Is it ever OK to say it’s not a good time to buy? Quite clearly, “yes!”
Once again, Melbourne is producing ‘healthy’ results with the clearance rate ‘year to date’ now residing at 70 per cent (up from 68 per cent in April) and the latest REIV house price index posting a 1.4 per cent increase for the month of May.
According to the REIV, this is the eighth consecutive month of ‘house price’ increases, with unit prices also showing a moderate boost – up 0.9 per cent for the month – which is the third consecutive monthly rise.
Not surprisingly, the biggest gains have been recorded in the inner and middle regions of the city – principally, the ‘auction dominated’ terrains – with the outer suburbs remaining stable.
Most sales in Melbourne are conducted private treaty with a rough 80/20 percentage split – 80 per cent being private sales and 20 per cent ‘for sale by auction’ and although as a percentage of total sales, the ‘share’ of auction transactions is down on this time last year, in raw numbers we are marginally ahead – when I last checked, year to date there have been approximately 11,719 auctions thus far, compared to 10,742 for the same time in 2012.
When confidence improves and auction results start to ‘openly’ surpass their reserve, the number of vendors opting to sell using this method increases. As reported by the REIV – by the end of June approximately 3,175 auctions will have been held. Only once in the past decade (2010) have there been more auctions in June, and in the inner and middle ring suburbs there is no perceptible sign of the market weakening, if anything the reverse is occurring.
Evidently, the majority of auctions I watch are selling under the hammer. However, it should be noted I filter the auctions I attend, concentrating primarily on listings which attract a wider buying market due to location and type – albeit, in some instances, those sales are exceeding reserve by as much as 10 per cent, and on occasion more. As we’ve seen previously, this cannot be sustained over the longer term.
It’s not quite the rampant atmosphere experienced in 2007 during which the ‘lending frenzy’ leading up to the GFC was pushing excessive amounts of easy credit into the market. Prices are still well below their peak and results patchy.
Albeit, whilst the aggregated data shows only moderate gains, – in areas where auction sales predominate (such as Bentleigh, Hawthorn, Glen Iris for example) a number of economic and social factors have combined to push it well and truly into a sellers domain.
The somewhat robust turnaround has produced a point of confusion in recent media articles. Confidence is still waxing and waning, with the ‘Westpac-Melbourne Institute Index’ down 7 per cent in May to 97.6 – below the ‘critical’ 100 point bench mark – and although a bounce back in June was welcomed, we’re still on a rough equal split between those who think the cup is half full, or empty.
Also, news of job losses have been filtering in over the past few months, initially from Ford and Holden and most recently Target – not to mention some of Victoria’s fruit growing regions following cutbacks by SPC Ardmona. All of this will produce a drag on Victoria’s employment data over the months to come, with unemployment currently sitting at around 5.6 per cent (in trend terms.)
The recent drop in the cash rate, provided buyers will a little more spending power, however the 70 per cent year to date clearance rate with overall turnover increasing and prices swinging past the reserve, is more to do with the effect public auctions have on buyer confidence than anything else.
I written about the chain reaction this method of sale has on the market as a whole previously. The last time we had an auction rally was back in 2010 during which clearance rates were in the 80’s. I’m still coming across buyers who, to date, having bought at ‘peak’ under competition, three years later, cannot sell for purchase price.
In other words, regardless of low interest rates and ‘improved affordability,’ their property sits in negative equity with new data from Melbourne Institute’s federally-funded “Household, Income and Labour Dynamics in Australia survey” backing it up. It shows one in every 40 families with a mortgage in 2010 owed the bank more than their home was worth, with senior economist Shane Garrett commenting that negative equity rates were likely to be the same now as in 2010.
Is it ever OK to say it’s not a good time to buy? Quite clearly, “yes!”
The physiological impact when bidding against competition for an emotional asset has been well documented – and when confidence improves, this method of sale does result in higher prices – prices which would be extremely difficult to negotiate in a private sale scenario during which there would be no undisputed evidence to the ‘leading’ buyer that a competitor is willing to pay more.
Not unlike sports gambling – a well staged auction actively encourages buyers to lose a sense of considered rationality, with a trained auctioneer pushing the ‘players’ to stretch their budgets past their pre-established limit, which when combined with a strong desire to ‘win’ at all costs, can result in a potentially dangerous set of circumstances.
Without adequate knowledge of where we started, taking full advantage of sales data for the duration of the ‘to-date’ 12 month time span, the possibility of overpaying on the back of a short term auction ‘rally’ is ever prevalent and the resulting rise in vendor’s expectation as they see neighbouring properties sell at a higher price, is not quickly corrected.
Furthermore, in some of these key regions stock is dropping – particularity good stock – which is fairly typical of a rising market. After-all, who wants to sell when the perception remains that a vendor can get ‘more’ if they hold and wait for further gains? Especially as additional rate cuts are still widely anticipated.
Therefore, considering the clear reality that the market shows no current sign of weakening, it’s somewhat of a surprise to find RP Data’s ‘daily index’ for the Month of May posting a -4.4 per cent drop in Melbourne unit prices whilst at the same time, there has been a 3.7 per cent ‘rise’ in house prices for the same period. Overall, R P Data’s recorded monthly drop for Melbourne is -2.1 per cent and in light of the information above, it should be questioned.
It’s not the only surprise to be found in R P Data’s monthly index. Take Canberra for example – according to R P Data, dwellings were up 3.8 per cent for the March quarter – yet just 2 months in to the second quarter they have dropped by – 1.5 per cent.
Hobart’s unit market has all but ‘crashed’ with prices – 8.5 per cent – whilst on the other hand; the housing market has posted a rather ‘healthy’ rise of 3.4 per cent.
Overall, the combined capital city index declined 1.2 per cent over the month of May after falling by 0.5 per cent in April. In other words, we’re on a downward slope with Rismark’s CEO Ben Skilbeck commenting that it could be “driven by vendors reducing their initial expectations in order to meet buyer offers.”
However, to come to this conclusion, you need to do more than simply theorise on the results as they’re set out on a spread sheet.
I’ve had the advantage of negotiating with vendor’s over the past 6 months, and can quite confidently confirm, there has been no such decline in expectation – unless the property is compromised by location or interior design, most are enjoying a relative windfall in relation to last year’s expectations. And according to SQM’s weekly “vendor sentiment index,” asking prices are – if anything – trending upwards which once again suggests there is demand in the market currently meeting expectation.
I’ve cautioned previously about this short term approach to statistics and I’m by no means alone in doing so. There has been plenty of criticism aimed at R P Data’s daily index for the apparent ‘mis match’ with other market indicators.
It seems the general consensus of opinion revolves around ‘lagging’ results which are collected and shuffled into the index at a later date. This would make sense in light of the strong gains that were posted in the first quarter, but not immediately evident ‘on the ground’ – and it should be remembered that the ‘daily index’ is not seasonally adjusted, so data can be ‘noisy.’
R P Data have recently claimed they “ring up agents” to get information of private sales, which would be a mammoth task considering most agents are highly unlikely to prioritise the reporting of private treaty sales information as soon as a contract is signed – if at all. And yet this is what the accuracy of daily index relies upon – prompt agent reporting. Without it, the results lag until the official ‘settled’ sales data filters through from the government (some 3 months ‘plus’ later.)
With this in mind, the degree of concentration given over to the index should be questioned. Furthermore, until missing results have been collected, correlated and adjusted for seasonal distortions, it’s clearly not a reliable or timely indicator.
However, it’s fair to suggest the underlying fundamentals of our “to date” ‘market recovery’ are at best – weak. Credit growth has been hobbling along (in part due to the trend to ‘pay down’ debt) and although ABS April data shows the highest monthly uptake of home loans since November 2009, Westpac best summed it up best when they suggested the gains to be ‘underwhelming,’ commenting on the 0.7 per cent decline (excluding refinancing) for owner occupiers, albeit year to date, they are up 11.4 per cent (not a great result in light of the current low interest rate environment.)
Data from the Department of Sustainability & Environment shows more mortgages in Victoria are being discharged than lodged and turnover – although moderately up with 168,029 transfers taking place in the year to May 2013, up from the record low 167,200 transfers in the year to March 2013 –remains 13 per cent below the decade average.
So what’s the fuel pushing both clearance rates and prices past reserve? Well – in a word (or two) – primarily speculation and a rush to invest anywhere that provides a greater return than stashing cash in a long term deposit account.
It’s clear, investors remain the most active demographic, with the value of investor finance commitments up by 1% in April, and 18% over the year – the highest level since January 2008, which would have a beneficial roll over effect for those relying on sales to ‘upgrade’ (which it should be noted, increases spending power without the need to increase borrowing levels.)
In a recent survey conducted by Mortgage Choice of a sample 1000 mortgage holders, 83 per cent (roughly four out of five) voiced consideration to use the equity in their principle place of residence to purchase an investment property – the trend is strong.
With this in mind, you have to wonder how long the current ‘recovery’ in Melbourne (and for that matter some of our other states) will last – especially as questions of ‘over supply’ still hang on the horizon. Or perhaps Steve Keen best summed it up when he termed it a ‘suckers rally?’
All in all let’s face it, as it stands, the market is imbalanced – a proportionally lower percentage of first home buyers, a desperate bid from investors to advantage from short term gains, and a construction industry calling out – somewhat desperately – for another rate cut.