From Bust to Boom – A review of Property Market in 2019.

The property market could not have started 2019 in worse shape, and it could not be finishing the year any stronger.

The year began auspiciously before January 1, when the Opal Tower had to be evacuated on Christmas Eve 2018. This incident signaled the beginning of the building defects issues which remains unresolved for many apartment owners. The Opal Tower was one of the many brand new high rise developments to fill the Sydney skyline in recent years. The apartment sector which was already battling potential over-supply and falling rental returns did not need another battlefront.

In the middle of the year Mascot Towers became the second building where residents needed to be evacuated from due to building defects.
Whilst reservations about some buildings and some developers still linger, the market at large seemed to shrug off the apartment defects issue.

The turnaround in the broader market was truly remarkable, with the volatility over the past three years leaving many to ponder – what is the true market price?

Increasingly, prices for houses are exceeding their 2017 boom-time levels, suggesting the market is setting fresh highs. Given the price correction during the downturn was around 15% and prices only started rising again in June 2019, there is evidence to suggest segments of the market have risen 15% in less than six months.

Historically, this explosive growth is unprecedented in a market that is recovering. Only in the time to come will we honestly know whether this recovery was a justified or irrationally exuberant market response to credit conditions and interest rates being eased.

An irony in real estate is that sellers are more likely to undersell in a strong market than they are in a soft market. The reason for this is that in a soft market, sellers tend to fight very hard to protect whatever equity they have in their property. They hold out for every possible dollar and really work towards getting the best possible result in the market. By contrast, in a strong market, a seller’s minimum price expectations are achieved quite easily, so there tends to be a lack of focus on the maximum price buyers are prepared to pay. Sellers in a strong market need to stay focused on each interested buyer’s maximum price and not their own minimum price. Above all, keep your minimum price confidential, particularly from the real estate agent. The moment you disclose your minimum price to an agent, that may be the highest price you will achieve.

Reserve price

The most common term used to describe a seller’s minimum price is the ‘reserve price’. There are two questions sellers should consider before putting their house on the market:

• Would you prefer to sell to the highest bidder at your reserve price simply?
• Or would you prefer to sell to the highest bidder for the highest possible price that bidder is prepared to pay for your property? When an auction stops with the final bid above the reserve price, that price is unlikely to be the highest price the buyer was prepared to pay. It is merely one incremental bid above what the second-highest bidder at the auction was prepared to pay. You will never really find out what price the highest bidder was prepared to pay if you sell by public auction.

False success

If you were prepared to accept $950,000 for your property and it sold for $992,500, would you consider that sale a success? On the surface, most people would call that a great success. But how would you feel if you found out later the buyer who bought your property for $992,500 was willing to pay $1,025,000? Would you still consider the sale a success? What seems like an initial success can become quite rubbery if a few probing questions are explored later. To overcome this problem, insist all interested buyers confidentially submit their best offer on a signed unconditional contract with the agreed deposit and 66W certificate. Buyer’s agents are well aware that some of the greatest value in real estate can be found at auctions. This is what Patrick Bright, a buyer’s agent and author of The Insider’s Guide to Saving Thousands at Auction had to say about the selling method: ‘I attend many auctions and bid for properties on behalf of my clients. At the majority of the auctions where we were successful, we had ‘money left on the table’ — that is, we spent less than our authorized limits.’ As happens so often, the buyer who secured the property at the auction left with the seller’s money still in their pocket.

The boom like conditions is not necessarily being felt Sydney-wide at this stage either. Inner-city housing, the Eastern Suburbs, and the Lower North Shore up to the Northern beaches seem to be performing the strongest.

The State and Federal elections scheduled for the first half of 2019 set up an intriguing anomaly for the market. The housing market tends to be cautious during elections, rarely do we have two significant elections in 3 months. Furthermore, many policies in both elections were likely to, directly and indirectly, impact on the housing market. The events in the week immediately after the Liberal Party’s shock win in the Federal election on May 18, 2019, set up the property boom we are experiencing now.

There were three significant events that turned the market:

Negative gearing would remain under the Morrison Government. The market unease with the potential impact of removing negative gearing was apparent in the 6 to 12 months leading up to the election. Labor’s policy would have distorted negative gearing benefits in favor of brand new dwellings; at a time, many capital cities were facing an excess of brand new high rise apartments. Once it became precise negative gearing would remain in place, buyer and investor confidence returned almost immediately.

Credit conditions were eased in the days after the Federal election. The further easing was also implemented in July and August as the mortgage assessment rate was lowered, meaning many more prospective buyers qualified for a home loan. This would have occurred if either party won. The Australian Prudential Regulation Authority (APRA) sensed their job was done in slowing the housing market down. Any sustained credit restraints threatened to have a catastrophic impact on the market and broader economy. In fairness, APRA was probably not expecting the rapid rebound in housing that then occurred.

Interest rates – the RBA signaled almost immediately after the election they would look to cut interest rates. One got the feeling they would have liked to cut earlier, but that would have meant the RBA risked becoming a political mid-election campaign. Rates were cut in June, July, and October. By late November, RBA Governor Philip Lowe hinted at more cuts to come and even money printing if Global events dictated it.

Coming into the March State election, stock levels began to tighten, leaving buyers with limited choice. A symptom of a soft real estate market is excess stock level. At the bottom of the market, the stock suddenly tightened as the vendor’s held out. At first, there was a sense the stock would ease after the state election, and then when that didn’t happen, people suggested post-Federal Election stock would swell. But the expected surge in stock simply did not come, not even in spring. Booming prices did not tempt an excess of sellers onto the market. Buyers have had historically low listings to choose from during 2019.

The market recovery was complete when the Core Logic Index in July/August turned positive and buyer sentiment went with it. The fear that had gripped the market between May 2017 and May 2019 was replaced with cheaper credit, more available credit and buyers more willing to take on credit.

After the Royal Commission in 2018, banks are lending out more credit than ever before to home buyers. Credit is the reason the property market finishes 2019 in credit both literally and figuratively. The more things change, the more they stay the same.

If Luis De Sousa and the team of HLG Property Advisory Services can assist you with searching, leasing, or buying a property/asset,please contact us on +61 413 883 299.