Is the property market accelerating?
We’re past the mid-point of the autumn 2015 property market. Competition in the Melbourne market is intensifying. What is driving the growth? And what are the insights for prospective buyers and sellers who want to participate in this market?
We’re past the mid-point of the autumn 2015 property market. Conditions are strong in Melbourne.
Auction clearance rates are consistently tracking in the high 70s and low 80s. In other words, very few properties are failing to sell under the hammer. And typically, most of the rest are sold within a few days of the auction date.
Not surprisingly, property prices are rising in Melbourne and are probably 3 to 5 % higher than they were at the beginning of the year. This is off the back of strong growth of 8 to 10% in 2014.
What is driving the growth? And what are the insights for prospective buyers and sellers who want to participate in this market?
As I hope to show in the next few minutes, the 2015 market is tracking subtlety different from the 2014 journey, both in terms of supply and demand.
Let’s start with demand. There was a fair degree of nervousness among buyers in the second half of 2014. Many had bought in to the narrative that the property market had peaked. That there was no more price growth to come. That the Reserve Bank was about to lift interest rates.
That doubt has been washed away. There is a definite sense of urgency among buyers. They know that the next move for interest rates is more likely to be down than up.
There is a palpable sense among many buyers that if they don’t buy soon, the property market will be more expensive in a few months.
So buyers want to get deals done. We’re seeing this focus in the number of buyers attending auctions and in the depth and quality of bidding.
Not only are we often seeing several bidders at auctions, it is not unusual for three or four bidders to be active in the latter stages of the auction. We’re witnessing situations where the third runner-up drops out only 10 or 15 thousand dollars below the winning bid. This indicates that there is a fair degree of consensus amongst participants about where ‘fair value’ is.
That sort of market trend tends to be more durable than one where only a few participants are competing and ‘setting’ the price.
Turning to supply. Matters here are a little more nuanced.
Supply is down from last year. Core Logic RP Data’s figures indicate that there are around 15% fewer new listings in Melbourne each month in 2015 compared to 2014.
You may be surprised by that fall. Indeed, I’m a little surprised as well. Intuitively, one might expect new listings to rise in response to higher prices and in anticipation of ongoing strong demand.
It appears that although the circumstances are auspicious for vendors, many people just aren’t selling.
I’m confident the data is correct as, on the ground, we are seeing fewer properties for sale in the areas where we buy. Respected estate agents are telling us the same.
I suspect what is going on is two-fold:
It may be in part because we’ve now had a run of 18 months of good conditions for sellers and the ‘stock’ of prospective sellers is running low. There were lots of 1000-plus auction weekends in 2014 and this may well have soaked up many of these sellers.
It may also reflect an improved savviness among property owners. There is an unwillingness to be parted from quality assets. And there is a sense that there is further capital gains to come so why would I sell now?
The second point illustrates an aspect of supply that is rarely discussed: discretionary and non-discretionary buyers.
At any one time, there is a group of vendors who are selling for lifestyle or life stage reasons:
Death, divorce, too much debt or a need to re-locate are prime examples.
Then there are the discretionary vendors. “I could sell if conditions are right, but I’m not obliged to.”
In reality, there tends to be a spectrum of discretionary vendors.
It ranges from that rare person who has complete control of when they sell – lucky them – to people who have an objective in life they want to achieve in coming months or years that depends on selling their current property. For instance, “our apartment won’t be big enough for our growing family in a year or two”. Or “I’d like to retire to the country sometime in the next 5 years.”
The nature of the discretionary vendor heavily influences how they respond to circumstances. In this current rising market, discretionary vendors who want to trade property – upsize, downsize, go sideways – tend to be quite happy to participate. That’s as long as they are confident they can find a replacement property. Which is a worry inhibiting some currently!
But I believe there is a significant chunk of prospective vendors who are happy to sit on their hands for the next few months in the hope of seeing more capital growth.
The lessons for participants is this. Buyers who want to succeed in this market need to be fully committed to the buying campaign. They must undertake their due diligence on what the going rate is for the property type and location they are after by analysing recent comparable sales.
And they need to be prepared to factor in another 5% or so above this technical going rate to account for strong sentiment.
Times are good for vendors. It’s a good time to sell. But for anyone who isn’t an absolutely discretionary vendor, just be careful about delaying your listing to co-inside with the peak of values.
The reality is that it is very hard to time the market. Once you really know the market has peaked, it’s too late.
RICHARD WAKELIN is the director and founder of Wakelin Property Advisory.