oc | Tuesday 21st January

Market News March 2006

Overall the market for good quality family homes is currently in a spike – this spike is similar to the “good quality home” spike just after the last federal election. By spike we mean sale or purchase results well above the existing upward trend line.

Balance this with our opinion that the outer Melbourne market is now and has been at normal transaction mode (since spring 2003), which would be regarded as slower than the inner city market. The Peninsula markets (since early 2003) are now and have been almost dead except for high quality offerings and some surprise results.

So what does this mean to the buyer of homes in the inner Melbourne market?

At the moment, you will have to pay more to purchase your “dream home” than you did say, just before Christmas. How much more? Nobody knows for sure but maybe 10% and maybe a bit more in some circumstances if your home is in the ‘over a million’ category. Maybe 5% more if you targeted home is around $500,000. The figure of 10% is our opinion only and very hard to substantiate. It comes from purchasing about 20 properties since we last sent our newsletter, probably missing an equal number for a variety of reasons.

In December 2005, the market was transacting strongly. We purchased 7 properties in 8 days:

•  Townhouse in Clarendon St

cmn1

•  Family house in Sunset St Jan Juc

cmn2

•  Family house for overseas client in Balmoral St

cmn3

•  Family house in Regent St East

cmn4

•  Townhouse in Grey St Clifton Hill

cmn5

•  Development house in Park St

cmn6

•  Family house in Glenora Drv Vermont South.

cmn7

The last couple of weekends have been the biggest auction days for this year and during this time we have bought 5 properties:

•  Investment house in Rae St Fitzroy North

cmn8

•  Family house in Milton St

cmn9

•  Townhouse in Ross St Toorak

cmn10

•  Townhouse in Paxton St Malvern

cmn11

•  Townhouse in Bendigo St Richmond

cmn12

Only two of those were bought at auction (see Auctions article in the newsletter).

Extreme example of spiking – 20 and 22 Church St Malvern.
Both properties are quality timber , out the back of the Malvern Hotel and on good pieces of (about 8000 sq feet). One sold late last year pre auction for about $1.8 million, which we thought was around the right money. It’s almost twin sold at auction a week or so ago for $2.5 million!

The combination factors that are causing this current spiking are:
1. Stock market gains mean buyers at the upper end have money; and
2. Big shortage of quality housing stock means buyers have little choice.

The market is in favour of the sellers at present for good quality family homes and in fact , despite what you may read, the market did not falter in 2003, did not miss a beat in 2004, continued up strongly in 2005 and has burst out of the blocks in 2006. Here, we do agree with what selling agents are saying.

Solution? Our suggestions have always been to secure the right property when you can. If you currently are not able to, then you have to be patient and search diligently. It will happen if you don’t give up. Last year we purchased just under a 100 properties and a few of those took a while to not only find, but also purchase. The alternative would be to opt from the market and wait until it drops. We do not agree. Some people have been waiting since 1998 for the market to drop.

Even if you buy with a long term view, you may see some dropping in prices in the short term. Then again, you may not. You may need to have a buffer (eg additional line of credit or savings) for any interest rate increases (not obvious to us but who knows).

It’s an interesting time for buyers. Another recent example, 80 & 84 Linacre Road .
Both were thought to be worth about the same say, two years ago. In fact, 80 Linacre Rd was sold about 2 years ago for $860,000. It sold in February 2006 for $1,330,000 (we were an underbidder). No changes had been made to the property since it was last purchased. It was a great house. Two doors up was up for auction at the same time and didn’t get a bid at $850,000 (we were not interested either, although it was a reasonably presented Californian Bungalow). It is now on the market for private sale.

Everything we have said above applies to homes with WOW. You need to know if others share your WOW rating before you dive in and purchase. O therwise, you may be spending $150,000 unnecessarily.

Auctions

We would get on average 2 calls a week to go and put our hand up at auction on behalf of the caller. We ask the callers a number of questions:

  • have they received pest and building inspection reports?
  • have they completed some sort of property valuation or detailed Property Report
  • have they checked or had the Section 32’s and checked by a solicitor?

By this stage the callers are usually getting a little short with us. All they want is someone to go to the auction and bid for them. We make two strong statements on this matter:

  1. We have only bought two properties on auction day this year (one was at post auction negotiations) and last year, of the hundred or so we purchased, less than a handful were at a Saturday auction. Why is this? A re we scared of auctions? No, we love the theatre. There are very good reasons for buyers to avoid auctions in these markets if they can .
  2. Hiring an advocate to put their hand in the air completely unprepared is like getting a lawyer to act for you at sentencing only. You have already stuffed up the research and pre-trial negotiations, failed at trial and been found guilty and now you want someone to keep your jail time to a minimum. Hey, we know it’s not that serious, but allow us a bit of colour when making this point.

At the moment, auctions favour the seller if they are being run by skilled agents. We believe that avoiding them is better than participating (if you can).

Case Studies – Due Diligence Completed in 48 Hours

We receive a number calls from people who are wanting to purchase a property but are not quite sure how to handle the negotiations. On most occasions, time is of the essence due to a forthcoming auction or the agent has rung them to say that the property that they are interested in has an offer on it.

This particular client called us on Tuesday. Here’s a snapshot of what happened:
Tuesday – first meeting with client.
Wednesday – went through target property, had paperwork checked by a solicitor and completed a full detailed Property Report . Second meeting Wednesday night to discuss Property Report .
Thursday – building inspection was already completed. Third and final strategy meeting on Thursday morning to discuss our recommendations and by Thursday lunchtime, we were sitting in the agent’s office when the deal was concluded.

We unfortunately didn’t purchase the property but our due diligence was completed within 48 hours and our client had a sound foundation for their decision not to purchase above a particular amount. The property was in Anderson Street South Melbourne .

Another example.

A client contacted us on a Tuesday to help him buy a property that had failed at auction.
Wednesday – we viewed the property, completed a Property Report and received the legal paperwork
Thursday – we discussed the Property Report with our client, looked at all possible negotiation strategies and received a legal opinion on the paperwork.
Friday – after agreeing on a strategy, we instigated it. After multiple calls with the agent we ended up in the estate agents office at 5.00pm with the vendors in another room. By 7.00pm we had completed a successful negotiation with our client leaving with a duly signed contract of sale. The property was in Paxton Street East Malvern.

Co-incidentally, both of the above happened last week.

Skilled Agents

The government is considering relaxing the rules on who can be an agent. Bring it on. Why? Because that would mean even more properties would not have a skilled and experienced selling agents selling them.

It would be great to get rid of those pesky selling agents who are skilled at their job because they DO make a huge difference to the end price. By all means, please encourage the unskilled, inexperienced and unqualified to sell as it makes it (for us) so much easier to buy.

Here are two recent examples of how the skilled make a difference. In the last few days, we have bought from Jeff Gole of Gole Peden (Paxton St ) and Scott Patterson of Jellis Craig ( Milton St Canterbury ). If we had been buying off unprofessional agents, a good result for both parties would probably not have been achieved.

How Do You Value a View?

There are views (eg view of the surf) and false views (eg glimpse of the water). When pricing a view, these are the things we consider:

•  Immediate foreground (eg nature or roofs of houses)
•  Middle or hinterland – do we see surf, beach or just large expanses of water
•  Background
•  Distance from say, geographical feature , water or valley
•  Distance from shops, transport etc
•  Supply restrictions – it might a good view but are there hundreds of similar views (eg Docklands , Queensland )
•  Land prices in immediate vicinity without the view
•  Possibility of being built out.

Views are “priceable”. We have just finished a 5 week post auction negotiation in Queenscliff where the view and the issues connected with the view were the main points of discussion. Here is another example of a property not being bought at auction (it was passed into us) and a price result vastly different from the vendor’s initial expectations. But it took 5 weeks.

Is Timber Making a Resurgence?

We don’t think it ever left us. It’s just that in Australia , for many, many years, timber has been regarded as the poor cousin to brick.

We have been involved with a number of timber properties recently including:

•  a $2 million spectacular timber home in Canterbury
•  a timber property in Linacre Road Hampton , which sold in excess of $1.3 million
•  a single fronted weatherboard which sold for $1.43 million in
•  a $1.75 million timber home late last year.

Here are a few reasons why we personally love timber:

1.  It does last – look at the single fronted Victorians that have survived and been revived throughout Melbourne .
2.  More prone to termites? There is plenty of timber in brick homes.
3.  More maintenance? Maybe a fraction more (eg painting) but brick cracks and is susceptible to rising damp.
4.  There is usually more light in timber houses because there is less support required for larger windows than for brick.
5. They are easier to renovate.
6. The jury is out on the insulation arguments. We can’t find any evidence that really shows that timber is not as good when well insulated.

Timber. It’s back – but maybe it never left us.

Buying For Your Children

We are getting more and more of these types of jobs from parents. We believe a good property to buy your children is a single fronted period home. Why?

1.  It can be rented out until your children leave home (or should we say, if they ever leave).
2.  They are usually cheaper than most bigger blocks with homes than aren’t much fun to live in.
3.  They are ideal for students.
4.  They can have a second storey put on when a family comes along (if a family does in fact come along – if it doesn’t, then unlike a big home, there is no extra unused space).
5.  Later in life, the property is not too big for a retiring couple.
6.  Make sure you are near shops, transport and parks.

Buying for clients’ children is an increasing market. Why shouldn’t it be?. It’s all very well for the many of us who have moved from say, outer areas to Bayside areas, but is it fair that our children have to move from Bayside areas to some new development on the outer edges of Melbourne ? Or worse still, rent all their lives? Think about it. Our children of course need love and an education, but they may also need a hand in housing as it has become unaffordable for most without assistance.

The Great Pool Debate

In many cases, pools can reduce the value of a home, especially if they dominate the backyard or are , let’s say “unclassy”. However pools with WOW, water features, gazebo’s, green space and privacy can add significant value to a property. They can even disguise some other faults of the property.

A classic example is 70 Rosedale Road Glen Iris (located in the real Glen Iris not Malvern/Glen Iris or Burwood/Glen Iris) which sold two weeks ago. It eventually sold at auction for over $1.4 million and in our opinion, the classy pool, gazebo, fencing and landscaping (which would have cost $100,000 +) covered up some design issues connected with the house.

cmn13

Commercial Property

We have noted that a few financial planners are starting to push hard for clients to consider investing in commercial property. While we personally love commercial property (in particular, buying your own business premises) there are some ground rules. Here are 5 really important points:

1. Commercial properties ARE more risky purchases than residential properties and you should buy at a discount, NOT at a premium for the RISK involved. Up until a few years ago when there was not much super fund money around, commercial properties were bought on an 8-12% return. Now they can go as low as 4% return.
2. If you are getting 4% return and there is not a logical additional reason to purchase commercial, then why not buy the residential house down the street. Lower risk for the same return and maybe higher growth expectations.
3. A tax advantage is a plus, not a reason to invest. Growth is the reason to invest . If it isn’t going to grow, don’t buy it or understand you are making a lifestyle decision.
4. Growth in commercial property relates to rental amounts, quality of tenant, term of lease etc.
5. Renting commercial properties have completely different legislative requirements attached to them.

We buy commercial property. But not a lot. Good commercial is harder to find than good residential.

Investment & Competition

We got a glazed look from a new investment client recently when we said we love to see other bidders at what we want to buy.

Many “investors” think that buying a property investment is all about buying at a “discount” or buying off the plan for tax savings or other things. Many first time investors also think buying an investment property is buying a “special or different property”. This is NOT TRUE.

Property investment is all about paying $1 now and getting $2 or $5 in the future. It is about buying something that more people will want in the future (demand) and that there will be less of (supply). That means price will go UP.

A really good indicator of the future is what is happening now. If you don’t want to live in the property now, why would a tenant want to live in it now or the future? If you don’t like the property now and you are a normal person, then why would lots of other normal people (ie buyers) like it in the future?

If you are seeing developers advertising really cheap deals on units in say St Kilda Road or Queensland , then why are they so cheap now? Because the developer is running a charity ? Because there has been such incredible growth in the past? No, because they are hard to sell at a higher price now and they will be hard to sell in the future at a higher price.

So if you are normal and other normal people are bidding now, that should make you feel good that in the future, others may well be bidding. It’s a simplistic way of making our point. Don’t be scared off by real and sensible competition when you are buying an investment property.

And also remember buy what you like, understand and have researched. A boring house, in a boring a suburb, next to a boring train line and boring shops with a boring agent and maybe two other boring bidders would be a good start.

Subscribe to our Market News Newsletter


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 $2m.
View more MasterClass Articles

Inside James Market News