We’ve seen a marked shift in the residential property market over the last 6 weeks. The exuberance and excitement that we saw in the year leading up to May 2010 has definitely faded. Sydney auction clearance rates hit 80% in May and by June, many Sydney suburbs had seen 15-20% gains since August 2009. In June however, clearance rates have dropped to around 60% and attendance at Opens and Auctions has diminished significantly. The hyper competitive ‘buy at all cost’ mentality is long gone and buyers are much more discerning with what they buy and how much they pay.
So what is happening? A good thing if you ask me! The scales are being tipped away from vendors and it’s becoming more of a buyer’s market. That’s because there are less buyers out there relative to sellers. And why is that?
- RBA has raised the cash rates 6 times for a total of 1.5% since October 2009 leaving it at 4.5% today. This puts a variable rate mortgage just below 7%. For a $500,000 mortgage the cost has increased by $7,500 in just 9 months! And, while this has subdued a bit in the last few weeks, there has been much talk of another 1.5% in cash rate rises within the next year. Understandably, that has cautioned prospective buyers.
- Continued global economic uncertainty with talk of double-dip recession has spooked equity and property investors alike. While property remains a ‘flight to quality’ play, investors have concerns that property price increases have exceeded what is justified by the global recovery. We feel that this ‘pause’ in equity and property markets alike is important and necessary so that we might avoid future bubbles.
- While investors have come in to partially replace first homebuyers as the First Home Owner Boost has been phased out, we have seen lowered demand in the lower end price ranges (below $1 million) which was extremely competitive at the end of 2009 and in early 2010.
- Once again the restrictions on foreign property investors have been tightened to pre-GFC norms. Students and other temporary residents must now again sell any owned property once they leave Australia. Also, any land owned by foreigners must be developed within specified timeframes.
- Investors have been discouraged by the new NSW Tenancies Act, passed in Parliament last month. The Act, while not yet in effect, will tip the scales in favour of tenants, increasing costs and risk to the property owners.
Nevertheless, we view the above as temporary and necessary for the evolution of the property market going forward.
While everyone enjoys a gain of 20%, this cannot be sustainable in the long run and we do need to revert to 8-12% year-on-year gains over the medium to long run. Overexuberance just leads to bubbles that burst spectacularly later on. Australian property prices will always be capped by the affordability factor (so long as foreign property investors are held on the sidelines by foreign investment controls) so property prices roughly need to track wage growth over the longer run.
What this means is that properties are on the market for longer and fewer parties are bidding on the same property. Under Auction conditions, if there are many registered bidders, buyer strategy can only sway the price so much. However, with vendors now seeing poor turnout at Auctions and many failed Auction attempts, buyers can use this to their advantage to negotiate smartly pre or post a failed Auction. We are now again seeing many situations where the first ‘fair’ offer is accepted by nervous sellers. A smart buyer can purchase very well in the current market.
So the capital gains may not match last year’s and we may see a quarter of below average property price returns (but not negative). However, we see no fundamental shift, just a much needed pause. Property prices should continue their inevitable upward climb, just a little slower than in the last 9 months.
About Oliver Stier
Oliver J. Stier is the Director of OH Property Group, a leading Sydney buyers agency. He studied Quantitative Economics and Finance at Cambridge University (UK), University of Toronto (Canada) and Princeton University (USA). In addition to being a licensed real estate agent, Oliver also holds the Chartered Financial Analyst (CFA) designation.