Sydney property 2014. End of year market wrap – we told you so and a property buyers’ survival guide for 2015

December 12th, 2014
Hands giving house model to other hands. Concept of real estate and deal

Hands giving house model to other hands. Concept of real estate and deal

Between this and our last CurtiseCall, Sydney’s property market has been around the world and back again. And that’s without taking into account the emerging debacle otherwise known as ‘Canberra’.

One minute:

  • interest rates will rise to cool the Sydney (and Melbourne) property markets
  • the Aussie dollar is holding
  • auctions are on fire with unprecedented numbers of properties being listed for sale in the lead up to Christmas
  • credit growth , especially of the interest only variety and to investors, is expanding
  • median prices are increasing
  • negative gearing is here to stay
  • huge infrastructure and urban re development projects such as the Bays Precinct, Westconnex , the Parramatta Road upgrade and a second Harbour tunnel are announced having the potential fundamentally to alter the urban dynamics of Sydney as well as the value of a lot of real estate both positively and negatively
  • ‘macro prudential’ tools are unlikely to be used to cool the property market in Sydney (and Melbourne) and
  • a free trade agreement is struck with China which, in so far as it affects property markets, will increase the flow into those markets of capital from developers already pushing up the costs of sites.

The next:

  • interest rates are expected to fall not once but twice in rapid succession to revive an economy in ‘income recession’
  • the Aussie dollar is falling
  • auctions ran out of steam with clearance rates falling to their lowest levels in over three years
  • credit growth is trending downwards
  • median prices are doing likewise
  • negative gearing is up for grabs
  • the same infrastructure projects are the subject of later announcements denying the existence of pre determined housing levels in the Bays Precinct; changes are announced to other projects and a second Harbour tunnel is thrown into doubt by the revelation of a shortfall between the costs of building it and the proceeds from power poles that are to be sold to pay for it
  • APRA, ASIC and other government agencies fire the first ‘macro prudential’ shots across the bows of all banks in a bid to curb what we believe has been the growth this year in risky lending practices by banks seeking a larger slice of a shrinking pie and
  • the report of the Standing Committee on Economics into Foreign Investment in Residential Real Estate is tabled in the House of Representatives which adopted our submission that penalties for breaching foreign investment restrictions be levied ad valorem. (Regrettably, that Committee failed to adopt our further submissions designed to promote the transparency and reliability of real estate data including the suggestion that  “there be implemented a mandatory system of electronic reporting by all sellers’ and buyers’ agents of foreign acquisitions within 24 hours of contracts being exchanged with such agents being required before exchange of contracts, to sight and record evidence of residency in the same way as selling agents in NSW are presently required to register bidders at auctions of residential real estate upon production of proof of identity”.)

All the noise created by these conflicting reports drowned out what we believe is the truth.

It is based on what we have witnessed in the auction rooms, during negotiations as well as recent feedback from actual and potential buyers especially above the $ 1 million mark.

Consumer and business confidence is undoubtedly fragile as confirmed by the fall in the Westpac- Melbourne Institute Consumer Sentiment Index which just reached its lowest level in three years and is on track to replicate a trend of negative sentiment not seen since the GFC.

Leaving aside pockets of sometimes misguided exuberance in Sydney’s higher end property market, many potential buyers at a macro level are genuinely concerned abut falling commodity prices, unemployment, what will replace the minerals boom, housing affordability, climate change and of course, ‘Canberra’ with all its connotations.

For those buyers, the chance of two further cuts to official interest rates in 2015 is not the signal to borrow more but further confirmation that the economy is weak and the country lacking direction. The same sentiment underlies the pre Christmas surge in listings as nervous vendors seek to cash in before things economic get worse.

In a ‘told you so’ story which this article has been advocating for over three months, auction clearance rates have fallen as now grudgingly conceded by mainstream media. Those concessions understate the extent of the fall. A blog by Richard Montgomery’s on 30 November 2014  mounts a cogent argument for example that Sydney’s auction clearance rate for Saturday 9 November 2014 was in fact 49.9% and not the 83.7% as widely reported in the media.

The extent to which it is a buyers’ market is disguised by the stream of one off stories in the media about those properties which for whatever reason “smash reserves” or yield apparently stellar capital gains for their vendors.

Those stories fuel the sensational headlines on which much of that mainstream commentary depends. They are generally micro tales at the margin.

Were it across the board the current growth cycle in Sydney’s property market would much more closely resemble the 2001 to 2004 growth cycle.

In a useful comparison of the two growth cycles published on 4 December 2014, Core Logic R P Data’s Cameron Kusher noted that:

  • growth in home values has been much more moderate over the current phase than in what was recorded over the housing boom of 2001-04
  • transaction volumes for houses and units have been significantly lower over the current growth phase compared to the previous phase (despite a larger population and higher overseas migration) and
  • despite standard variable mortgage rates typically being much lower over the current growth phase than they were in 2001 to 2004 with rates consistently at record lows for the past 16 months, the rate of growth in housing credit has been much more moderate over the current growth phase compared to the 2001-04 boom phase.

A non exhaustive property buyers’ survival guide for 2015:

How can property buyers survive and thrive in what is sure to be a roller coaster ride in 2015 if the above is any indication?

  • Do your due diligence: This should be much more penetrating than just the information contained in pro forma Current Market Appraisals and similar on line proprietary products. Be alert to risks and opportunities especially of an over supply of medium density accommodation in certain parts of Sydney
  • Avoid auctions: Like horse racing, a canter (private negotiation leading to contract) is far easier to control than a gallop (auctions) especially if the race is rigged (underquoting)
  • Recognise that underquoting does exist: And it will only get worse as Sydney’s property market continues to move downwards from its peak earlier this year. Probe the next selling agent who tells you “market feedback is $X”. Why does he/she say that? Have there been offers at that level? Are they in writing? On what is that remark based? Ask to see those offers. Be brave or be misled
  • Don’t rely too much on published auction clearance rates: For as long as agents are free to choose what to report and not to report and the formulae on which those rates are based include purchases prior to auction, this popular metric will remain inherently biased and unreliable. (Did you get that regulators?!)
  • Don’t rely too much on sensational headlines about record sales: Especially those appearing in local and community mastheads. These sales happen all the time across all cycles. They often reflect the micro realities of buying and selling property rather than what is happening at the macro level
  • Avoid or mitigate the stress by retaining a competent buyers’ agent: In a little heralded development in November this year, buyers’ agents were formally recognised as part of the property landscape with the publication of the new 2014 Standard form contract jointly published by the Real Estate Institute of New South Wales and the Law Society of New South Wales.
    • In addition to adding the words “and purchase” to its title – “Contract for the sale and purchase of land 2014 edition” , the front page now includes a section identifying the buyer’s agent as well as the vendor’s agent. Yes, there are two sides to such a transaction!
    • Assess whether you should see it as an investment rather than a cost. Find out exactly what your proposed buyers’ agent does; how they will do it and exactly what you will receive for your fee
  • Think positive: property has out performed shares over the longer term and despite the market imperfections and considerable room for improvement that exists regarding planning controls and infrastructure projects, the fundamentals in Sydney are sound; it is quite simply a beautiful place to live in; in which to invest and its population is growing
  • Think long term: For most buyers, property is a long term investment. This also means it will survive ‘Canberra’ in whatever form.

As this is our last CurtiseCall for 2014, we wish all of our loyal readers a wonderful Christmas break and happy New Year. We look forward to returning in February 2015 and with a new format.