A selling agent is not there to work in a buyer’s best interest

A selling agent is not there to work in a buyer’s best interest

By Catherine Cashmore
Tuesday, 25 October 2011

This week we witnessed a high-profile agent get slapped across the wrist for “lying” about an offer.  I have to tell you, a selling agent “bending” the truth to manipulate a higher offer from a buyer is not a rare experience in real estate – or any other selling industry, for that matter.  After all, a buyer won’t increase a bid just because he appreciates the property’s attributes; however he’ll shift if he feels the heat on his neck from another “interested party”.  Sales agents won’t be slow to play on a buyer’s emotions if it means getting a higher price – they’re contractually obliged to work in the best interests of their vendor, not assist the buyer.

The vendor is paying the selling agent no meagre amount to get a premium price for their property.  While most agents won’t go out of their way to openly lie to a buyer, any advice relating to the likely sale price of a house will always come with a good degree of bias towards the vendor.  Therefore just as you wouldn’t trust the vendor’s solicitor to give you unbiased advice on a sales contract, neither should you trust a vendor’s selling agent to give you unbiased advice on price! You’ve got to do your own leg work – or you’ve got to enlist your own representative to do it for you.

The auction system claims to be a more “transparent” system of sale.  Providing the property reaches its “on market” number, the process will clearly show who is there to purchase and a figure they’re willing to pay.  However, considering most auctions in Victoria fail to be knocked down and end up being resolved via negotiation, it’s imperative buyers have a basic understanding of their rights should a property pass in.   For example, it takes just one bid from the highest bidder prior to a property passing in to grant them an exclusive right to negotiate at the vendor’s reserve.  While negotiations are ongoing, the agent may not deal with anyone else who may be willing, or able, to pay a higher price. The rule is reiterated at every auction I attend, however the message isn’t coming across.  When I see properties pass in on a vendor bid and five people immediately approach the auctioneer following the auction to embark on serious negotiation, then later in the day see the property has sold for a price higher than the vendor bid given, I can only shake my head at the lack of experience.  When this happens the agent is in the box seat – not the buyer – and as an experienced negotiator, they’ll often be able to manipulate a higher price from the buyer than they would have done had there been competitive bidding outside the property.

It’s all very well calling on the state government to place further safeguards on the industry, but it’s extremely hard to hamstring a sales agent to work fairly for both buyer and seller.  Furthermore, it’s in the government’s interests to line the coffers with hefty stamp duty payments – who’s going to worry in Parliament if a buyer pays tens of thousands over the purchase price through lack of experience?  When such issues arise, the government continually says,” We will look into it” however they will never be able to legislate that a selling agent must assist a purchaser. This would break the fundamental contractual obligation the selling agent has with their vendor.

We get a similar outcry every so often regarding price quotes. Rightly or wrongly, agents use a number of varied quoting methods to “condition” expectation. Quoting low – while unfair – is not officially underquoting.  Pricing property is not an exact equation. When a sales agent lists a property for sale he draws a fine line between market expertise – (broadly based on comparable sales) – and personal opinion. The exact requirements by law are minimal. According to the Estate Agents Act in Victoria for example, the agent is required to write an estimate of likely sale price on the sales authority. This can either be a single price, or 10% price range. This range doesn’t have to be the vendor’s asking price or – in instances where the vendor’s asking price is unknown – reflective thereof.

If an agent advertises the property under the bottom number of the estimated price range, it is regarded as underquoting. However, the agent’s price quote  is an extremely conservative appraisal of what the property can easily and comfortably achieve, not a “guesstimate” of what buyers might pay in the heat of an auction, or the vendor’s “wish” price. The vendor is employing the agent and approves of the way he quotes, markets, and advertises the property. Therefore perhaps the pressure should be placed on the vendor and if the vendor is not willing to sell within the quoted range, insist it’s changed?  However, I doubt you’ll see it happen, vendors know as well as agents how the low quoting system works to attract buyers.

While I am in full agreement of fair legislation outlawing deceitful advertising and agree whole-heartedly that an agent openly lying to a buyer about a serious offer should be frowned upon, the responsibility unfortunately falls upon the buyer to get the right advice prior to purchasing to secure peace of mind.  It would take a foolish selling agent to use deceitful tactics on an experienced licensed buyer’s agent.  Throwing out a line about some “higher” phantom offer is just too easy to debunk. We’ve seen all the tricks of the trade and know our way around each and every one of them.

Nearly every person who sells property in Victoria uses a sales agent. They pay roughly 2.5% of the sale price to employ a professional expert to market, assess and negotiate the property’s sale.  Most believe this is the best way to achieve the highest possible price in an industry where they have little expertise.  Buyers also have the option of levelling the playing field by employing their own representative.  Just as you wouldn’t stand up in court without using the services of legal counsel, so too do you risk being tripped up by the system if you purchase property without getting an experienced licenced agent to work on your side.  It’s a choice – not a requirement – but it’s one every buyer should take advantage of if they really want to avoid the pitfalls.

Catherine Cashmore 

It’s time for something to be done on housing affordability

It’s time for something to be done on housing affordability

By Catherine Cashmore
Tuesday, 18 October 2011

It’s somewhat heartening to see the Wall Street protests gathering momentum across major Western nations.  Heartening because ordinary people (99% of us) are starting to realise we do have a voice in a world that all too often rewards the rich above the needs of the poor.  There’s no doubt our country is in a much better position to weather events than parts of Europe and even the US, although we’re not immune to the global eruptions that continually erode  investor confidence and threaten to topple nations that were once too big to fall. However, I’m confident in the resounding Aussie spirit to push for the changes we need for a healthy future.  No one can forget the recent Queensland floods where a large army of ordinary people turned out in droves to help rebuild communities while many insurance companies refused to lift a finger.

We’re always promised security, shelter, affordable food and superior medical treatment by our pollies, but whichever side is in power, we’re usually disappointed at the outcome.  Before the “voice” of social media, our words of dissent were sounded behind closed doors – however now they can be shouted out for all to hear and it’s a privilege to bear witness to this new source of power.   Perhaps this influence can spread to our housing market because – as headlines all too often scream out – the dream of owning property is no longer feasible for a growing number of citizens.  It harks back to 1974 when Gough Whitlam aroused passions in his ‘It’s Time’ speech by pointing out: “The land is the basic property of the Australian people. It is the people’s land, and we will fight for the right of all Australian people to have access to it.”

A recent report conducted by ANZ –Asset Returns: Past, Present and Future – rightly pointed out that residential property has had “the highest returns of any asset class over the past 24 years.” The results of the report state that “Residential property averaged annual returns of 12%, compared to 8.9% for equities”.  It should be pointed out that the residential property in question is the principal place of residence – not a negatively geared investment property.  The reason being, not only is it exempt from any capital gains tax when sold, but also the “boom” in prices from easier lending conditions and lower rates witnessed since the 1980s has allowed growth in this asset class to outperform  most other investments.  The report goes on to point out that this level of growth can’t last perpetually, and over the next few years the bank expects shares to win the historic battle of “shares verses property”.  However, shares don’t provide shelter and home ownership will always be a needed priority for the majority and therefore a right we must fight to maintain.

Each year we receive the Annual International Housing Affordability Survey, and each year it lists Australia as having one of the most unaffordable housing markets in the world. The survey covers 325 markets across Australia, Canada, Hong Kong, Ireland, New Zealand, UK and the US. The latest report condemns Sydney as the second least affordable market behind Hong Kong, which tops the list.  (Melbourne doesn’t fare much better – coming in at number 321 out of the 325.) The report uses a system called the “median multiple”, which is calculated by dividing the median house price by the gross annual median household income.  According to the survey “affordable” house prices should have a ratio of no more than three times the average income level. We haven’t seen a ratio like that in Australia’s metropolitan regions since the 1980s (during which time interest rates were significantly higher). The same can be said for London, for which you’d have to go back to the 1970s to find a ratio at three times.

If you compare Australia with London and other European cities you’d find the general cost of living more affordable with petrol prices, eating out, entertainment and travel all well under those offered in other major cities.  Therefore, if drawing comparisons, we arguably have more disposable income to put towards a mortgage.  However, the difference between here and the UK or US is our inability to spread away from our major capital cities due to high land prices and the lack of adequate infrastructure to enable a reasonable commute to inner-city areas.  This means many home buyers are only willing or able to consider city-ring suburbs, and these are largely unaffordable for those who don’t already have a foothold in the market.  We simply must start setting up our regional centres with bullet trains and capital city amenities – just as the US, UK and Canada have seen fit to do – if we want to provide long-term affordable options for property buyers.

This weekend the REIV released its September quarterly results showingthe Melbourne median house price has deflated $16,000 (2.8%) to $551,000, from a previous recorded median of $567,000.  The overall gain, year to date, is a meagre 1.4% – which is below the rate of inflation and flags our ever-present affordability constraints.  However such small changes in the median are movements we negotiate daily and therefore mean little when it comes to purchasing property.  For example, when assessing value in a flat market, a comparable sale 12 months old can be just as significant as a comparable sale a few weeks old – little changes.  We’re not facing freefalling house prices, nor are we likely to do so.  Those who have already achieved their spot in the expensive inner- and middle-ring suburbs have taken up all the best seats and are happy to sit tight until things improve.

Melbourne has significant problems because it has the highest population growth in Australia, and it’s lacking much-needed family accommodation.  Even for those willing to move to the outer suburbs and purchase a new property they’re not necessarily faced with affordable options. In a report commissioned by the Housing Industry Association for the recent tax forum, it was stated that 38% – that’s $180,000 – of the purchase price on an average sized new property in Melbourne is immediately taken up in taxes – and it’s worse in Sydney, with 44% being swallowed up in taxes.  In New South Wales there are additional problems for builders who are hamstrung by the new Environmental Planning and Assessment Act, which differs across councils and makes the issue of building new homes extremely complex. There is simply nothing to encourage new homes sales in regional areas as a feasible alternative for home buyers or spark growth in this part of the industry.

Too much time is taken up discussing housing affordability, yet we never see broad-based changes.   If we’re going to grow as a nation and maintain our standard of living, we must start lobbying for ways to provide a better functioning housing system.  Until we make our voices heard, nothing’s going to change fast enough to ease the pain.

Catherine Cashmore

Property in prestigious school zones always in demand for both investors and owner-occupiers

Property in prestigious school zones always in demand for both investors and owner-occupiers

By Catherine Cashmore
Tuesday, 11 October 2011

An article in Melbourne’s Herald Sun this weekend (October 9, 2011) highlighted how it’s just as possible to lose money through unwise investment in the real estate market as it is with any other financial acquisition.  Residex sifted through 268,000 sales transactions to conclude that over the past three years 5,427 vendors have sold property for less than they paid (not taking into account stamp duty and transaction costs).

To put this into perspective that’s a little over 2%, with the main losses occurring in areas that either have a surplus of high-rise developments – for example, Docklands and Southbank in Melbourne’s CBD – or in areas that suffer accentuated volatility during the property cycle such as those with $1 million-plus price tags such as the bayside suburb of Brighton, with a median house price of $1.79 million. Furthermore, the losses were incurred over a three-year period, which in real estate terms is too short to make any substantial profit even in the best of times.  However, even taking this into account, for many still hoping to get a foothold into their area of choice, life isn’t getting any easier or property prices any lower.

One sector of the market particularly feeling the strain is young families wanting to enrol their children in reputable inner-city schools.  Melbourne’s population is estimated to reach 5.6 million by 2026.  It’s growing faster than any other Australian metropolis, and while a bulk of the population is being squeezed into newer suburban regional areas such as Warrandyte and Werribee, it’s only a result of increasing density in the inner- and middle-ring suburbs with facilities unable to cope with the growing demand.

While the state government has been busy planning large developments of high-density housing on disused industrial land such as Fisherman’s Bend in West Melbourne – an area expected to provide accommodation for an extra 12,000 residents – little planning or finance has been dedicated to adequately facilitating existing public schools or building new establishments to cope with the extra surge in enrolments.  Furthermore, the squeeze is putting pressure on an already limited supply of residential family accommodation for middle-income families wanting to give their children the best education Melbourne has on offer.

This is why there is a very strong connection between Melbourne’s top public schools and the prices of residential property.  If you analyse the statistics, being in a school zone for one of the top 20 or so government schools in Melbourne can increase the price of properties in the area an average of 10 to 15% – and the smaller the zone, the greater the pain.

For example, Melbourne’s McKinnon Secondary School zone only covers an area of around four kilometres – however, it spreads over four suburbs (McKinnon, Bentleigh, Bentleigh East and Ormond). There can be a big difference in the price of a house on one side of the street in the zone and the other side of the street outside the zone, even though they may be located in the same suburb. We’re talking differences of $100,000 or more on a house in Bentleigh East for example – which has a median price currently recorded at $732,500.  Even within such a small area, the number of enrolments being submitted to the school each year is often so high there is always talk of the zone reducing in size, which obviously worries anyone who is purchasing property near the zoning boundaries – take away the zone, and you can potentially wipe that $100,000 off the price tag.

As a consequence, the homes closer to the school (easy commutable distance –within two kilometres) will sell for higher prices and potentially generate a greater appreciation in price than those located on the edges.  Even in soft markets such as we’re experiencing at the moment, demand in the school zones remains robust. The average clearance rate in Melbourne is currently 58%, however in the areas surrounding McKinnon high school it’s sitting at approximately 70% and so tightly held is the location, there have been fewer than 50 house sales recorded by the REIV over the past 12-month period.

Investors add to the demand in school zones because not only is capital growth generally higher, so too is yield from families who have been forced to rent due to high property prices or not finding a suitable property in time for enrolment.  Neither is it unheard of for an old property located in a popular school zone to be rented by a family never intending to move in, but simply using the address to meet the criteria for enrolment into year 7. However, it’s important for investors to understand they will only reap the benefits of a school zone if purchasing a property that suits the major home buyer demographic in the area.

Purchasing a “set and forget” two-bedroom unit obviously won’t attract the same intensity of demand and will therefore only produce comparable returns for the general suburb rather than the school zone.  Developers aren’t missing out either – land sizes are shrinking as full blocks are being sliced in half to accommodate high-spec townhouses often selling for double the price of the initial land value – and to further accentuate the point, according to the latest valuer general data, over the past five years, houses in the McKinnon school zone have recorded an average annual growth rate of 12.62%.

It’s another symptom of poor planning for a growing population, which is unduly inflating property prices of desirable inner-city residential real estate.  For example, six years of secondary education at Melbourne Grammar School is currently around $139,920.  When you take into account stamp duty and transaction costs, plus the time and effort it takes to find a house appropriate for a growing family, you can easily pay more to get a foothold into a popular school zone. Therefore, even though we’re seeing price falls in some areas of the state, we’re still facing challenging problems adequately accommodating an increasing population looking to settle into the world’s most liveable city – and this will only result in increasing prices over the long term.

Catherine Cashmore 

First-home buyers are priced out of the market, and something must be done

First-home buyers are priced out of the market, and something must be done

By Catherine Cashmore
Tuesday, 04 October 2011

Single first-home buyers have a battle on their hands if they want to secure a property in today’s market, which is predominantly dominated by second-home buyers, investors, and young couples who are able to draw on combined salaries.  In fact the only time we see a significant rise in this sector of the market is during periods where generous incentives are offered by the government, which conversely does little to ease the pain for property buyers.  The resulting increase in competition caused by a temporary inflation of the economy – particularly in the inner- and middle-ring suburbs – makes it harder to get a foothold, not easier.

We only have to take a brief backward glance at the initiation of the first-home owner boost in 2008 to understand the advantages fleeting targeted schemes like this can effect. The post-GFC property boom was ignited by the first-home owner boost introduced in October 2008. During this period grant recipients accounted for 40% of overall housing turnover.

However, in Victoria it was the extra dollar incentives offered for purchasing new properties in the growth corridors that had the biggest effect on first-home buyer trends, and this was where the buying activity centred. Immediately following the introduction in November 2008 overall sales of new dwellings had increased by 1,764 to 11,695.  Melton, in Melbourne’s West, grew by 8.2%, equating to 7,535 new residents – an all-time high.  Other regions such as Deer Park (17 kilometres west of Melbourne’s CBD) recorded a 15.67% rise in its median value. And by January 2009 there had been 530 house sales recorded in Tarneit (25 kilometres south west of Melbourne), with prices increasing 21%. Werribee (32 kilometres southwest of Melbourne) and Point Cook (25 kilometres south of Melbourne) attracted the greatest number of grant recipients, with Werribee South recording a whopping 25.74% rise in its median house price, which was clearly unsustainable over the long term.

When the grant was finally scaled back demand substantially declined, and the effects are still being felt.  The REIV recorded a 4.3% decline in Werribee’s median house price over the last quarter alone, and according to RateCity, there have been 40,000 fewer first-home buyers entering the residential market in the year from July 2010 – 2011.

The decline has caused a two-tier rift in our property market and left home buyers in the outer-suburban regions facing a long road of potential property stress.  RP Data’s recent equity report shows that “3.7% of home owners across the nation are in a negative equity position,” which includes a significant proportion who purchased at the peak of the market (many of whom were first-home buyers).  Clearly, the reduction in demand following the drawback of the first-home owner’s boost and a sharp period of interest rate rises has taken its toll. Another report analysing mortgage-backed securities by Moody’s Investor Services shows a worrying increase in delinquencies from those holding the least amount of equity in their properties. The report has produced a “heat map” for each metropolitan and regional housing market across the country and it reveals the greatest deterioration in mortgage performance is evidenced in those areas “radiating” away from our well facilitated metropolitan inner- and middle-ring suburbs – principally the outer regional areas.  These are the areas our first-home buyers flocked to during the boost and the areas that are now struggling with negative equity and an inability for buyers to bail out due to the reduction in demand.

On the other side of the coin the inner-metropolitan regions where most people want and need to live are fast becoming unaffordable for the majority of home buyers who don’t already have existing equity in the property market – principally first-home buyers.  RP Data now has 40 Melbourne suburbs listed with a median house price of a million dollars or more.  Furthermore, in its recent equity report Victoria came top of the list, with 71.4% of Victorians currently holding at least 50% equity in their property. Melbourne has also recorded the highest rate of capital growth over a five-year period (to July 2011), with dwelling values up 51.5%. The overall results of the report specified that the biggest gains were understandably in the capital cities – areas where job security is strong and vendors are under no pressure to sell. Regional “mortgage belt” areas containing the highest default rates dwindle some 10% behind.

Obviously Australia is suffering a housing dilemma, which is largely the result of our geographical landscape where more than 75% of Australians live in and around our major cities along the eastern and south-eastern costal planes.  The limited land available in these locations, along with a growing population of buyers and immigrants, naturally puts pressure on Australia’s metropolitan prices and even taking into account the recent soft market, which has slightly improved buying conditions across the country, it’s clearly splitting the housing market into a gradual rich/poor divide.

Luring people out of the metropolitan inner-suburban areas is the only obvious way to ease inner-city demand and consequently make housing more affordable. However any future plans to do so have to be sustainable and not fuelled with fly-by-night incentives. In Victoria, the state government’s answer to the shortage of housing has been to action urban land releases on former farmland in growth corridors such as Casey, Hume, Whittlesea, Wyndham, and Melton – areas lacking in public transport, adequate health services, and other amenities needed to support a growing population.  It was boldly stated that infrastructure would be provided in these areas to make them liveable for new home buyers; however this was to come in the form of a hefty new tax called the ”growth areas infrastructure contribution” – the GAIC.

As I understand it, the GAIC is levied if land is sold, transferred or subdivided, or if sizable building works are conducted. The cost can be up to $95,000 per hectare and essentially it falls at the feet of the purchaser, which further increases the underlying cost of purchasing. There is negligible encouragement for any new home buyer to move into these areas, and quite clearly it’s going to do little, if anything, to address the growing issues facing the practicalities of sustainable population growth.

We have a looming crisis on our hands, and the only way to solve it is to build suburbs with enough diversity and infrastructure to foster a sense of community.  Re-igniting the first-home buyer market and committing to a strategised plan to adequately facilitate the outer-metropolitan regions would be a great initial step towards addressing this issue. This means providing more than simply an abundance of “roof space” or high-rise inner- city rabbit hutches, it requires substantial hand-in-hand investment in schools, small business, open spaces, and transport facilities without which growth cannot be sustained. All in all, most owner-occupiers will admit the most valuable asset they own is their home – however it is no longer a right reserved for all – for a growing sector of our population, it’s fast falling out of reach.

Catherine Cashmore