinking Wayne Swan is here in any long term capacity.

Any would be upgraders, owner occupiers or downsizers need to understand that buying a new home will not be a short overnight enterprise. It will take many weekends of understanding what is currently out in the market place. You will need to also look at all the stock on the market and track all the sales in the area you wish to purchase in. This is paramount in the current market. If you make an error of judgement now, the very professional selling agents will sell you a property for well above its value.

There are many would be purchasers that are getting exasperated in the current market. And there are many agents trying to capitalise on exactly this. I have seen many properties in the last six weeks sell very well. Multiple bidders have been pushing above reserves by 10 – 20%. If the house is good, well marketed and well-presented and has all the fundamentals of a good long term investment property, the vendors are selling extremely well. Prices are often well above reserve. There are also some of the “not so well located” properties doing better than they have a right to do. Some unsuspecting buyers, who aren’t doing their homework, see these high prices and immediately equate this to prices across the board rising and agree to pay some very silly prices for property that is “not so good”

Do your homework. If you do not you may find that your property has shown little or no capital growth. And for those very unlucky few that are forced to re-sell their properties in a short term will potentially find themselves in a negative equity situation, especially if they leveraged quite high in the first place.

Over the next 12 months we will see the market begin to strengthen. This will be followed by more owner occupiers putting better homes on the market, and this will snowball into an upturned market where fundamentals of good stock, lower interest rates and a growing economy will bring stability to the faltering property market. This in turn will increase rental returns and bring investors to the forefront as well.

If you are considering purchasing property in the next 12 months, please feel free to call for a free no obligation chat.

Ian James
Director
JPP Buyer Advocates

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Has anyone rung the bell?

May 8, 2012 Posted by Ian James

Ian James

I have! There is now no doubt in my mind that property prices in Melbourne have reached their lowest point. And the drive by owner occupiers will lead to higher prices for the better properties over the next 12 – 18 months. We have already shown why median house price movements are basically a useless statistic at the moment (turnover volumes are so low the statistic can be skewed too easily.)

The clearance rate does not give a reliable picture of market sentiment either. Owner occupiers will pay over the odds to secure the property they want and will not go after a property they don’t like. This is different to investors. Investors will take the second best or third best house – but at a reduced price! What we are currently seeing in the market is five, six and sometimes seven people bidding on the best presented house at the time and no interest just down the road on the second best house in the neighbourhood.

This does two things in the market place. The first, it pushes the better prices up substantially. The second; there are a lot more pass-ins and negotiations after auctions. It can also mean a lot of properties are negotiated prior to auction. A selling agent, and indeed a vendor do not want their property to be one of those poorly attended at auction. There is no worse feeling than a dead cold pass in where there are no bidders. Avoiding this at all costs is at the forefront of a selling agents mind.

So why have I rung the bell. Owner occupiers now make up 75% of our clients. This time last year over 70% were investors. I have asked many agents who are their main purchasers and all are saying this year it is the owner occupier. Add to that the lack of people willing to by any old property, even at a fair price. It is showing us a distinct lack of investors and this proves who is dominant in the market place.

Secondly, the amount of agents doing deals within the auction campaign. With the new three day cooling off laws, I assumed there would be a dearth of deals done prior to auction. I could not have been more wrong. If agents get a price they, and their clients, see as fair and reasonable, then they want to do deals. Last week alone, we closed 5 deals prior to Saturday, 4 of which were auction campaigns.

The Victorian economy, like most other non-mining states is, at the moment, not performing at its peak. This will also change dramatically through the next two to three years as the funds from the mining states begin to flow through the mining company’s offices, quite a few notable ones located in Melbourne.

In my opinion, the statistical data will show a very flat market and it will begin to move upward around this time next year. But the prices will actually start to move up later this year or early next year. At first you will see some big prices sporadically, then regularly, whilst still seeing a lot of pass-ins. As the prices of the best properties rise, prospective purchasers will begin to re-calibrate their own needs and wants and begin to look at slightly “lesser” properties than their wish lists. This will in turn generate high clearance rates and eventually higher prices.

This will in turn bring more vendors to the market and before long the market will pick up pace to be similar to 2006 & 2007. If you are a keen observer of the market you will see this building very easily, however the statistics will take 3 to 6 months to catch up. Even the media will catch up to the market movement by mid-way through next year.

If you are considering purchasing a property to live in or as an investment, please feel free to call for a chat or organise a no-obligation first meeting.

Ian James
Director
JPP Buyer Advocates

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Navigating the Melbourne property market.

April 30, 2012 Posted by Ian James

Ian James

Clearance rates are stagnating at 60% on very low turnover. The State Government budget this year has Kim Wells pulling his hair out trying to manage the State’s finances. We have data analysts contradicting each other and we have real estate agents telling us how well they are doing. Throw in the uncertainty of variable interest rates (whether the RBA does anything or not is no longer the issue – the issue is whether the four banks will pass on anything to the public.) and you have the average punter wondering why the Australian economy is labelled as one of the best in the world. BY WHO?

As Chris Vedelago correctly pointed out in his column in The Age yesterday, all four major property data companies are at odds with each other. REIV are saying median went up, RP Data are saying it went down last month. APM have said property prices rose over the last three months and Residex have said it has fallen over the same time. Unfortunately they are all talking about the median house price and none of these “analysts” will admit that the median is not a useful statistic when there is major change to the volume. And worse still, when there is a large shift in the make-up of the purchasers this will impact even greater on the median price as you remove one large segment.

Owner occupiers are coming back into the market place. You do not find this out by sitting behind a desk and analysing auction results. You need to be talking to the people that are walking through the open for inspections. You need to talk to people who are bidding at auctions. Even loan data doesn’t let you analyse what people are doing until after the deal is done.

We are seeing properties that shouldn’t sell well, getting extraordinary numbers. Take the 5 bedroom, 1 bathroom period home in a Camberwell that is in a street with light industrial properties at one end. In today’s Age the property is said to have been sold for $1.965M above a reserve of $1.83M with three bidders in the action. To purchase a beautiful period home that you are going to live in for many years is the dream of many owner occupiers. They do not mind getting into a battle to win the house they want to live in. Investors do not do this.

Owner occupiers however will all congregate to a few properties that they deem are the best and leave the rest untouched. Investors will take the second best property if they can’t get the best – BUT AT A PRICE. This year you can expect to see some very high prices paid for what owner occupiers deem are good family homes and you can expect to see some lean prices paid for homes that cannot create competition.

Again this will throw the median price statistic out the window. Change in median price data should be looked at over a minimum term of 5 years and it is much more accurate over 10 years. The data should not be from a shorter period than a full years sales. Looking at monthly median changes to property prices is not going to give anyone an accurate picture of what is happening in the market place today.

The market will remain very erratic over the next 7 months at least. But there will be some very big ticket prices paid for homes that agents can create competition with and there will be some bargains to be had from those agents that cannot. I get asked is now a good time to buy and I also get asked is now a good time to sell. There is never a perfect time to do either. The right time to buy is when the house you want is on the market at a price you can afford. And the best time to sell is when someone offers you a price that you are comfortable to move on from your current property.

You can navigate the current Melbourne property market. The best thing to do is discover all the current properties, and all the recent sales (you will need some professional help with this from a buyer’s advocate). Once you have done this, think about how long you will be living in the home, or as an investor, how long you think you will hang on to the property and what rental return you think it is capable of attaining. Look at the property and see if you can add value, is the property likely to have competition on the day of sale. Is the property in a good location that is likely to have inherent capital growth. These are the questions that you should be asking yourself and your advisors.

If you want assistance purchasing a home think about using a buyer’s advocate. A buyer’s advocate is a licensed real estate agent that does not sell property or share commissions with selling agents. According to the Real Estate Institute of New South Wales under there “best practice guidelines” a Buyer’s Agent (advocate) must be completely independent from vendors and selling agents and only accept fees or commissions from buyers. In other words they do not sell or conduct the practice of vendor advocacy.

JPP Buyer Advocates are one of the only buyer advocates in Melbourne that do not share commissions with selling agents or take referral fees from selling agents. The only money JPP has ever taken from a selling agent was when we assisted them to purchase a property for themselves.

Ian James
Director
JPP Buyer Advocates

Ian James

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What is happening in the property market?

April 24, 2012 Posted by Ian James

Ian James

After another weekend of hearing clearance rates are good, not so good and woeful by different media outlets, it is time to have a think about what is really happening. The REIV has said the clearance rate is 61% from 532 Auctions. 327 of these sold at or directly after auction or before the auction was held.

We now know the median price statistic is fatally flawed due to the dramatic drop in actual sales numbers. We also know that numbers of homes “on the market” is also not a reliable statistic, because there is absolutely no way of knowing what the change in numbers of people who are looking is. If you can only see one side of the “supply v demand” ratio then you do not have a viable statistic.

So what can we look at to give us a sense of what is happening? Simplistically, we can talk to agents and people who are looking at the negotiations in the market place on a daily basis. When I hear about all the gloom and doom, and hear that all the properties are sitting on the market forever or failing to sell at auction, and then I bid at an auction for a 3 bed 2 bath townhouse in Abbotsford against 6 bidders, I have to start thinking this must be an anomaly. My other auction is a double fronted residence in Kensington. 7 people bidding taking the property some $110,000 above the very top of the quoted range! 12 out of the last 14 auctions I have attended over the past three weeks have had multiple bidding well above the range that has been quoted. These auctions have been the best houses in their respective areas at the time.

It seems relatively obvious to me that if you have a very good property that is well presented by a professional selling agent it will sell and sell quite well if there is not direct competition at the time you are selling. From our enquiry statistics the market demographic is changing. The investors are still there, but they are being vastly outnumbered by owner occupiers. The owner occupiers that have had some discretionary time frames have been sitting on their hands for nearly 2 years. At some point in time everyone says “enough is enough” The owner occupiers are back in the market.

Owner occupiers are far more emotional than investors. It takes them longer to choose a property, but when they do, they will want to secure the property with more vigour than an investor. The owner occupier will tend to have a higher budget for any given property. This means that when a good property comes up more buyers will gravitate to it and potentially push the price up.

Because the market commentators use median price these spiked sales figures will not significantly impact the overall reports. This means the media will continue to tell us the market is falling in a hole. They will continue to quote professors who say the market is going to drop 40%. And to be fair they have no choice because that’s what the data says and that’s what some university professor has said. But in reality, the overall market is relatively flat and full of anomalies. There will be some bargain buys and there will be some great sales and this will continue for a little while to come.

The Australian property market is worth well in excess of $4 Trillion. It does not jump around by nearly half its value. Even the total capitalisation of the share market in Australian is only worth a little over $1 Trillion. The Australian property market and in particular the Melbourne market is a fairly safe place to have the majority of your money invested.

Ian James
Director JPP Buyer Advocates

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Statistics Are Fantastic! Aren’t They?

April 2, 2012 Posted by Ian James

Ian James

Super Saturday rolls through and the REIV clearance rate is 61%. Out of a reported 929 auctions, 566 sold at or before auction and a further 597 homes were reported to have been sold privately last week for a total of 1163 sales for the week. This time last year total sales reached 1190. The auction sales were 497 with private sales at 693. The clearance rate in the first week of April was 61%. All these results come to us via the Real Estate Institute of Victoria.

When is the best time to buy a property?
When you see the property you want and you can purchase it for a fair and reasonable price! What is a fair and reasonable Price? What someone else is likely to pay!

The latest Melbourne median house price is in December 2011 was $550k whilst at the end of 2010 it was $580k. The current Reserve Bank cash rate is 4.25%, and at this time last year it was at 4.75% with no change in sight. The All Ordinaries index at its close on Friday was 4420 and as at 31st March last year was 4928.

Do we need any more statistics?

If we looked at the statistics above and not what was happening at the coal face of the real estate market in Melbourne, nobody would be putting their properties on the market. There have been fewer sales than last year, the median house price is down, the interest rate has dropped and the stock market in Australia is lower.

The median house price is calculated by putting all of the sale prices of the houses in a suburb, or the metro area, or whatever area you are calculating, in order from highest to lowest and then take the middle number. To use this method from year to year is fine if you have the same distribution of good, average and poor properties from year to year. You also need the same buying demographic. Are there the same number of investors, owner occupiers who are downsizing, upsizing, going bankrupt, getting paid better etc.

To give you an idea of this let’s look at 11 sales in an imaginary suburb. The sales prices in thousands are as follows, 400,410, 420, 430, 440, 450, 460, 470, 480, 490 & 500. The median is 450 as it is the middle of all the sales. Let us now move forward 1 year and assume that the exact same properties sold for exactly the same prices. In other words the value of the properties have not changed at all. However, there were four fewer properties (36% fewer) put on the market: the 440, 460, 470 & the 490 property. Total sales now look like this: 400, 410, 420, 430, 450, 480, & 500. The median price however is now 430 even though not one house price sale changed yet statisticians would tell you that the median house price has dropped 3.6%.

We know that the sales volume in 2010 was approx. 95,000 sales in the Melbourne metro area and last year there were only about 65,000 sales (31% fewer). We also know there were far fewer owner occupiers looking in the market than investors. So both the volumes and demographics have changed.

Unfortunately, none of these numbers will tell you what your property will sell for next week, nor will it tell you what you will need to pay for your next property. The property market is not the same as the share market. When you decide to buy BHP shares, there is a current listed price and “basically” you buy at that price or not. For the average person there is no “battering” or negotiation. Property is totally different. Every BHP share in the same class is the same as every other BHP share in that class. Every house is different.

If we look at the current demographic, we know that owner occupiers are making up the bulk of the enquiries. This is easy to understand as owner occupiers have been sitting on their hands for well over 18 months and at some stage, regardless of the economy they have to act.

This year I believe we will see the median house price in most Melbourne suburbs increase dramatically. I am also predicting there will be little or no change in the price people will have to pay for a house. The median may move, the clearance rate may fluctuate, but if your property would have sold last year for $500,000 and you present it well, have a good agent who markets and negotiates well on your behalf, I think your property will still sell for $500,000 this year.

Properties nearly always sell at a price that is similar to what many other SIMILAR properties have sold for in the area. It is what the industry calls comparable properties. These are not just any sales in the street, nor are they always the examples the selling agents give you on their handouts at an open (do not forget the selling agent is working for the vendor). A comparable sale needs to be estimated looking at land size, land orientation and aspect, street appeal and location to amenities (both too far away and too close: eg. 2km from train line is too far but backing on to boom gates is too close), The size of the house for accommodation and living space, the feel and flow of a house, the quality of the house, the outdoor living space and car accommodation.

Once you have found and analysed multiple comparables, you can guesstimate what the target property will most likely sell for. This is a far more accurate guide to property prices than any statistical analysis of annual median prices will give you.

If you are thinking of buying a property this year please feel free to give our office a call.

Ian James
Director
JPP Buyer Advocates

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