You have to question the pure insanity that surrounds Australian real estate


27/06/2013

You have to question the pure insanity that surrounds Australian real estate – you have to live here and experience it to truly believe it, because I’d challenge you to find another country where the subject receives the same intense level of pre-occupation.

Firstly, the obsessive and hugely popular renovation shows that populate our screens almost every evening – at peak viewing times – where contestants plot against each other to try and produce a product that will attract a storm of buyers when time comes to ‘flip.’ In this case, I’m talking “The Block.”

Whole episodes are often devoted to mindless discussions as to whether spending an extra few hundred on a 3D television would really reap a benefit. And whilst it may be the deal breaker enabling contestants to win a room ‘reveal’ prize, it certainly won’t make much difference to the end sale price.

Marketing a furnished property intended for owner occupation, or rent has its difficulties - albeit, this is ‘entertainment’ real estate style and judging by the ratings, viewers love it. The first apartment to go online (now followed by others) has been marketed at $1.2 - $1.4 Mil with a Depreciation Schedule of around $1,000,000 over 10 years.

Perhaps my only caution at this stage to potential buyers of ‘The Block’ would be to pull their eyes away from the interior styling and check instead for nearby completed planning approvals - which hold potential to change the landscape, natural light, or views...   Always concentrate on what you can’t change, before you pay attention to the fixtures and fittings you can change. In previous series’, buyers have been tripped up by this very issue.

Then the other week ‘The Living Room’ on channel TEN chipped in with some handy ‘auction advice’ for a couple of first home buyers.

After encouraging them to spend money on a valuation which would not have taken into account any discussion with the agent of the level of buyer interest or vendor expectation – two vital bits of information required when negotiating a property purchase - and clearly without the budget to beat the evident competition surrounding the home, they were given the helpful advice to bid strong from the onset with an “odd” final number.

They lost of course – but never mind eh?  As the program told us – apparently, you have to ‘typically’ fail at 7 auctions (upping your budget along the way) before you graduate to be the lucky purchaser.  Information I wasn’t aware of.

And meanwhile, we’re fed ‘daily’ with house price statistics from R P Data – which could be somewhat relevant if we were monitoring petrol prices – but in the daily index, real estate can ‘boom and bust’ all within a couple of months.

R P Data “ring up agents” to get collect their information, which would be a mammoth task considering most agents are highly unlikely to prioritise the reporting of private treaty sales information as soon as a contract is signed – if at all.

And yet this is what the accuracy of daily index relies upon – prompt agent reporting.  Without it, the results lag until the official ‘settled’ sales data filters through from the government (some 3 months ‘plus’ later) - hence why there is a large ‘pinch of salt’ feeling surrounding their media releases.

Realestate.com.au is another carnivorous operator trying to secure a great proportion of the obsessive property industry pie. As the national number one property website (albeit not in all states) regular rises in advertising costs are all but guaranteed.

Compared to the other portals, REA’s fees are extreme, with a model that now requires agencies to pay a subscription fee plus an additional cost for each and every new listing uploaded – this obviously impacts the smaller and regional agencies fighting to get market share.

Of course, the dollar’s rise further for various feature highlights – which essentially equate to a few frills such as a fancy border surrounding the advertisement which will supposedly stay at the top of the list when searching on a ‘default’ setting – or special ‘emailed’ brochures.

All of the above is typically funded by ‘vendor paid advertising’ and passed on as such by the larger proportion of metropolitan real estate agencies, who recognise the need to run an effective ‘online’ campaign in order to maximise potential demand.

As the old saying goes – ‘you can’t sell a secret!’ However, the anger surrounding the dominance of REA – a company which collects and uses real estate agency data effectively free of charge, has caused outrage in various corners of the industry – and rightly so.

Property advertising is not realestate.com.au’s only inroad into the media landscape.

Their latest innovation is an attempt to promote a ‘twitter’ craze called #propchat – the hash-tag of which was recently run as a ‘paid promotion’ launching it onto the top of the worldwide ‘trending’ table inspiring questions such as

‘what the $%^%$ is #propchat!?!’  - from far off regions.

#propchat has – until now – only been picked up by in any significant proportion by various industry professionals wanting to ‘spruik’ their wares and joins various other social media campaigns such as ‘HOUSENET’ which markets itself as ‘facebook for real estate.’

We’ve had auction tipping models running for some time – such as ‘Property Tycoon’ for which you can ‘guess’ the price of a house or apartment for the grand prize of $1000 for he who gets ‘nearest the pin.’

Louis Christopher at SQM recently bought to light "Centrebet" who have begun taking bets on the direction in property prices are heading, and now  Sportsbet have chimed in giving ‘odds’ on the weekly clearance rates across the capitals. Pure insanity.

It’s somewhat amusing because there’s widespread distrust surrounding reported clearance rates. Firstly – a result listed as ‘sold at auction’ makes no distinction between what sells ‘under the hammer’ with heated competition, or what is negotiated on the same day ‘post auction’ (either from a buyer attending the auction, or a participant making a post auction enquiry.)

The auction reporting guidelines state that anything sold in the ‘non cooling off’ period following, should be listed as ‘sold after.’ Those negotiated before the auction are evidently, listed as ‘sold prior’– but importantly, all of the above counts towards the reported clearance rate causing some angst in real estate circles. This is but one of many reasons we have so many ‘unreported’ results lingering on a Saturday evening.

The broad perception remains that ‘sold at auction’ should be an ‘out in the open’ sale for all to see with all other variables being listed as ‘by negotiation’ - and it’s an important distinction.

Whilst a sale ‘under the hammer’ would typically have a similar buyer who - just missing out - was prepared to pay $1,000 less for the home, a good auctioneer can often get more than a few thousand above the reserve when negotiating with the ‘highest bidder’ post ‘pass in.’

This is important particularly from a valuation perspective; therefore I’m of the opinion that whilst agent reporting can’t be completely relied upon, the clearance rate should be comprised of sales that have been ‘knocked down’ only. And if this were to the case – depending on the current ‘cycle’ we could have clearance rates as low as 30 per cent.

But if we’re really talking insanity the biggest miss conception is that high and rising house prices are somehow ‘good for the economy’ – without which ‘small business’ would be unable to operate – as over the years, reliance on using the house as an equity ‘ATM’ became somewhat of a dangerous ‘card tower’ speculative pre-occupation.

Putting aside for a moment the widespread misunderstanding of how banks work or why prices have inflated as high as they currently remain, the shortage of affordable property in Australia in areas of our country where most need to live in order to make a living – in other words, not set in far off un-facilitated nether lands - can have far reaching impacts.

High prices and restrictive development policies put the squeeze on economic growth as existing infrastructure fails to cope with additional demand - local businesses feel the pain as costs inevitably rise - and workers face restrictions on where they are able to move in order to advance their employment ‘career’ – all of which paint just a small fragment of the problem.

A recent study was conducted in London where residents have been forced out due to ‘shockingly high’ accommodation costs resulting in skills shortages with larger companies such as Vodafone who are finding it hard to source staff.  Considering 50 per cent of prime London real estate – the capital of a debt laden struggling economy - is foreign owned it’s scant surprise.

However, we face similar issues here – low vacancy rates, inflated yields, and reports that students are facing periods of homelessness during their studies are shameful. Not to mention the impact foreign investment has on our shores with recent analysis from Citigroup demonstrating the large impact Chinese immigration is having on Australian property values.

Whilst those who purchased early in the 2000’s have seen their assets ‘boom’ the consequences have forced a social divide as those priced out are forced into areas where schools, transport and local amenities have not been funded to keep up with the flood of lower and middle income households in search of affordable options.

Below is a map from the REIV which illustrates the median house price by suburb, relative to the metro median at the end of 2012 which was recorded at $555,000.

The colours coded with the darkest blue indicate house prices which are more than double the metro median, and orange - house prices more than 25% below the metro median.  The white spaces are areas for which there is insufficient data, They also map very closely to the colours exhibited on recently released ABS data which ranks geographic areas across Australia in terms of their relative socio-economic advantage and disadvantage.  The point is aptly made.

map 2

Source: REIV

map 3

Source: ABS

Realistically, a well developed city, which has policies flexible enough to meet the demands of its home buying demographic, should see prices rise track the rate of inflation with growth in household incomes somewhat influential for those areas in greater demand.

Not the well spruiked figures of 9 per cent + per annum we experienced in some cities prior to the GFC – or figures outpacing both wage growth and inflation.

Across Australia, every city faces its own intrinsic economic challenges for which housing policies need to be flexible enough to adhere, local resident voices need to be heard, and councils need to have the freedom to respond.

However, if the only options we offer first home buyers are candy style incentives in a low interest rate environment which must stay at rock bottom levels in order to support the inflated levels of debt it encourages – then over the longer term – our real estate obsession from which so many feed will become a noose provoking far wider concerns.  And that’s insanity.

Catherine Cashmore

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About Catherine

Catherine Cashmore

Director

Herald Sun Pic .jpg

Catherine Cashmore has been working in the Australian real estate market for over 14 years. As a buyer advocate, she has assisted hundreds of Australian home buyers and investors to secure quality real estate for the best possible price. Originally from the UK, and having lived in the US, Catherine is a seasoned traveller who has extensive experience across a range of international real estate markets for those interested in property investment overseas.. 

As President of Australia's oldest economics organisation, Prosper Australia, Catherine is a regular and highly respected media commentator and often called upon to give guest lectures to university students (including RMIT and Sydney University) on how tax policy affects real estate, the design of cities and the economy.

She is editor of Port Philip Publishing’s 'Cycles, Trends, & Forecasts' – a publication that teaches real estate investors about the land cycle and its effects on the economy. She is author of ‘Speculative Vacancies’, the only study in the world that analyses long term vacant housing based on water usage data (Melbourne focused). As such Catherine has an in depth knowledge of the Australian real estate market, few can rival.

You can contact Catherine directly on 0458 143 089 or at cc@cashmoreco.com.au

 

 

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