Housing Prices to Drop 7% and the Baloney

Market News banner

WOW, what a week in !

Last Friday we had one active negotiation and by yesterday, we had eight.

This is contrary to the talk of a tanking market so in our opinion piece this week, we examine closely the “evidence” used by The Australian to support their ‘Housing prices to drop 7%’ headline. You be the judge of whether this sort of reporting is fake news or professional journalism.

And to show some balance, we have published a word-for-word copy of a letter of advice that we sent to a client, midweek. This client is considering negatively gearing their first investment.

We are not blue sky advisers living in la la . There will be market fluctuations from time to time, some unexpected and some of a severe nature.

This week in James Market News:

  1. A Market Truth – the true state of the Inner Melbourne market
  2. Inside James – Mid week Off Markets and Auctions Saturday
  3. Off Markets – sellers point of view
  4. House Prices to Fall 7%?
  5. Negative Gearing Both Sides

A Market Truth

So Mal, what is really happening in the Inner Melbourne Market? – I’m reading a lot of newspaper headlines lately…

Ok let’s find out what the Inner Melbourne Home market is really doing in May 2017.

To do this we are looking at statistics that really count.

Bidders per auction, combined with stock levels, combined with  on homes at auction.

These are three stats (across a wide sample), that cannot be manipulated by an “expert or journalist” looking at a new set of tea leaves and seeing the world in a different way – just for a humdinger headline or press release.

It’s very simple, we at James Buyer Advocates will cover in the next 3 weeks (13th, 20th and 27th) of May and report back on 100 randomly chosen auctions over $1 million in Inner East and Bayside.

Three disclaimers

1. We are not clear, as we are only in the first month of the new underquoting laws; if there is going to be a major change to Clearance Rates/, as new strategies or hesitancies are adopted (or not) by both buyers and sellers (through their agents); in this transition period from old quoting to new quoting. It may be that the market hiccups from structural change to process, more so than a change. All we can do is measure, as we have in the past and give you an additional commentary, if we notice any new auction bidding trends linked to the new underquoting and seller reserve laws.

2. May (and October) are traditionally the biggest auction months. We always have big stock levels – as well these two months have price falls more often than other months of the year. May (and October) are good indicative months, but we suggest you make some allowances when reading the stats (eg, a few percent drop in May is not unexpected – it’s seasonal and it’s expected).

In other words we have picked a really true test month. If we wanted to manipulate the results, we would not have chosen May. If the market is tanking it will show in May – if the stats hold up, then the market is not tanking….now.

3. At James we do make slightly more money when the market is rising, as opposed to cooling; so rising is better for our bottom line. However, our credibility would be shot (and that’s even worse for our long term bottom line) if we are reporting in James Market News contrary to what is really, really happening.

If the market is tanking – these stats will tell us and we will report it. We promise!

Definitions of Market Strength

These definitions are exactly the same market definitions as we used last year, when we last carried out this exercise on such a scale. Please refer to our 2016 definitions by clicking here.

These definitions are on our James dials that you see every week (began in 2008). Example below of cooling (blue) and rising (red).

250217

Rising Market: Over 70% Clearance Rate (auctions bought versus auctions conducted) with over 2 Bidderman (bidders per auction), on auction numbers over 100 per weekend in Inner Melbourne.

Steady Market: Between 60 and 70% Clearance Rate, bidders below 2 per auction on auction numbers over 100 per weekend in Inner Melbourne – which we are happy to accept is an easing market, off solid highs of the last few years.

Falling Market: Below 60% Clearance Rate, bidders below 1.5 per auction, on auction numbers over 100 per weekend in Inner Melbourne.

So let’s see what the Inner Melbourne Market, is doing in May 2017.

No grabber headlines, no filler news stories, no stat manipulation for a news story.

100 auctions covered and here is the JAMES BIDDERMAN-OMETER. Looks like a big tank (pardon the perhaps Freudian pun) and sorry about our graphics – but there is nothing FAKE, that will go in here.

Our Rising “target” is 70 homes actually transacted on the 3 Saturdays of the 100 auctions AND we have over 200 bidders at those same 100 auctions.

If that happens then the market is still strong and still rising.

If we have less than above, then the market is easing and if we have a lot less; eg less than 120 bidders and less than 60 homes sell on the 3 days, then we are definitely in a falling market.

It will be RAW and REAL.  STAY TUNED:

JB1JB2JB3

Auction Action

Stonnington Purple banner

10 Eileen 1

Armadale, 10 Eileen Street – Passes In $2,450,000, 3 bidders – auction report here

Inner East green banner

25 Myrniong 4

Hawthorn East, 25 Myrniong Grove – Passes In $3,750,000, 0 bidders – auction report here

neg1

Inside James

This week our auction negotiation work began to build again – as expected after the April holidays.

May is the first full month without interruptions after Easter and it’s the last full month without interruptions before Winter: when the migratory flight of the gods to warmer Europe takes place and the public listings slow right down to the July halt.

Mid week Off Markets

Last night we bought an Off Market through Al Craig and Geordie Dixon (straight and annoyingly fair.) It was an incredible block of land and it involved a real s…fight with another party.

It took five weeks from seeing it to buying it. It involved an accurate quote range, a contract produced when they said they would, absolutely no advertising or public announcement. In fact, it was found by our intrepid Randall – who is always out there knocking down doors, on behalf of our local and international clients.

We had one strong buying competitor (with agent representation) from the less than a dozen buyers that went through and the price was negotiated over three days, culminating in a boardroom auction last night to sort out the buyer.

We bought this above the quote as market forces pushed the result.

The property is in one of the top three streets of its suburb and is an absolute ripper, even at a high price per sqm.

We (clients and us) also liked it because of its frontage, flatness, double driveway and … should our client ever in the future choose to rebuild, then its all-important neighbourhood zoning and no heritage overlay means they can have their cake and eat it too. In other words, our clients have the freedom to build without fear of a block of flats being built next to their home – so their investment should hold itself financially on resale and spiritually while they live there.

This home is one of four we are actively dealing in off market and one of eight in total we are currently in negotiations on.

Auctions Saturday

At one of the auctions we were involved in and successful at today, we were surprised at the level of aggression and lack of adherence for the rules (or spirit of), read out by the auctioneer.

We bought this property for a substantial and undisclosed price.

As the market eases, one of the cornerstones of the auction market system, becomes rules surrounding pass-ins.

There are currently three types of pass-in “rules” at auctions

1. There are rules read out and adhered to by all fair agents, in relation to allowing the highest public bidder to treat exclusively with the seller, for a reasonable period of time post auction AND with a fair reserve, before other steps are taken by agents to treat with other buyers, if an agreement cannot be reached. Many agents in the Inner Melbourne operate under these rules.

2. There are rules read out stating the agents will treat exclusively with the highest bidder, at the reserve price or for a period of time, and then that does not exactly happen. Here the argy barg with other buyers (who did or didn’t bid) starts before the highest pass-in bidder even gets through the front door. BUT the highest bidder is given a fair go and the other bidders only come into play if a fair deal cannot be reached with the highest bidder inside. Some agents in the Inner East and Bayside operate under these rules – it’s a grey area – they are still outside negotiating with other buyers when they say they are not AND the feedback/offers they get from these other buyers, are used to strengthen the resolve of the selling agent negotiating inside. In this case, the inside agent still tries to make the deal happen with the highest bidder and in doing so, they are still dealing with some good faith (perhaps close enough say some sellers.)

3. And then there are the rules that are read out at auction, but are completely ignored by the agent when treating with the highest bidder at a pass-in.  The highest bidder is told a Claytons Reserve (above the quote and the actual reserve) allowing time for the other agents to negotiate out front with other bidders. In this situation, the highest pass-in bidder inside has to contend with the bulltish reserve, other offers walking through the front door with other agents and an increased level of aggression, once the agents feel they have the upper hand with other offers out the front. This strategy has no protection for the winning bidder and the winning bidder was sometimes no more than a pawn used by the agent, to extract under pressure an offer from the bidder outside on the street.

Even for me I find this very high pressure and I’ve done this over a 1000 times – I can imagine how an inexperienced buyer must feel, when subjected to this.

We call this the GFC Merchant Banker or Cowboy Two-step, with apologies to some GFC Merchant Bankers and Cowboys. We call it so because the rules in this type of post auction negotiation are NO RULES, except whatever gets the job done for the agent. This is prevalent in auctions involving only a few agents and often, but not always, involving Asian bidders outside.

When you object, you hear from the agent “I am only acting in the seller’s best interests.” Sounds like the excuses we heard about dummy bidding and underquoting – it’s always the old furphy/chestnut –  acting in the seller’s best interest even though the agent stated rule or statute law or decency principle is being ….. how shall we say….. lost in translation.

The other issue is the agent think this works (and at times it does) but very soon those agents become known for what they really are. The trust drops and the truly good deals become harder – the aggression increases and the vicious circle continues ever faster. In the end it doesn’t work for the sellers or the buyers, as the trust just goes on both sides and that lack of trust again harms buyers and sellers, our profession and our community.

Nonetheless, if you are a bidder and you are by yourself and you turn up to a certain agency’s auction and you see a lot of agents from one company and interpreters and its passed into you – good luck on what we experienced today.

But please this is not sour grapes (we bought at a fair price today) and it didn’t come as a complete surprise because …. we did have our own four people there, we did have a Mandarin speaker also, we were taking photos post auction and I was privileged to a flurry of our internal texts explaining what was happening on the street, before the “surprise” statement from the auctioneer “your 15 minutes is up and we are selling to a buyer outside”.

This “surprise” announcement that we were out of it, came as we had moved to the point where we were on the same number as the seller. Yep fair dinkum.

At the point “Mal, we are selling to another buyer”; there was an interchange, no doubt great theatre for those witnessing this and then a gap.

After the gap, cooler heads prevailed (and well done to them on that) there was a result and we bought at the previously discussed number.

So how would you deal with this?

What do you need to do before an auction that may pass-in? (eg we had 4 people their today at our auction versus the agent’s 6)

What rights do you have after you have been told a Claytons Reserve?

And do you have any comeback at Consumer Affairs, when an agent has sold the home to somebody else and you were the highest bidder without a fair go; or you were forced up several hundred thousand above the real reserve?

In the next month or two, if we get some feedback, we would like to know how Consumer Affairs and the REIV plan to deal with reserves that rise, outside the quote range, after a pass-in AND under the pretext that the seller has changed their mind at the last minute. We don’t want to address this publicly now, as our aim is to totally support CAV, REIV and the industry in this transition period to ethical and consistent quoting.

There is a bigger picture than this issue but it will need to be addressed, if it becomes widespread, as it will make a mockery of the auction rules and the quoting process.

Finally on this matter –  of course there is always the other side of the story and we have agreed to a coffee with one of the agency directors and will be contacting other directors of the company concerned; to listen to their side and to see if we can’t nut out a better way to operate post auction – one that avoids raised voices, colourful language and threats (and that was just our side)……. because there is no need for this to happen.

Irrespective of this week’s outcome, there will be no names from us. We always feel it’s best to sort these types of post auction differences behind closed doors rather than out in the street. Well that’s our auction rules anyway and we are sticking to them – unless we weren’t the buyer in the above situation and then it would have been out of our hands, as we must also do our best for our client – the buyer.

Off Market james colour banner

If you are a SELLER and have a home to sell – why consider off-market?

This week I talked openly to three homeowners about selling off market – phone calls were initiated by them.

The first lady I spoke with was from the middle age generation and it involved a 45-minute phone conversation. We firstly discussed that I represented buyers and not her. We then talked prices and what a good offer would look like for her (for those who know me, yes I used the traffic lights scenario); we talked about why she was doing this and we talked about what her options were after a sale, should she accept a good offer. We agreed on who a good selling agent was and it was nice talking to you Ms Malvern East.

The second phone call actually did not start this week, rather things crystallized for her this week. I will call her Ms Surrey Hills. She rang a month or so ago about taking some buyers through her home off market, as she had tried to sell it unsuccessfully last year. We had an open and pleasant 30-minute phone conversation. During our talk it become obvious it was not appropriate to take buying clients through her home, without her having representation. We are really happy to deal direct, unless you already have an agent and then we deal through the agent.  We are really happy to deal direct with owners when you are big and ugly/pretty enough to handle us – this was not the case in this situation and Ms Surrey Hills will be proceeding with representation from a selling agent, we suggested.

The third conversation was during a visit to a couple in Armadale who were referred to us. They wanted to sell their family home because the market was hot, so they could reinvest when the market was low. Our advice – this was a great theory but a bloody hard real-lifer. We advised perhaps they could look at some renovations first, to enhance the value of their home and get a good plan on what they wanted to buy – as all that “profit” may be chewed up on a new buy with transaction costs or alternatively they could be renting or living in a home they didn’t like. They may be future clients (their choice), however in the meantime we suggested two selling agents they should interview.

Off Markets work for the buyer and the seller – if you know what you are doing or you have good representation.

Owners – you get to keep your privacy, your advertising and marketing costs and you are not tied down to a three week auction campaign – meaning you often have to be lucky that your best buyer, just happens to be looking in that same three weeks you are selling.

Gina Off Market

By the way:

We at James Buyer Advocates are really struggling to find good Off-markets in the $4m range on land with a good home in:

Princes Hill, Carlton, Fitzroy area

And

Port Melbourne, South Melbourne, Albert Park area.

We have really good clients in these two areas, that we have been looking for some time for a good home on good land and ready to buy.

However if you are a homeowner anywhere in Inner Melbourne on land and in particular in that $2m to $6m range and you want to sell your home off market, then please give us a call 9804 3133. Please note we act for the buyer only, so be clear on what you want – we recommend if you have any doubt, engage an ethical and experienced selling agent. We can advise if you wish and no we don’t receive any money from you or them for doing that – we only act for buyers.

You need;

  • A price
  • To give us access
  • To get a contract of sale and Section 32 if you want an offer from us
  • OR you need a selling agent who has your authority – ask them to ring us

Opinion

Australian4.5.17

Housing prices to drop 7%

Congratulations to The Australian – I read their headline and you then read our headline today –  so it’s the 7% drop headline that keeps on giving.

These sorts of headlines, like this one we spied on Thursday, are now becoming widespread, as the housing affordability argument for young people morphs into ‘the market is crazy and about to fall’.

Part One:

Do you know the basis for this 7% drop headline in The Australian?

An unnamed source within Citibank who used a “floppy end” graph with no supporting data to support the argument that house prices could drop 7%. We’ve seen kids cartoons drawn in crayon with more evidence of rigour.

They at Citibank were then quoted by The Australian “there could be partial correction in house prices during the course of the next two years.”

That is like anybody saying, we expect that the population could catch cold in the next 18 months and some 7% of the people may be ill.

Finishing off on Citibank, The Australian quoted this 7% drop could be the case, even if population growth remained strong. So Citibank is predicting a fall based on their own evidence of a rise in the fundamentals.

Part Two:

There was some meat on the bone in The Australian article about an increase in loan defaults, quoting Genworth Mortgage Finance. I would like to understand this more and granted, this could be an indicator of impending issues, as loan defaults are an indicator of local financial strength. So tick there!

BUT THEN came the DOOZY.

Part Three:

To support the case of a falling market, check out this from The Australian article and we quote;

The REA index (realestate.com.au) released yesterday showed demand from buyers (realestate.com.au – numbers of hits per property) fell 7.8% in April, compared to the previous month.

The Australian took this “evidence”  and then said NSW had recorded its biggest drop in demand from home buyers as affordability constraints bite.

Hold The Phone: Wasn’t there Easter and Anzac Day holiday weekends in April and limited new properties coming onto the market, when compared to March. Most of our clients and many buyers would have taken an internet breather? Of course numbers would be down. If this is a legit measurement, wouldn’t you use this Easter month compared to 2016’s Easter month?

The Australian then seemed to again contradict their own assertion by quoting Ms Conisbee, chief economist from the same REA (realestate.com.au) saying demand was well above last year and higher than the previous November peak.

So again a prediction of a fall based on their evidence of a rise in the fundamentals.

The article finished with a bag of quotes saying the market had peaked – based on ……

Why does this happen?

Negative headlines sell newspapers and negative press releases get quoted by newspapers and that means the PR departments of companies like Citibank and Genworth and REA have justified their salaries this week.

We’ve done the same ourselves by putting the 7% headline at the top of this article – but we are in real estate and we have no shame.

Why are these headlines bad?

Many younger and inexperienced homebuyers hold off buying due to “newspaper knowledge” and meanwhile another 1000 people per week from China, US and other overseas countries, plus interstate, plus local with new babies entering Melbourne, have come to Melbourne to live and many are buying up the homes, that the young people and nervous nellies let go.

And so the gap between the have and have not for some, widens – all due to headlines and dispositions, NOT facts.

Will the market fall in the future?

Yes and it may soon – but nobody knows (for sure) when and by how much and you cannot live a good life frozen in fear. Understand we are in uncertain times – no not now – forever. Understand when buying a home – buy what you want – what makes sense (land, building and near train and a good price) and have a financial buffer in your buying plan for the unexpected and buy for the longer term.

Negative Gearing

There are also many articles on negative gearing at the moment and it’s easy to lose focus on the big picture.

Below is a letter I wrote to some clients for whom we have bought three homes, but never an investment, as we are looking to buy them now.

I wrote it this week – when they were considering getting in ahead of the budget.

LOA

5th May

Dear Peter and Judy,

Your New Purchase and Negative Gearing.

I have experienced the good and bad of negative gearing.

I have bought homes that I needed to for family and I have felt so good in the afterglow of the purchase.

I also feel good now – years and decades later, really good that I have done these things.

However in the middle years there were stressful times, some very stressful times, when interest rates rose and other expenses like school fees arrived and when my business was under pressure.

Why? The mountain of debt and the constancy of having to find the interest money every month and the forgoing of other things such as travel, because I didn’t have the cashflow.

BUT overall I am happy to have bought homes for my family members, via the negative gearing process.

Negative gearing is great when interest rates are dropping and values are rising and you can touch what you own and negative gearing is really good, when it turns into positive gearing (more in than out) or when you sell and after you give about a quarter of the profit back, you have some good money in your hands, simply because you made a good decision.

Negative gearing is bad when interest rates are rising and the value of what you bought is dropping and the tenant gives notice.

Negative gearing is super bad when you have to sell, either bank or circumstance dictated or psychologically you can’t take it anymore.

Your initial decision to buy feels like a nightmare, as you now have lost money while holding and lost money when selling and have nothing to show for it – except a bigger mortgage.

Numbers quickly

On a $3 million purchase with costs included you are paying $150,000 out each year in interest.

Less rent $50,000 – don’t forget expenses and vacancies can make this worse – that leaves you with a net loss of $100,000.

You can take that off you tax and so if you are earning $500,000 – you now pay tax on $400,000.

So to hold a $3 million asset – the tenant pays $50,000 and the tax man pays $40,000 (please, this is an estimate) and you pay $60,000.

Your contribution is about 2% of the value which is great, if it is going up 5% or more.

You will have to pay CGT on any profit you make (if you sell).

It get’s harder if the tenant leaves AND/OR interest rates go up.

Significantly harder.

However many Australians do negatively gear – I have owned 5 investment properties (no apartments) and they have all worked for me and yes I bought two of them off market, after I advised to get selling agent representation (which they did).

It is a way to build wealth, when you have significant capital growth.

However you should:

  • Have a significant buffer when buying, eg I have always had at least $500,000 in an overdraft free to use to make me a lot less stressed, when at times carrying between $2,000,000 and $3,000,000 in debt.
  • Be clear on what and why you are buying. It’s either for the family or you can see a way in the future it will make you money. This is not about saving tax, this is about making money.
  • Do not sell when you are squeezed – if you have to sell, it should be when you don’t want to, as that is when you bargain the best and usually the market is rocking – that’s why you don’t want to sell. The way to not sell under pressure is to have a buffer. The worst mistake I made was to sell a good investment under pressure of too much debt – it was actually positively geared when I was under debt pressure (so, in my case psychological), and yes, I made a couple of million profit in 7 years, but I got rid of my best asset and I have “lost” more millions since then, as it has gone up a lot more. You learn – think long term.

Finally, the key is about what you buy and why – IN THE FIRST PLACE.

Buy well and negative gearing is great – buy poorly or panic under pressure and it’s a nightmare.

Get a second opinion from a trusted but savvy (they’ve actually done it) financial adviser and then be brave.

Warm Regards,

Mal James

Towers


Tags: , , , , ,

Be with James

Would you like to talk to us about finding or negotiating on your next home?
We buy 100 homes for our clients every year.
We buy Inner East and Bayside over $1m.

Inside James Market News