Sydney’s property market is correcting. How can an exclusive buyers’ agent help you maximise opportunities and mitigate risks?

What is an exclusive buyers’ agent?

An exclusive buyers’ agent is a licenced real estate agent who only acts for property buyers. Their only source of income is fees paid by those buyers to purchase property at auction or, more commonly, by negotiation.

How can an exclusive buyers’ agent help you?

The core functions of an exclusive buyers’ agent are to:

• expand your choice of off-market properties
• alert you to potential hazards to help you mitigate risk and
• alert you to opportunities to maximise the monetary and emotional returns on your property investment.

Most important: a buyers’ agent’s paramount duty is to prefer your interests over his or her own; even if that means reduced turnover and a leaner bottom line. Advisor first. Buyer second.

What does that mean in an uncertain market like today?

This paramount duty can be of considerable value to buyers racked by the doubts about what to do when, as now, a market is correcting and bubble bursting headlines in the media are hard to avoid.

While it is true Australian households are carrying worryingly high debt loads, very few media articles mention for example that 65% of that debt is being comfortably serviced by households in the top 40% income bracket and that interest only loans as a percentage of total loans is falling rapidly.

What to remember about today’s market

Long overdue, this correction has been underway for at least a year during which, according to the ABS, Sydney residential property prices have fallen 3.9% in the year to 30 June 2018. Weekly auction clearance rates have also moved to historical lows.

Driven mainly by a change in the way financiers assess and make loans – as well as the effective cessation of interest only loans which has curbed lending to investors – this correction has been turbo charged by revelations of widespread poor lending practices exposed by the financial services Royal Commission.

Loans take longer, are harder to get and some valuers are nervous. This has increased the risk of a funding shortfall for those buyers who take the valuation risk – which, because that includes every leveraged buyer of residential property at auction, explains much of the fall in weekly auction clearance rates.

Compounding things, this correction coincides with other changes that have a direct impact on property markets. These include: reduced migration and political pressure from some to reduce it much further; a highly possible change of federal and state governments in the next year with implications for negative gearing; the capital gains tax discount; and several Sydney infrastructure projects both underway and proposed.

Keeping abreast of the risks

By keeping abreast of these and many other factors, an exclusive Sydney buyers’ agent can not only help leveraged and unleveraged buyers mitigate risk. They can also bring to the table of every purchase a detailed, expert analysis of the Sydney property market and identify buying opportunities every market correction yields.

As the Oracle of Omaha once said: be “fearful when others are greedy and greedy when others are fearful.”

Sydney: a city of multiple markets

Critical to remember is that there is no single Sydney property market. Instead, it is the sum of multiple parts which constitute individual micro markets. Not all of those parts move in unison during a general correction and not all buyers simultaneously share the same buying risks and opportunities.

Some properties have fallen much more than 3.9%.  For example, in the oversupplied, mass produced, high rise unit market in areas such as south western and western Sydney, 15 + % price falls have already occurred. More reductions are likely as rates rise and interest only loans convert to principal and interest in 2019 and 2020. The hope is that the ripples from the pebble dropped into that micro market won’t spread to the rest of Sydney’s property pond.

Conversely, many other residential and commercial properties have increased in value over the same period. Indeed, according to CoreLogic’s latest Pain and Gain Report, well over 90% of all residential properties sold at a gross profit in the June 2018 quarter with no sales selling for a loss during that quarter in prestigious Mosman, Hunters Hill and Strathfield.

Putting this in further context: re sales at a loss in that quarter totalled $52.7 million whereas re sales at a profit came in at $5.023 billion.

Hardly a picture of doom and gloom.

So, while Curtis Associates for example, is generally advising non leveraged residential property investors to defer buying until prices fall further and yields improve, the opposite is true with high income earning leveraged investors for whom negative gearing is an attractive option provided, as always, there is longer term capital growth.

Similarly, having advised buyers at the beginning of the year to pass on the overheated Sydney CBD commercial strata micro market, the opposite is now also true as its cycle follows residential micro markets. It is a similar story with boutique, higher end development sites and the presently overheated industrial sector is likely the next to follow suit.

Other residential property buyers benefiting from this correction are those able to upgrade to around $3 million – a bracket where even owner-occupiers have this year experienced tight credit conditions.

In all cases, a competent, ethical and exclusive buyers’ agent’s patient advice should caution against investor grade property and those for which there is a small market as well as a glut of available options.

Finally, two warnings

(1)   “Exclusive” means “shutting out all other activities”

Some Sydney buyers’ agents have links to other real estate businesses and make income from other sources – such as managing properties bought for clients. These buyers’ agents cannot legitimately claim to be “exclusive” and such business models may involve inherent conflicts of interest of a kind the Royal Commission is exposing on a daily basis.

(2)  All agents, including every Sydney buyers’ agent (whether exclusive or not) are required to act ethically and according to rules.

In that regard, some Sydney buyers’ agents offer referral fees to seller’s agents – sometimes up to 20% of the buyers’ agent’s total fee.

This is a clear breach of the relevant regulation (clause 14, Schedule 1), which states:

“An agent must not offer to provide to any other person any gift, favour or benefit, whether monetary or otherwise, in order to induce a third person to engage the services of the agent as agent in respect of any matter”.

The rationale for that regulation is clear.

Arrangements like this create many conflicts of interest: for example such buyers’ agents might be tempted only to recommend to a buyer client properties listed by that sellers’ agent rather than properties of their competitors thereby giving that buyer client fewer options.

Even worse, they could encourage a sellers’ agent, instead of selling a property direct to a buyer, to recommend a buyers’ agent to that buyer so as to earn a referral fee in addition to sales commission.

With transaction volumes in the Sydney residential property market down on previous years and the Sydney commercial property market now following suit, these breaches will likely become more frequent.

Unless NSW Fair Trading does its job and names, shames, and prosecutes buyers’ agents who offer these referral fees, real estate agents will continue to achieve the lowest score of all industries on the Governance Institute of Australia’s Ethics Index.

It is important to remember that the only ones who gain from such illegal referrals are the two agents at the expense of their respective clients because the hand each agent might need to bite in their clients’ interests is now a hand that feeds.

To sum up

The better news is that there are in fact buyers’ agents in Sydney such as Curtis Associates who are both exclusive and follow the rules. There are also many ethical sellers’ agents who refuse to deal with buyers’ agents who offer referral fees – (which is bad news for clients of those buyers’ agents).

And one last take-away: whether the prevailing animal spirit is FOMO (fear of missing out) or FONGO (fear of not getting out), the focus should always be on those blue-chip properties of which there are relatively few. That is where the one that is right for the client will be found.