As we pointed out last week, even in a buyers’ market it is still possible to buy badly. You can buy the wrong home for your family, or you can commit the lesser but still significant sin of paying too much for a home.

Why is paying too much a sin?  Because it not only lessens your capital growth going forward but it also puts more of your disposable income towards your mortgage.

What if I promised you a free family holiday in Europe each year for the next 20 years or agreed to pay for you children’s school fees until they have left Carey or Firbank or MLC or Scotch?

That’s what you’d be  losing if you paid $3,200,000 for a home that you could have bought at $2,900,000. Over the life of a 20 year loan you would need to pay back approximately $580,000 or $29,000 per year (after tax) assuming an average 7.5% interest rate. That’s an overseas holiday or fees for two kids at private school.

Paying too much upfront means your capital growth will be lower too. Our investment division has the constant challenge of explaining to first time investors that the price tag of a home is not always the start point for capital growth –  the market value is.

Take the example of paying $2,100,000 for a home that you could have negotiated down to $1,800,000 in this buyers market. If you sold the property in seven  years time for, say, $3,600,000, your capital growth would be 100% if you’d originally paid $1,800,000, but only 72% if you’d paid $2,100,000. Do that a couple of times and the smart buyer gets to keep a free home and the not so smart buyer gets to keep a big mortgage.

Want some more evidence that this is a buyers’ market in which you should be able to negotiate a better price?  Here are three big stats that show the May 2011 million dollar plus market is a buyers market:

Clearance Rates – these have dropped into the 40% and 50% levels at auctions. That means that around half the homes currently up for sale can’t find anybody to agree with the seller on price.

The Weekly Review Bidderman – This stat is derived from the 30 auctions we attend each week. It’s a simple count of all the bidders who bid, divided by the number of auctions, giving a measurement of underlying demand for what is on offer. With Bidderman currently around 1, i.e. an average of just one bidder  per auction, you can see that there aint a lot of leftover bidders for the next home.

Lone Ranger Auctions – Single bidder auctions are currently the most common type of auction, at 1 in 3 auctions. This is why buyers need to be on firm foundations in terms of price.

What those three stats tell us is that there is little group consensus on price right now, which makes it all too possible to overpay.  It also makes it all too possible to miss a bargain. Sellers sometimes get prices too low as well.

Even professionals can get it wrong as this personal story shows: I sold one of my own investment properties during the GFC. I’d bought a ripper little investment in Brighton, but it had put me out of my comfort zone and I decided to get rid of another investment home I’d owned for around 10 years at 13 Durrant St Brighton. It failed to sell at auction (I wanted too much), I got the squeeze and despite everything I knew, because I was emotionally involved I let it go in the $800,000s a couple of months later. If I’d sold a year either side of that, either 2007 and 2009, it would have gone for over $1 million. Shows how much easier and better it is to deal with others than your own.

The point is that this market is a great market to buy in if you have a longer term view, have found the right home and you have a good plan, good strategies and good execution. But you can pay too much for a home in this market and for most of us that doesn’t makes sense.

Printed each week in The Weekly Review – Melbourne’s Million Dollar Plus Magazine

8/27 Hill Street, Hawthorn

Let’s take a look at a property which sold recently with Danielle Henry of Hocking Stuart:  8/27 Hill Street, Hawthorn. It was a beautifully renovated first floor unit in a nice quiet pocket of Hawthorn.

On  the surface it had all the right investment grade attributes: it was a secure first floor unit, with a workable floor plan, onsite parking, outdoor space (albeit quite small) an abundance of natural light and very appealing neighbourhood views to top it off.

So why didn’t we buy it….?

It was on a Company Title.

What is a Company Title? Simply, it’s where you purchase shares in a company that provides you with the exclusive rights to a defined area. This is very common in Melbourne – especially in older style unit blocks. Company Title has been has been replaced by strata title, which affords the owner a simpler and clearer form of ownership.

Two considerations when looking at purchasing company title from an investment perspective are Growth and Security.

Growth

Banks see a higher degree of risk when lending against company title as new share ownership needs to be approved by a board of directors. This may restrict your market on re-sale and can drag out settlement.  Additionally tenants require approval and, while in most cases this is merely a formality, there is greater opportunity for issues and complications.

As a result banks (in most cases) require a lower loan to value ratio (LVR). Essentially what this means is that people looking to purchase company title need a greater deposit. This can be seen as a positive for cashed up investors as they can generally purchase the property slightly cheaper than an equivalent strata title unit. But if one of your key goals is growth, your market will be limited on re-sale and there are more suitable investment properties in the market place.

Security

One of the key elements to a good investment is its ability to hold its value during tough times.  As most downturns in the property market coincide with a tightening in lending criteria, the ability for this form of investment to hold its value becomes more and more difficult. Selling this type of property in a downturn may be problematic – as such it’s very difficult to recommend this form of ownership as a viable investment vehicle.

In summary: there is a greater degree of risk when investing in Company Title property and if you are thinking of purchasing such a property, it is wise to conduct additional due diligence prior to purchase and to familiarise yourself with the various regulations and limitations.

Invest Well

At 6pm Saturday, as we go to press, the James Clearance Rate stands at 50% from the 20 we reviewed and attended. Some interesting results below.

This result is slightly weaker than expected after last week’s stronger than expected results and shows how this current $1m+ market is on a stock level edge. More available stock and auction bidding numbers diminish, less stock or good quality homes and the clearance rates go up. On the demand side bad news and $m+ buyers become more cautious – good news and we all breathe a little easier.

Sunday footnote: Now at 70% James $m+ Clearance Rate, so while it felt a tad weaker (slightly fewer bidders) it was still a strong market result on higher stock levels.

As we go into a short Easter hiatus, with no auctions and no James Market News next weekend, we thought it might be interesting to go left-field in all our articles and below I’m talking about buyers and what is in their minds.

To make sure we weren’t only getting it from one source (us), we also spoke to David Gillham, director of Noel Jones; Julian Augustini, director of Hodges Sandringham; Dean Gilbert, senior sales executive from Marshall White Armadale; and John Holdsworth, Albert Park sales legend and past director of Hocking Stuart. All agreed the following points:

In fairness we spoke to all of them before any would have been aware of today’s results.

1. The 2009 market has started stronger for sellers than anticipated.
2. That prices have increased this year from December 2008.
3. That prices are still well below 2007 and early 2008 – and even October 2008 in some cases.
4. That stock levels are low and seemingly here to stay at this level for most of this year, or at least until Spring.
5. That buyers are more cautious than previous years and have felt more in control.

Question: What is the biggest difference between buyers now and 2007 in their thinking and actions?

The Buyer Compromise has gone - the sense of urgency is not as great.

John: The herd-like, panic mentality of 2007 has gone. The Buyer Compromise has also gone, in early 2009. Buyers are now far more considered in terms of location and value in 2009 and now have a strong regard for quality.
Julian: Buyers believe they now have time to make decisions.
David: Buyers are a lot more reserved. No urgency. There are many people who think they are buyers but they are not. Many people can meet the income requirements but not the banks’ capital requirements for lending eg 70% ratios is becoming a norm. In 2007, it was a week-to-week buyer scenario and, in 2009, it is a “well, if I miss this, there will be others” scenario.
Dean: In Stonnington, there is an increased sense of urgency in 2009 compared to 2008 but not as strong as 2007.

Question: How are overseas buyers performing this year compared to local buyers?

More enquiry but less activity from overseas.

John: We rarely deal with overseas buyers – and, now you mention it, we have had some enquiry but few transactions.
Julian: Enquiry seems up from overseas buyers but, now you mention it, of the last 50 sales by Hodges Sandringham, only three have been overseas buyers.
David: In 2007, there was a lot of money from overseas and not just Asia eg the UK. In 2009, that has all but dried up, except for Australian-based Asian buyers. UK expats are now returning to rent or live in their investment properties. There are very few overseas transfers.
Dean: We are inundated with enquiry and, while many are non-performing buyers, I believe that is due to lack of stock.

Question: What do you say to a buyer who says they will wait till prices get cheaper later in the year?

Are you buying a home or buying a price!

John: I normally put my statesman-like hat on (26 years in this business) and tell them that, in Albert Park, I have never seen prices fall more than 10%.  So to wait, they are taking a punt – do they want to buy a lifestyle now or buy the market later?
John’s examples:
43 St Vincent Place: sold in 2007 for $1.5 million and  resold, as is, in late 2008 for $1.4 million.
86 Grey St St Kilda: sold in 2007 for $1.7 million and resold, as is, in 2009 for $1.6 million.
Julian: Will they be cheaper? Money is as cheap as it gets and, with stock levels looking like remaining as is, then will that home be there later in 2009? The ability to upgrade has never been better.
David: Huge undercurrent of buyers all with the same thoughts. If your job is secure, why wait? We are possibly turning a tide right now.
Dean: There are too many people going through open for inspections and too great a lack of supply to think there will be significant drops anytime soon. It’s harder to get the right home in Stonnington than almost anywhere else. Yes, the property may fall a bit, but will that home still be there to buy? Real buyers from overseas are not seeing much future in that country and are returning to Australia to settle their children and are buying now.

Question: What is the profile of those buyers who are buying?

Mostly local upgraders.

John: First home buyers; empty nesters and downsizers. Some are buying as an investment now and renting for two to three years with the view of then moving in.
Julian: Local upgraders – eg they already live within the area or adjoining area.
David: Upgraders with safe income. $800,000 sellers going into $1 million-plus homes.
Dean: Chinese people. Strong established families. The employed.

Question: How do you read a buyer’s mind at the moment?

Cautious.

John: Cautious and we, as agents, need to provide comfort and be more consultative. It is definitely harder for buyers to make decisions.
Julian: The common thread is opportunity and knowledge.
David: Cross-section of buyers. Some are buyers buying position, living in a survivable home with a view to develop later – in other words, opportunity buyers. However, they definitely have in their mind that they are in control – that thought may change if the auction clearance rate continues.
Dean: Buyers do feel there is a good opportunity before the rises start again.

From the James Buyer Advocates’ point of view:

As buyer agents, we have found ourselves agreeing with many of the answers from John, Julian, David and Dean.

The buyer herd mentality has gone; overseas buyers are ringing but few are buying; buyers are more cautious and those that are acting in the most part are long termers trading up and taking advantage of the cheap money and good buying opportunities. That’s above a million.

We believe prices have risen marginally to date in 2009 (compared to Dec 08/Jan 09) and this is, in part, due to lower than last year’s stock levels. It is also in part due to local people feeling more confident to act and in many cases (babies, growing families, weddings, divorces etc) having to act. We have heard the calls (gee, who hasn’t) that prices may fall dramatically in late 2009; however, we feel that depends on local job security, stock levels and if there are large numbers of forced sales. If there is job security and we do not get large numbers of forced sales, then we may see prices only dipping if significant amounts of Spring stock come onto the market. But continuing large price falls in the $m+ market are not occurring right now as they were in Sept 08 to Dec 08.

If the market turns down, we will report that, as we did strongly last year and we are not saying that a $2 million home cannot be bought for $1.8 million with good strategies, lack of competing buyers and a stressed vendor or an uneducated buyer would not be encouraged by a quality selling agent to pay $2.2 million for the same home.

If you asked overseas clients the price question, many feel we all face dire consequences. Ask Australian buyers and they do not share those views; a bit nervous yes, but life is continuing on. Who is right? Is there indeed a right or wrong answer?

Thank you David (0411 518 672), Julian (0418 558 408), Dean (0418 994 939) and John (0417 318 271) for your thoughts. If you need selling advice, we would recommend any of these selling agents, as they have been professional in their dealings with our company to date.

A big thank you to Paul Keane of Jellis Craig for his thoughts and effort in our another point of view segment and Grant’s article this week on Dead Cat Bounce.

Have a good break, maybe forget about property for a few days and then, after Easter, maybe do something – maybe not. Your call.

Buy Well

Mal

No James Market News next week with Easter and no auctions.

Auctioneer Phillip Kingston and Gary Peer agents Sally Zelman and Darren Krongold selling 24 Frederick Caulfield South last Sunday for a strong Caulfield South price of $1.05 million post-auction.

At 6pm Saturday, the clearance rate from the 15 auctions we attended was 40 per cent, with a few more expected to sell overnight.

The week has been a traumatic one for many whose lives are connected with world finances.

In property, this week has been the culmination of a very quiet month. Perhaps quiet is not the right word – more like stressed.

Should I or shouldn’t I?

In the million-dollar-plus stakes, many sellers have seen deal after deal fall through and agents will tell you that, even though it’s footy finals time, it’s still the quietest and most difficult time they can remember.

For us on the buying side, the news is no different – a lower enquiry rate, more nerves and fewer purchases.

What this means going forward – who knows, except it will find its balance again. In the meantime, families still have to live somewhere and children are born and people get married and divorced. Life goes on.

Under a million dollars, the news is different – the buyer enquiry rate is reasonable and people are transacting. If the home, position and price are good, then buyers are there, and even a few smarter investors. We have also bought several $700,000 investment properties recently.

Buying properties for a long time, I still find it a little funny to see why people struggle to pay 20-30 per cent LESS than last year on a house that, in 2007, would have had people fighting like crazy to get it.

But that is human nature.

If you can hold your nerve and get some good advice (about the right properties), then logic tells us that there has to be some bargains out there for those trading up or buying in for the first time or even investing.

No market news next week, as it’s the grand final so, until then, good buying.

Sunday Footnote: REIV still reported a healthy 65% clearance rate on 613 auctions. This shows the lower end of the market is still holding up. Despite last weeks positive bubble we cannot yet see the million dollar plus market moving upwards in price or buyer interest.