The most asked questions by Home Buyers during August 2022
The market has changed – panic set in with buyers and with vendors of property alike. Both parties felt like they had missed out. The buyers were suddenly being scrutinized more heavily on their borrowing capability… it had reduced, and the vendors of property were stuck in the euphoria of past prices… it too had reduced. The net impact is the market has changed for all participants. But when is the right time to enter? Read on…
The interest rate rises in the past months have shaken a lot of people
Listen to Tim Lawless of Corelogic (Australia’s and the world’s largest property data and analytics company) for an expert’s helicopter overview. I used to work with Tim and value the quality of his analysis, commentary and data which provides some of the best insights into the property and finance industry that you will ever get access to. Listen to his overview here: August 2022 in the Corelogic National Housing Market Update.
The biggest questions that I am being asked in August especially are:
The property market has fallen, and I am going to wait till next year to buy…
Fair call at least you have made a decision. This is important. The truth is no one can be 100% accurate in picking the market tops or bottoms. I advocate that like the stock market and equity markets for that matter if you can enter or exit in the top 5% range – be it on the way up or on the way down you are doing well.
What I do know is that every time someone tries to dictate what a market will do, market forces will humble them.
Yes, property prices have fallen directly from the interest rate rises – generally speaking. Sydney for example is full of a multitude of niche markets – be they prestige (luxury homes Palm Beach, Eastern Suburbs), bread and butter suburbs (Inner West & North and South Corridors), exclusive locations (Double Bay, Byron Bay Palm Beach), conveniently located (trains, transport, facilities, or city access) or in the many ‘mortgage belts’ (Sydney’s Western Suburbs and corridors of new house land releases), and whether they are units, houses or townhouses. Design can have a massive impact on livability and price. Some of these niches respond at different rates and with different value adjustments
The property market is very much a needs-based market where people need to sell and need to buy for all sorts of reasons (births, deaths, marriage, divorce, downsize, upsize, employment-related issues and relocations, change of financial circumstances). The market is driven only by a small amount of speculation
Property Prices are falling and so are the buyers.
Research shows a direct correlation between interest rate rises and property prices falling.
Why? – Simply the affordability has changed for many.
Most mortgages are paid for in after-tax money. The impact of a rate rise directly affects the amount a family must live on and the amount of the household income that must be dedicated to maintaining a roof over your head (the same for renters). This affordability also impacts the number of discretionary funds for spending e.g., food, entertainment, holidays, school fees and clothing. The other part of the equation is the household income has not grown proportionately to match the dramatic increases that an interest rate rise can bring. Confirmation information of this can be derived from several research houses such as Domain and CoreLogic.
I can’t get the same money that I thought I could borrow. …
In the current market conditions on the back of interest rate rises the banks also reassess their position. They reassess the credit worthiness of clients and certain property types (units) and the areas in which they are contained. The result here is that borrowers are ‘stress tested’ for being able to service higher interest rates for example up to 5% and 6%. This is coupled with a retraction of credit as banks consider their exposure to certain suburbs and properties on the market, this is particularly in high-density unit areas and certain stock in North Sydney, Rosebery, and Parramatta.
I always remind people …
‘You are only the custodian of your house while you pay the mortgage, the day you default on a payment is the day the real owner… the bank steps in and they keep it all
In this phase of the market, the banks are concerned about where their money has gone and want to be sure they have a safe loan book that is not overexposed to certain borrower types or properties. If you pass these tests… they welcome, you. This occurs as banks are only making money on their deposits when they are lending it out…’ safe as houses’ and they have you on a long-term treadmill of repayment.
My bank loan preapproval is taking a long time…
Depending on your readiness with personal information, wage (income), debt versus assets, and your spending behaviours… this can affect the time frames for preapprovals. Clients with solid mortgage broker relationships are getting through quicker on priority. A Mortgage broker described the process to me that if it is a standard application it will sit in a pile of applications waiting to be assigned to a credit officer (1 -2 weeks) then on review they may come back with questions or require additional information (1- 2 weeks) then the application is reviewed again….and so it goes. Good brokers usually have priority submissions through volume, contacts, or the quality of applications. They bring well-qualified clients who are approved faster.
A good broker will gather all the information first and know the best institution to place your business with or know how to get pre-approved verbally before submission of the formal application given the strength of their relationship with the institution and the volume of business already placed. Pricing or your interest rate will also reflect risk. If you are a clean client with all data ready, and good asset/ income to debt ratios then the correctly placed application will see your approval accelerated and offers with good rates of interest.
I know of some brokers who will charge the client for the credit application however their approval rate is close on 100% successful. These can be approved within a week.
I am not going to buy now I am going to save more so I have a larger deposit
This is a logical thought…until you understand the period it is taking the average person to accumulate those deposit funds or top up their existing balances versus the opportunity cost of the house price rises. A good example is that yes… property prices have reduced in recent times however… the rate of growth before the reduction is still far higher (see Tim Lawless CoreLogic National Housing Market update) the net result is that property prices are still moving upward albeit at a slower rate.
The rate of savings doesn’t match the growth in property… it could improve your loan-to-value ratio’s…
Property has dropped in Sydney and will keep dropping I will jump in at the bottom
Yes, prices typically have reduced on what were massive price rises in December 2021 and the first quarter of 2022, however, they have only started to pull back against those excessive gains. They are still on an upward trend. Sydney housing has a habit of doubling every 10 years and within that cycle, there are major growth spurts and periods of flat or low growth where days on market extend. Picking the bottom and tops can be risky business.
However, some areas still are achieving top prices for a high-quality or unique property. This has been apparent in parts of the eastern suburbs market where the mortgage influence is less of an issue. Traditional mortgage belt areas in the Northwest, Southwest and West of Sydney have had significant price drops and a high reduction in the number of buyers competing for each property. Every area has its uniqueness, strengths, and weakness. Understanding this is critical to acquiring a property at the right price. This is where a Buyers Agent can assist.
The truth is no one can accurately predict the timing and balancing of the market. The idea is to enter educated decisions that suit your circumstance. The past years have been fuelled by the cheapest loan funds in 70 + years and stimulated by a pandemic that saw people challenge the very nature of spending time at home and what their new workplace would be and how it would look. This took over from the massive immigration numbers and funds that were creating demand and money being used to acquire property. This immigration issue is about to rise again as we have low numbers of professionals to meet the job demands and future growth requirements. The result is there will be more pressure on this limited commodity… land. There is only such much available. Demand for housing has always outstripped supply, and now even more so.
Infochoice – The History of Interest Rates
Another consideration forgotten or not experienced by many was the GFC impacts (Global Financial Crisis) where excessive lending created massive overleverage and ultimately a collapse of the financial and housing market globally. Since then, many measures have been put in place, particularly with Australian bank lending criteria and the tighter credit controls being brought into play. There has been a large decoupling of financial markets and the property industry through financial controls and Regulations. The changes to lending and continued monitoring by the RBA have created a different environment from the past. Markets are moving and responding more efficiently as information and data are available faster and in greater detail. This could ‘smooth’ what would have been drastic price falls in the past.
Bank balance sheets are much healthier regarding property and lending responsibly than previously due to the lessons of the GFC. This potentially means the massive falls and volatility and the recovery of prices will perhaps not be as dramatic.
How do I know where the market will fall to…
Indicators around a falling market for property prices:
Days on market are a great indication of a slowing in demand for property sales. In the height of the market, it was common to see Days on Market at 18 days to 23 days, when a lot was selling off-market and many within days of being listed… and a substantial premium to the listing price. Researching the days on market in an area can provide a good temperature gauge of the market for that suburb and property type. Currently, many Sydney areas are extending to 30 days + on the market. This illustrates the change.
Inflation does push property prices higher as history shows us. The value of the dollar erodes more in the current market with the increasing cost of fuel, food, rents, goods, and services generally. Property internationally is a true store of wealth in inflationary periods. Inflation becomes a major reason why the price of property increases further as the capital value of money and its real spending power drops. The dilemma faced by the property is that the RBA uses interest rate rises to slow inflation. This has resulted in lowering house prices by curbing demand and affordability.
Property prices have dropped but credit has tightened as well…
Another great indicator is ‘Discount to Market’ with regards to the asking price. When the market is hot the discount to market rate is very slim or non-existent with a lot of properties being marketed as prices are being achieved in line with the marketing campaigns. Regularly you will see prices being seen as ‘underquoted’ by agents.
In the instance of ‘Discount to Market’ figures that are reported the final selling price is transacted underneath the price guide that is published. The price guide is typically subjective and the agent’s opinion. It is the results of the advertising campaign, open homes and client follow-up that normally guide the selling agents as to where the market is seeing the property value. This property pricing is reported back to the vendor and when the gap between the vendor’s expectation and market sentiment is still high it is effectively used to condition the vendor to be more realistic in their price considerations. When the vendor meets the market below the originally published price expectation this ‘discount to market’ is published as a collective figure to a suburb (not to the individual property).
The heat in the property market has dropped
The market’s position can be illustrated by who is in control. For example, in the burgeoning market, the Vendors were in control. Their properties were put on the market and competing purchasers paid well over normal prices to acquire the property. Days on market reduced to below 20 days. Demand exceeded supply and purchasing was emotional and spurred by the Fear of Missing Out. We are now moving into a market where the buyers are regaining control – Auction clearance rates have fallen, days on market are increasing, and many vendors are not in a hurry to sell their properties as they cannot realise the prices that were achieved last year. More properties are being sold by private treaty. Buyers are making offers below the asking and these prices are increasingly being accepted. A critical factor is the availability of money to purchasers, as credit tightens so does the housing market.
How to use the ‘Discount to Market’…
Working out a median price, or the average of prices for a property of similar style with a comparable number of bedrooms, bathrooms, cars, age, design, and land size within an area is a great start. In stalling or falling market applying the average discount rate to the price can be a good indicator of where price offers being made for a property should perhaps be commenced. In negotiations, it is easier to offer under the market and rise to an acceptable price than throw in a ‘top offer’ and try to come back from it. A professional Buyers agent will help identify the right value for money in the market or ‘Fair Value’ of a property.
Auction clearance rates are dropping. This is a great indicator of where the market is currently performing. In a strong market selling agents will go to Auctions and let the public fight for the property and in a hot market would invariably achieve far higher prices than if advertised and sold by a private treaty. The irony is the Auction clearance rates are ‘played’ by selling agents and the reported clearance numbers versus the actual clearance rates are greatly distorted.
Auction results – Realestate.com.au
If an agent withdraws a property during the auction or it is ‘not’ passed in … the figure is not reported and not recorded. If the agents disclosed the property as ‘passed in’ then the clearance rates count and show a decline. The real numbers of properties not achieving a sale in the auction campaign are far higher than documented. This is a sure sign of the market momentum shifting. This correspondingly relates to the increase in properties for Sale by Private Treaty.
Domain Auction results – Cleared, Sold Prior & Withdrawn
‘Data analysis is a precautionary tale’ – some advocate the numbers don’t lie.
I agree normally, but only when they are 100% accurate. This never really occurs as data is collected from many areas, combined and collated often they maybe test samples of a broader pool, or translated with a bias. Data is great for getting a helicopter view of the market and generalities for an area. Furthermore, data reports are delayed and are representations of the past and not necessarily the future… this is both true in a fast-rising and falling market. For example, a sale may take six weeks to be recorded at the land titles office after the exchange. The information is then historic.
What data does not discern is how a house is presented, what renovations have been, how the land and the construction are etc. The only true way to intimately understand value is to inspect the target property and those that are comparable. Only then can you establish a true benchmark of fair value.
These questions and topics were discussed a lot throughout August by buyers. There are many different viewpoints however the key takeaway is that as interest rates rise the affordability and sentiment toward buying property shift. This part of a natural cycle will probably last a while longer yet.
A key area of purchasing is understanding the value of a property and reducing any risk associated with the purchase of the property. A Buyers Agent can help, protect your interests and acquire a quality property for the right price. Save time, money, and stress. Regards Gary from Advanced Buyers AGents… Get in touch
