A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
Return of the balanced market
The last two years have been the greatest seller’s market in Melbourne and Sydney that I’ve seen in my career (and that includes much of the 1970s). With the auction clearance percentage rate in these cities regularly in the high 70s and sometimes in the 80s, conditions have been abnormally favourable to vendors.
It’s not so much that there has been an over-abundance of buyers. Although numbers are strong, I’ve seen several periods in the past when demand has been more intense. It’s more a case that stock levels haven’t responded in the usual way to the high clearance rates and double-digit capital growth i.e. potential vendors are not entering the market in sufficient numbers to soften prices and clearance rates.
Why haven’t sellers been more active? In part it is because property owners have become more sophisticated and increasingly understand that holding for the long term is wise. I also feel that many have figured – quite rightly so far – that this growth phase has further to run.
But I also suspect it’s because this growth spurt is quite a recent phenomenon and many prospective sellers have needed a bit of time to move from thinking about selling to doing something about it. If you’re fortunate enough to have held a property in either Melbourne or Sydney since September 2007 – around the time the GFC hit – today it is probably worth (based on extrapolated ABS figures) around 50% more in Melbourne and 60% more in Sydney. Not bad work in eight years. However, in that timeframe there have been downs for the property market as well as ups, such that most of that net growth has only occurred in the last two-to-three years.
The obverse of this coin is that it’s been a challenging market for buyers: lots of competition for most properties, often not much choice and the quality of stock is sometimes lacklustre.
However, this spring may see a rebalancing of conditions away from sellers and more in favour of buyers.
I see two related factors driving this change. First, the policy regulators – led by APRA and the Reserve Bank – have in recent months shown an unusual commitment to reducing investment lending growth. It’s a contrast to previous episodes of strong credit growth where there was lots of jaw-boning rhetoric threatening intervention but little real policy action. This more substantial policy is giving participants more pause for thought than yesteryear’s ‘crying wolf’ efforts.
Second, with many Sydney and Melbourne property owners now in the sweet spot of significant equity, some will be thinking: ‘Right, I’m happy with the capital growth I’ve built in this property and perhaps I’m not going to get much more in this cycle. Let’s put the property on the market whilst times are good.’
Putting aside whether their approach is sound (I’m an advocate of hold and never sell), I’ve little doubt that many owners think this way. Consequently, don’t be surprised if we see a jump in the quantity and quality of property on the market in coming weeks.
The return of these discretionary vendors presents an opportunity for the savvy buyer. To be one, do your research now so you are clear about the locations you want to target, and the sort of property you’re after. Also have your budget locked down and pre-approved by a lender before the campaign gets serious – and make sure you understand any restrictions the lender might have regarding property types and minimum sizes to ensure they don’t conflict with your search criteria. Monitor closely what is coming onto the market in coming weeks and talk to estate agents about what’s in their pipeline. Naturally, don’t be specific about your budget as this won’t help you in your negotiations down the track. Keeping these channels open and active may well see you get an early ‘heads-up’ on a quality property coming onto the market and, if you very lucky, potentially be offered something off-market at an attractive price due to a vendor who needs a quick sale. Richard Wakelin