The Realities of a Tough Housing Market Terrain
It’s not been the easiest of times for the local high-street real estate agency over the past two years.
Following a long period during which healthy transaction figures and 70%+ clearance rates were ‘the norm’ – in the Melbourne market at least – the recent sharp downturn in revenue has seen many in the industry struggling to make headway in a highly competitive & progressively difficult atmosphere.
IBISWorld – “Australia’s largest provider of industry-based research” estimates revenue for the real estate agent industry will decrease some 4.3 per cent through 2012-2013. Furthermore, according to their report, over the past five years, industry revenue has fallen by 1.6 per cent and currently stands at an estimated $8.9 Billion – revised downwards from a previous estimate of $9.61Billion.
Although there was a pickup in annual sales turnover in 2009-2010 principally buoyed by various Government stimulus packages such as the ‘first home buyer boost,’ 2011 and 2012 have hit the industry hard – taking the overall number of transactions back to levels not seen since the mid 1990s. And although the trend is slowly improving as the year draws to an end, it’s still a bleak remnant of that achieved in the few years prior to the GFC.
The job listings promising potential sales agents commissions amounting to and ‘in excess’ of $100,000 per year which attracted so many into the industry whilst the market was bursting with confidence, would seem a distant dream to a number of less experienced employees who have recently left in search of riches elsewhere.
IBISWorld estimate an annualised drop of -1 per cent in employee numbers as agents, not used to working in a harder market terrain, head for the hills.
It takes a lot of skill negotiating with a reluctant and unconfident buyer who will only show an interest ‘if the price is right.’ Sales success in the industry is often underestimated by those looking from the outside in who tend to assume agents do little more than stand outside ‘open for inspections’ handing out brochures.
Competition in some suburbs of Melbourne has seen commissions being lowered to ‘flat rate’ figures. In Victoria it’s not uncommon to find some agents prepared to list a property at 1-1.5 per cent (including or excluding GST) – or signing a general authority to ‘share’ the listing with another agency. It’s something I happen across at least once or twice a week.
Although it’s hoped – particularly by the Government, who plan to replace a diminishing mining boom with another property boom – that investor confidence will return during 2013/2014 spurring a new decade of growth, there are no such certainties in a world that is arguably struggling to recover from the brink of economic collapse.
It may not ‘seem’ as such in Australia – however this was – and is – the continuing reality in many areas of Europe and the USA and we’re not immune. At the very least, it alters the investor mindset.
As ‘The Australian Mortgage Report 2013’ by the Global consultancy Deloitte pointed out, growth in Australia’s mortgage lending market is slowing – particularity for the big four – and “property prices will remain either flat or (only) grow in the order of 1–5% into 2013.”
Future drops in the RBA cash rate are less likely to be passed on as banks struggle to protect existing margins and although I’ve read more bullish reports in regard to property prices of late – as a whole, I expect the above prediction to fall closer to the mark. We’ve entered a new era ruled by cautionary sentiment and it’s not going to change overnight.
Other Reports of households taking advantage of lower interest rates to stack more onto their mortgage is also a concern with the OECD estimating our household debt to income ratio currently sits at a lofty 183.7 per cent.
We may have population issues and a widely accepted housing shortage, however this doesn’t mean growth in the industry or market prices is a foregone conclusion. The elastic band of debt only stretches so far – especially when it is hamstrung by a reluctance to borrow through fears of further capital losses.
However, as with any industry, the need to ‘pump’ the market and keep the dollars circulating under the premise that ‘everything’s rosy’ is – as one agent expressed to me – ‘absolutely vital’ – especially in a sector that’s heavily dependent on behavioural economics. It’s one reason you’ll rarely hear a mortgage broker or industry professional tell you now is ‘not a good time to buy.’ It’s akin to a shop keeper advising his customer to leave their credit card at home – it’s simply not going to happen.
Aside from feeding the media with positive messages, another weapon sales agents have to inspire uplift to the real estate sector and improve overall revenue is by way of marketing initiatives such as broadening their affiliations with off shoots in the industry.
For example, it’s not unusual to see a brokerage within a high street agency or organisations offering ‘one stop shops’ with a range of services including buyer advocacy, vendor advocacy, finance, renovation and property management all under one roof.
Other more innovative ideas have been by way of real estate ‘apps’ with the Common Wealth bank even developing a ‘property’ mogul “ Investorville” game, in which you can imagine your way to a multimillion dollar real estate portfolio.
Obviously the idea is to inspire a feeling of confidence that a consumer with the ability to ‘tap’ a screen and buy a fictional listing with monopoly like dollars can navigate the world of property acquisition with as much success as Donald Trump. I’m doubtful it can translate into markedly higher transaction figures; however, ‘feel good’ motivation is clearly the idea.
Recently a story hit the press of a type of Facebook site for real estate devotees marketed as ‘social media for real estate.’ The idea is to give buyers and sellers a forum to communicate with other like minded people (including real estate professionals) along with the opportunity to list and sell their own properties.
However, whether Australia’s infamous house market obsession will develop into a ‘viral’ atmosphere of ‘likes’ and ‘favourites’ is debateable. After-all, the last thing you want when listing a property is buyers discussing between themselves how much it’s worth and the potential ‘downsides’. No one trusts a price quote – most have a well accepted perception that real estate agent’s ‘play games’ – and any sales patter, no matter how accurate, is seen as ‘spruiking’ the market. Therefore, I remain somewhat sceptical that social media is the ideal platform for a sales campaign.
However, in a few cases it has been successful. Earlier in the year individual vendors took the lead developing Twitter accounts for their homes – some of which turned out to be incredibly popular. Agents have tried the same tactic – however it was the vendor’s love and emotional attachment to their property which translated ideally across the internet domain to produce a ‘feel good’ atmosphere for interested buyers. They were able to create the ‘perception’ of homely bliss, and unlike Facebook, where negative comments are displayed openly on the home page, Twitter conversations are somewhat less obvious.
Any social campaign can only be successful if it manages to personalise an inanimate object, thereby inspiring buyers to ‘fall in love.’ Think ‘Thomas the Tank Engine’ or named number plates on cars for example. It’s the same concept.
Time management and lack of market experience deters the majority of vendor’s from selling their own homes – and although I don’t see this changing any time soon, vendor marketing can clearly achieve something the all too often ‘despised’ real estate agent – automatically labelled as ‘dodgy and dishonest’ – can’t. I often wonder what would happen if real estate agents had the same ‘feel good’ reputation they have in Singapore where 8/10 consumers expressed that they were ‘satisfied with the service’ from their local real estate agency. Perception is such a powerful force in the world of finance – it really is a true demonstration of behavioural economics.
The game of perception is most clearly demonstrated at an auction. Traditionally, auction sales push median prices higher than those sold by private sale, however this is generally only the case by any significant percentage when two buyers are openly demonstrating their ‘desire’ to purchase in a heated frenzy of testosterone induced activity.
If you attend an auction where buyers are waiting around for ‘someone else’ to start the ball rolling only choosing to bid when it’s clear the home’s about to pass in – confidence in the worth of that property can fall like a stone. Should it pass in without a bid, the most common question I get asked is ‘what’s wrong with it’?
It’s one reason agents will opt to sell ‘prior’ to auction if they can negotiate to meet vendor expectation. If the property fails to sell ‘on the day’ it’s far harder to achieve the vendor’s ‘wish price.’
So whilst the HIA may be spruiking that ““Housing affordability has been improving on the back of steadily growing incomes, falling interest rates, and easing dwelling prices,” and is consequently back at levels ‘not seen since the early 2000’s” – and we’re all busy telling potential purchasers that ‘now’s the time to buy!’ it’s doing little to inspire the consumer who is not motivated by indexes or charts.
For the purchaser who still ‘feels’ in the midst of a rocky terrain, housing affordability may as well be back at the extremes of 2007 because the plain perception and stark reality prevails, that housing is still ‘unaffordable’ for a growing minority of renters and potential home buyers – and I expect it to remain as such for some time to come.