The market has entered into a new phase. It is a phase, which in my opinion is closely affiliated with coming to the peak of a market bull run.
There is considerable fear out there by residential real estate buyers. And it’s the fear of missing out. And with it, the loathing of not buying sooner.
These are buyers that have been sitting on the side lines, some of them for years now, waiting for a market crash. They have been severely disappointed and emotionally crushed. They almost had their way; however the government of the day put an end to their property crash dreams.
And now it is they who have stepped up to be today’s buyers. And they are the most fearful as they are also the ones who have fallen further behind in the housing market bull run. What they are doing now goes against their logic and core beliefs. And they loath and they despair at it; yet they buy.
That, in its essence, is the raw emotion moving the curent housing market.
Sadly, they also could be some of the very last surge of buyers to enter into the market.
Make no mistake, the Reserve Bank of Australia will lift rates again and lift them shortly. The markets suggest another 25 basis points in either April or May. And possibly yet another rise by June.
What the Federal Government had done is massively distort the market. If it wasn’t for the extension of the First Homeowners grant, a larger correction of the 2008 housing market would have occurred instead of the very light 5% decline that we did have. The Bears would have been right if it wasnt for Rudd.
Now, almost everyone thinks there can’t be a crash. The unspoken feeling is the government will come to the market’s rescue again at some point. And they may well be right.
However more and more government intervention in the housing market cannot be a good thing. It means more and more of the country’s resources are spent holding up housing. Money, which could have been used on health, education, infrastructure, you name it.
Even so there are other factors in the market that can no longer be ignored and which are also flaming ever higher house prices. It is a simple fact that many states are not building enough dwellings. In NSW the number of monthly building approvals is at the same level that the state had in 1983. Think about who you were and where you were in 1983! To think that back in those times NSW was building more dwellings than now!
No wonder SQM’s vacancy rates have headed to new lows of late.
Overall what higher house prices and higher rents mean is a drop in the standard of living. No, we won’t have more people on the street or more of the populace not being able to eat because of their outrageous rents or outrageous mortgages. But what we will have is more people grouping together. And importantly the gap between rich and poor will widen. Indeed it is possible the gaps between all the various classes will widen.
So when will a crash come? Will there be a crash at all? Now that the bears have been capitulating, one has to wonder.
I am looking for at least two or three of the following events to happen simultaneously or at least within a 12 month period of each other in order for a property crash to occur:
• The major banks reduce their loan to value ratios down to 80% for a first home buyer that has a sound credit history.
• Average home loan lending rates to hit 8% or more.
• China to enter into a recession.
• The globe to have a double dip recession.
• Our unemployment rate to breach 7%.
I suspect it’s going to take more than one of the events to do the trick. If for example we have 8% average lending rates or more, this may dramatically slow down the housing market, but in doing so, the RBA may just decide to cut rates accordingly.
No it’s going to have to take more than just a lift in lending rates. Bear in mind a property market slowdown where house prices have an entered period of being flat will still feel painful to many.
However the rest of the possible events could be a death rattle for the market. The most dangerous is a double dip recession, possibly bought on a sovereign debt default, China stumbling, or both.
You see, the danger with a double dip recession, created by government default is very serious.
Firstly it may prevent the government of the day coming in and propping up the market. A sovereign debt default would mean there would be ample pressure on governments to avoid borrowing and so, as the theory goes, there might not be much in the government kitty for First Home Owner grants, etc.
Secondly, the psychological damage behind a double dip recession would be devastating. It would mean, potentially a far deeper recession where unemployment would very likely rise above the 2009 peak.
But for now, there is no double dip recession taking place, only rising interest rates in this country to try and tame a kangaroo economy. Our forecasts, made at the start of the year remain in place. That is 4-6% house price increases as the National City average, with Sydney possibly outperforming this. We believe Sydney may come in at 7-9%.
We have been on recent record as stating the market could be on the brink of a downturn. That follows four months of declines in housing finance approvals. However it is becoming increasingly obvious, that the departure of First Home Buyers has not, this time, lead as yet to a material downturn. And the reason behind this is that while demand has fallen, so has supply. National listings are down by 30% from the peak recorded in November 2008.
No, Investors have not entirely taken up the slack left by the departure of First Home Buyers but it seems they have taken it up enough to hold the market up.
Certainly, it will be a very interesting number when the ABS reports on Housing Finance approvals for February. I am now expecting a bounce, probably brought upon by the RBA holding off lifting rates for that month.
All up we are expecting a slowdown to start at any point in time but we do not rule out the market in the capital cities to continue to boom until at least the 2nd half of the year.
So there is still upside risk in our forecasts. The fear and loathing may continue just for a little while yet. Just enough to get the very last bear into the market.
Louis Christopher
"No sympathy for the devil; keep that in mind. Buy the ticket, take the ride...and if it occasionally gets a little heavier than what you had in mind, well...maybe chalk it off to forced conscious expansion: Tune in, freak out, get beaten." — Hunter S. Thompson
According to independent property research house SQM Research, rents are likely to rise moderately this year, contradicting recent reports which have predicted massive hikes.
The December National Vacancy Rate Index officially released today shows vacancies around the country remained flat during the final month of 2009. Year on year, vacancy rates in capital cities have risen modestly, with the market remaining relatively tight in most areas; particularly for affordable real estate.
SQM Research Managing Director Louis Christopher says the rise in available properties is due to many renters becoming first home buyers during the year.
“That said, not a lot of new housing stock was added in 2009 to meet demand. We saw an increase in new dwelling approvals last year, but the average lag from approval to build of about 18 months will keep the supply response fairly static in 2010.”
“Regardless, there is no evidence at the moment to suggest we will see significant increases in rents. Despite the recent aggressive forecasts, increases of between 3-5% in most areas are more likely, depending on what you’re renting and where” Christopher said.
“Any higher forecasts at a capital city level may well suggest questionable methodology.”
Please refer to our free vacancy rates for all vacancies for capital cities down to the postcode level.
When it comes to McMansions, we Aussies tend to love a Big Mac.
According to Commonwealth Securities, the typical size of a new Australian home hit 215 square metres in 2009; up 10 per cent in a decade. Sydney came in at a whopping 263 square metres. Indeed, according to the same research, we have the biggest houses in the world.
The love of very modern homes and sizable homes is to be expected. We humans can’t help but treat our homes as a status symbol and the larger and more shinier a home is, generally speaking, the better we feel about ourselves.
However are McMansions a good investment? Do the houses actually outperform the rest of the housing market, or do they just give their owners bad stomach pains?
According to SQM Research the answer is generally not good news though there were some exceptions. Resale values of McMansions tend to record underperformance against the local median house price by 11% over a five year period. So in other words, if a suburb’s median house price rises by 30% over five years, the resale gain of a McMansion in the area will be 19% on average.
Just to be clear that is buying one of these homes new and then being the first owner to resell it back into the market.
Now in all this the initial asking price is key. In our research we found examples of where the resale values did perform in line or sometimes did even better than the suburb’s average growth rate. And that was because the original asking price was mostly in line or at just a modest premium compared to the rest of the market.
I have a friend of a friend who purchased a new McMansion in North Western Sydney approximately six years ago. Earlier last year they listed their property for sale. It’s still on the market today with its priced reduced.
The problem they are finding is that the grossly small land size, compared to the house is putting off many families who want their kids to have somewhere to play outside. And on top of that, they are also dealing with other families who only want to buy new McMansions, not second hand ones. Despite their efforts, the house simply doesn’t look as shiny and new any more.
Buying new McMansions can very much be like buying a new car or boat. They look great and they smell great and so they can initially make you feel good. However in the first few years of their life, they can depreciate quickly relative to other house values; especially if the bulk of the initial purchase price was made of depreciable fixtures and fittings that suffer wear and tear.
And especially if the property was overvalued compared to the rest of the market to begin with.
The auction clearance rate is by far the most quoted and reported real estate statistic in this country; particularly for Sydney and Melbourne residents where a weekend fails to go by without auctions and clearance rates reported on the major and regional newspapers.
The question begs how reliable are the results? As an analyst who for many years directed and managed the Australian Property Monitors (APM) auction monitoring process as well as made forecasts based on those results, I believe I am in a strong position to make an informed comment.
Please find with this article a link (below) on the APM results sent through to parts of the media last Saturday (17 October 2009).
You will clearly note the clearance rates reported plus the total number of properties listed for Auction yesterday. And importantly, the total number of unreported auctions – those auctions where APM were not able to obtain a result from the real estate agent.
As can be read from results recorded, the number of unreported results has risen dramatically from last year. In every city, based on the APM results at least 10% of listings are not being reported. In Melbourne, the situation is very alarming with over 60% of listings not being reported to APM on the day.
It is understood that APM (and RPDATA) make up for this deficit in Melbourne by monitoring the published REIV results over subsequent days.
For all cities, the clearance rates reported by the reporting bodies (APM, REIV, RPDATA) and subsequently published by the major papers assume the unreported results NEVER EXISTED. They are left out of the clearance rate.
I am not individually blaming APM on this. Indeed APM is the only reporting body that has the courage to publish a count on unreported auctions. RPData, and certainly the REIV are not this transparent.
Taking all this into account, what is the actual clearance rate? Well, certainly less than what the media is currently reporting.
Whatever the motive in this, inaccurate and misleading data is harmful; not just to buyers and vendors but all participants including a number of honest agents whom have to regularly explain to clients why auctions might not be the best strategy for their property.
Click here to see reported auction clearance rates
Today, SQM Research launched it's latest product; the SQM Research Home discounts Report.
The Home Discounts Report is a postcode by postcode report that publishes those properties that have been on the market for over 60 days. For each of those properties, the report will provide information on
• when it last sold and how much for
• when it was initially advertised (in its current advertising campaign
• when the asking price has changed and what it changed to
• a link to the current ad.
The report is available on www.sqmresearch.com.au
Louis Christopher, Managing Director of SQM Research said,
“I came up with this one based on some personal experiences over the years; both when I have been a seller and a buyer.
“As a seller, its very easy to end up having a tough, long campaign even though you think you have the property priced at fair market or better. The problem is stale properties really do become stale. Buyers overlook them and agents eventually get tired of them.
“For sellers in this predicament, this report will put your listing in front of a new set of eyes.
“From a buyer’s perspective, this report is a chance to find some actual bargains and to potentially enhance your negotiating power. Whenever I’ve had interest in buying a property, I was always interested in knowing how long the property has been on the market for. And this report will provide that info for you from an independent source.”
The report is now live and retails at $39.95 for one postcode. Discounts apply for multiple postcode purchases.
For more information, please contact: SQM Research 1800 766 651 www.sqmresearch.com.au
Australia’s national capital city vacancy rate held steady at the end of March 2009, according to independent researcher, SQM Research. Australia’s nationwide city rental vacancy rate stands at 3.5 % in March. Sydney has recorded the highest vacancy rate at 4.0%. Perth and Canberra have recorded the tightest rental market, sitting at just 1.1%. Across the country there have been a number of similar patterns with regard to vacancy rates.
Upper end properties are struggling to be rented out in what appears to be a collapse in demand from executives and expatriates.
While at the affordable end there is still considerable tightness, with a large number of cheaper localities recording vacancy rates under 2%.
SQM’ vacancy rate index is based on monitored online rental listings, adjusted for false listings and properties that have been withdrawn from the market within the monitored period concerned. The available rental properties are then divided into the total number of established properties available for rent as provided by the Australian Bureau of Statistics.
The index and full methodology is available for free on www.sqmresearch.com.au. It is available down to a regional and postcode level with a monthly back series to 2005.
According to Louis Christopher, SQM Research founder and Head of property with ratings house Adviser Edge:
“Vacancy rates overall have been very steady so far this year. We had been expecting a rise in vacancy rates to occur due to over 40,000 renters turning themselves into first home buyers. But to date the influx hasn’t hit the market as hard as we thought it might.
“We are still recording higher vacancies in the inner urban areas compared to outer suburban locations for most capital cities. In Sydney as an example, the CBD is recording a vacancy rate of over 8%.
However the highest vacancy rates in the country are clearly in Sydney’s and Melbourne’s affluent suburbs with vacancy rates over 10% not uncommon.” “Upper end property investors are facing the harsh reality of property value declines and falling rents. This should really not be a surprise to anyone given that we are in a recession. The upper end of the property market has always been very discretionary based.
“However what this does mean is that resources should be deployed to encourage developers to build at the affordable end of the market where historically, there has been minimal returns for them."
Two main parts to the methodology. The numerator, being rental listings. And the denominator, being the number of established properties available for rent.
Rental Listings
The rental listings component is based on all monitored and unique listings for the period of a calendar month. The series starts off in January 2005.
We then monitor all residential listings for each month and create three columns.
1) New listings added for the month..
2) Listings withdrawn for the month and current listings as at the very end of the month.
A reconciliation is conducted with the number added, number withdrawn and the previous current listings.
All listings are taken from online monitoring of major listings sites. Only those properties with unique addresses are used. Those advertisements with no addresses are excluded from the series. Any addresses repeated between the two sites are de-duped.
Finally, only those listings that have been advertised for two weeks or more (and are still currently advertised as at the time of collation) are used.
Established Dwellings
We use the 2006 No. of total established Dwellings (as a base) by postcode as determined by the ABS census. In addition we estimate total dwellings for 2005, 2007 and 2008. We then multiply this by the percentage of renters for each postcode as also provided in the census. This provides an estimated available total stock for rent.
The numerator is then divided into the denominator, which provides a vacancy rate percentage.
Some have argued that using real estate listings cannot be done because of advertising of false listings and properties that are only advertised for a fleeting moment as they are taken up immediately.
We have addressed those issues.
We have left out those ads without an advertised address and also taking into account a whole month’s worth of listings which automatically adjusts for those ads withdrawn quickly.
In my opinion real estate agents have one of the toughest jobs in the world.
Think about it.
They have to try and find a middle ground between an often steadfast seller who thinks their property is worth its weight in gold verses an often reluctant buyer who is usually worried they are paying too much and being duped.
While at the same time they regularly and collectively get a bad wrap in the media over the deeds of one or two bad apples.
Yet the role in many respects is a necessary one. They effectively help grease the middle ground that would otherwise be very rusted. How would the market work if it wasn’t for the real estate agents?
Well it would be very tough.
Certainly there would be many sellers exchanging below market value through poor negotiating ability and bad marketing. While at the same time, buyers would find it difficult to understand all the choice that is out there and certainly would find it more difficult in talking directly to a property owner.
I have known and trusted many a good real estate agent during my time on this planet. Certainly I have known far, far more good agents than I have known bad ones. All of them hard workers and all of them have copped unnecessary and unwarranted snide and rude remarks from buyers, sellers and others over their time.
How would you like that for your job on a daily basis? Would you put up with the snide and abuse in your work?
Quite frankly I take my hat off to many of them.
Let us also not forget there are many problems and underhandedness in many, many other industries, which fail to attract the just media attention.
This all said, in my opinion there does need to be improvement in the industry on a number of fronts. For me, I consider myself an advocate of price and market transparency, particularly when it comes to property market indexes such as median house prices, auction clearance rates, vacancy rates, etc.
Improving market measurements is useful for the whole industry including the agents, the institutes and of course both for buyers and sellers. Having a better understanding of market value for both property prices and rents means less chance of everyone in getting it wrong or being duped.
I also believe that independent bodies (non representative of its industry member base) should publish market indexes. This occurs in other industries such as securities and commodities and in my opinion it should be occurring in real estate. Doing so increases confidence and transparency in the market.
That is not to say there isn’t a place for the institutes. In my opinion they play a vital role in professional training, certified education, ethics and voicing issues facing its membership base.
I feel I am in a good position to help make change in the reporting of real estate markets given my long time at APM and the new indexes we created there. One of which changed the reporting of aggregated city house prices in Australia forever.
Right now SQM Research is focusing on vacancy rates as I strongly believe we can now offer information on that front at a micro level. Yes the rental market is tight, but it isn’t tight everywhere. However in other areas it’s even tighter.
The reports of hundreds of people queuing outside one property are real. Once again though its not happening everywhere.
If anything having vacancy rates at the postcode level might be able to be used by renters to find alternate areas for accommodation and also help landlords set the right rental price, whether it is further up or down.
Louis Christopher