Market turn...?!

When a property market turns, the tricks, trends and tactics  employed  by agents, sellers and buyers change too.  If you identify the shift in  how the market is  functioning, you stand a much better chance of being  on the right side of the trade.  Those looking to buy or sell in the next few months will be faced with a barrage of dramatic reporting and predictions as mortgage rates rise. Staying calm, up-to-date  and pragmatic is the key to winning in the 2022 property market.

Rates will continue to rise, but… wages and rents will also rise,  to cushion the impact. Interest rates are rising due to global inflation. With inflation running so hot and an unemployment rate of 4%  in  Australia, wages  are rising. Higher earnings will help owner occupiers.

As   you  have  probably  read,  rents  are rising. There is not a rental crisis in Sydney as much as rents are merely returning to their pre-COVID levels. The rental crisis is mainly in  lifestyle locations and regional cities where higher wage earners shifted during COVID and inadvertently imported rental inflation into these lifestyle markets. If population growth explodes in the next 12 months now that the international borders are open, then rents will  begin to  exceed  their pre-COVID levels in  the major capital cities. This will help landlords offset rising interest rates.

Get set to read and hear a wave of doomsayers who quote current rental returns and wages as the primary reasons higher mortgage rates will  crush the property  market. Admittedly,  rents  and wages have been stagnant for some time now.

“The maths simply won’t work for tens of thousands of households, as interest rates rise” the ‘Permabears’ will  argue. This is unsophisticated analysis though.  When it comes to markets, nothing happens in isolation. Yes, higher interest  rates will  put downward pressure on property prices, but the higher rents and wages will act as a support mechanism, to help/hopefully avoid a market crash.

Furthermore, many households took advantage of ultra-low  mortgage rates during COVID  and fixed their mortgage rates. Interestingly, households seemed to accept that interest rates would rise well  before the RBA did.

If  the  economy and the  property market  come  under  sustained pressure as interest rates increase, the RBA, the Federal Government of the day and the retail  banks will also respond to support the economy. They cannot and won’t sit idly  by. The Federal Budget in April demonstrated that a Government can be nimble and nuanced in their policy response, when required.

Those that fixed their mortgage at the bottom of  the rate cycle have clearly beaten the banks in  the mortgage market game. Given there were a record number of households that  fixed their home loan rate  at the time of ultra-low mortgage rates, that trend will  now minimise mortgage stress in the housing market, as rates rise.

If  households  enjoy higher wages, receive higher rents on their investments and/or  have fixed their mortgage rates at ultra-low levels, then cases of forced selling in the property market will be moderate.

In 2 to 4 years (2024 – 2026), many of the ultra-low home  loans from the COVID  era will come up for refinancing.  It  is  at  this time that mortgage stress could rise as many people are suddenly exposed to the higher interest rates of the day as their Fixed Home Loan rate expires.

Trading the trend line – a characteristic of  a booming market is lots of buyers and few sellers. This  was evident during the COVID property boom. Clearly prices rise in this scenario. In rising markets, many people opt to buy and  then sell. Even though there is always a risk  in buying before you have sold, the risk of selling and watching prices rise by the week is a greater risk.

A  characteristic of a depressed market is excess listings relative to buyer demand. Whilst some vendors hold out against the market, the reality is prices fall when the number of  sellers outnumber buyers in the marketplace. Many people wisely secure the best sale they can in a depressed market before making a property purchase.

This removes the risk of unintentionally owning two properties in a falling market.

The current market is evenly poised between seller supply and buyer demand. Stock levels are tight due to the Federal Election campaign and the winter market closing in (winter is a traditional slow period for stock levels). However, stock is more likely to increase sharply than decrease in the current environment. Locking in a sale at a good price before buying may  be a smarter option in the current market.

Renovation resistance  –  everyone has or has heard of a ‘cost   blow  out’ horror story with a renovation or building project. Unfortunately,  large and small building  companies, locked into fixed price contracts, are going broke.  Others are being squeezed at the margins like never before, through no fault of their own.

Quite  simply, the cost of materials and  labour is  driving  construction costs higher. In the real estate market, buyers are shunning unrenovated properties in favour of renovated homes.

Buyers being extremely time poor are also adding to the appeal of a completed property.  After years of Sunday night television shows glorifying renovations in a 30-minute program (if only it was that easy), buyers are suddenly extremely hesitant to undertake major building/renovation works.

Even though renovation costs have risen, in many instances, buyers tend to overestimate the cost of these works.  And they overcompensate in the offer they make the vendor. Therefore, vendors are better served  doing as much work and improvements as practically possible, to lift the standard of their property, before going to market.

The days of  unrenovated properties selling for a similar price  to  a renovated one, are over.

Oblivious – many vendors are exposing themselves to financial loss in  the  current  market by allowing their selling agents  to savagely underquote  the value of  their property, in  the marketing phase of the campaign. The pitch goes along the lines ‘let’s quote a really low price initially to attract the best  buyers and ratchet the price up during the campaign as the buyer competition builds’.

When a property sells for $300,000 or $400,000 above the initial (low) price guide, the agent blames ‘the  market’ to the aggrieved underbidders.

In  recent times, vendors who have gone along  with the underquote ‘tactic’ are oblivious to the risks they are running. In  the current market stock levels are higher and  the auction clearance rate is now below 50%. The bidding wars that occurred in 2021 are not happening in 2022.

Many vendors  have recently experienced a painful reality – if you start with a low  price, you may finish the campaign with a low  price.

Yes, a vendor can easily pass the property in and/or withdraw from the auction, as 50% of  vendors are currently doing. In the process, the $10,000 advertising campaign will have gone up in smoke,  as will  the $7,500 on styled furniture. It is only at this point that the vendor’s oblivious mindset to the risks they have taken, turns into a definitive financial loss. On those numbers, it’s a financial nightmare for many vendors.

The agent will blame ‘the market’ and move on without any financial loss and probably “rinse and repeat” the same process with someone else. Sometimes it works, sometimes it doesn’t…

The primary consideration for vendors who fail to sell, having consented to their agent underquoting,  is the damage that is done to the respective property’s digital footprint. When a seller wants $2.4 million for their home, yet allows their selling agent to advertise it as  ‘Guide $1.9   million’ the vendor is usually unaware  ‘$1.9  million’ is recorded on property data websites for all  time.  These data companies won’t delete the pricing history just because the ‘tactic’  didn’t work out as the vendor hoped.

When  vendors  discover  their property has been so viciously devalued, they quickly turn from oblivious to irate.

If a vendor wilfully lies, or allows their selling agent to lie  on their behalf, to buyers about the acceptable selling price, then the vendor owns the result.

“Well, we will  just  wait!” – is a common response from sellers when it’s suggested their expectations may be above the current market price. In a rising market, waiting is a smart play. If the market is  falling, maybe it’s not so smart to wait around.

Patience is a virtue, stubbornness is not.

The property  market  did  not  rise as one and it won’t correct as one either. For example, houses outpaced apartments during the boom. During COVID,  larger, spacious houses rose faster in price than smaller ones. As the  overall market cools in   2022, the prestige end of  the market is still booming. If your property is not selling in the current market, it’s best to ask yourself, ‘are we being patient or stubborn?’ Sometimes  waiting is the best strategy, sometimes it isn’t.

The market is falling, so let’s  grab a bargain – Buyers will  begin to hear headlines and anecdotes about, ‘the property market is falling’. If  a  ‘bargain’ is  a buyer’s  primary objective, they are more likely  to end up with a flawed property than a genuine bargain.

Buyers should remember,  the best homes are the least negotiable and vice versa. If you have a long-term perspective  for the property  you are going to purchase, then you will experience  several market cycles in that time. No  one really knew where and when the last boom would peak and no one really knows when the next downturn will bottom out. If you buy quality real estate, you will enjoy higher  highs  during  boom  times and higher lows during downturns. Quality is the best criteria for buying a property, not a bargain everyone else has passed over.

Our property is  better… Home sellers understandably compare their property  to  the  sales  within the street and/or the immediate surrounds. Whilst their home may be comparable, or genuinely superior to the property that sold down the street last year, the market conditions are not the same. The  housing market was stronger last year, and mortgage rates were considerably lower for home buyers. Therefore, in some cases, superior homes may sell for less in 2022 than inferior homes did in 2021 in your street or suburb. The agent  is  not incompetent, the buyers are not bargain hunters, it’s simply that the property market has considerably changed. Markets rise, markets fall  due to a multitude of factors.

The best way to describe the current situation is prices are not falling from fair value, they are falling back to fair value. The 2021 boom was an aberration which the RBA should have addressed sooner.

By Peter O’Malley, author of Inside Real  Estate