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Brad: Hello and welcome to another edition of Teal Talking Property, in this podcast I want to talk about the real estate market. We see that the market is still bobbing along and each week, you’ll see the auction clearance rates around the low 60% mark and I’ve mentioned some time ago, the clearance rate as not being a really indicative feel of the marketplace.
Number one, because 25% of the stock that is sold in Melbourne is by the auction system but, for some reason, the media and many analysts think that the auction clearance rate is the absolute best guide as to the performance of a marketplace. So, why do I think that it’s not the right indicator? Number one, if it is 65% clearance rate on a Saturday night, I believe that probably as much as…this is a big percentage, but as much as 40 to 50% of those auction results that are advertised as cleared, have actually passed in to either ‘no bidder’ or ‘one bidder’ and they are sold within a number of hours of the auction to that one buyer on a private sale basis. And yet, they are still treated as a clearance and the idea of a clearance rate is, if I read personally of 65% clearance rate, I’ll think, “Oh, there’s been, if you had 100 auctions, 65 of those auctions have sold with competitive bidding and they probably reached and exceeded reserves,” and that’s your mindset of what a clearance rate is. But if you were to look deeper and see that the clearance rate was actually half of that and the remainder of the 65% were sold afterwards, I think that puts a new slant on the interpretation of the phrase clearance rate.
And when you think that about 25% of the sales in the Melbourne area are by auction on a Saturday and the other 75% are sold within a week or two of auction and off the plan-sales and private sales, expressions of interest, tenders. They make up the other 75% and so that’s probably more of a guideline as to how the market is going rather than just focus entirely on the clearance rate.
So, the market is going along okay if you do use that 65% clearance rate but it’s also going along in okay fashion, as my terminology is, based on low volume and that is really what’s driving the market.
People still want to buy, there’s still a mindset out there of, “I’ve got to get involved in property.” And that’s based on, one, their need for housing, but two, still based on the Australian principle of setting yourself up for your own financial independence when you retire and not rely on a government pension. So, superannuation and investment is still a strong mindset. The sales are down. You’ve got to go back six and seven and in some suburbs, eight years to get similar volumes.
And so, we’re down and therefore the buyers are competing with the fewer houses available and there’s a little bit of upward pressure there. Where the market might get a bit more sensitive than the 1% and 2% negative results over the last quarter promoted in newspapers and on TV and on radio, where that will really hit hard, if it ever happened, was if there was a massive flood of stock come on the market and there’s not enough buyers to take up that stock. But while we have low stock levels, I think we’re going okay.
Now, you talk about the declines, the focus has been on the market going into negative territory and they talk about a 1% fall over a quarter, which, if you annualize, that is a 4% drop. Now, if your home’s worth $1 million, bearing in mind you probably paid $500,000 or $600,000 for it a number of years ago, and you talk a 4% drop on an annualized basis, so you think your home’s worth $1 million and it’s now worth $960,000, that is not a life-changing amount of money.
If it became worth $850,000, well that might be off the imaginary. “My home’s worth $1 million.” That’s what everyone would hope because it’s that psychological number. If it became worth $850,000, that would become a 15% drop and that might start to affect mindset and the amount of equity that you’ve got for what else you wanted to do, whether it be retirement, how much equity you’ve got for retirement or just what you want to do going forward.
But, bear in mind, it’s only a realizable loss if you sell and bear in mind that you probably paid $500,000 or $600,000 for that home and so it’s still a growth figure but it’s not as high a growth as what it might have been if you had sold for that imaginary $1 million.
Cost of living. We deal with cost of living in our hit pocket every single day of the week and over recent months, we’ve seen electricity prices, gas prices be a major point of relevance and it’s important to look at that in terms of a market update because, while people are shifting money out of their wallet into paying for extra electricity, petrol prices…man are they high. Everybody’s hurting at the pump at the moment with petrol prices and it doesn’t look like easing because while around the world Saudi Arabia have said they’ll increase the flow, it’s just ducks and drakes.
They play with the price of petrol, price of crude oil around the world and, you know, we’re going to be paying $1.50, $1.60, $1.70 over and coming up and recently in Europe, I was paying 2.15 euro for a litre of fuel in the middle of France to fuel up the rental car just before I handed it back.
And that equates to about $3 a litre. So you can imagine, if petrol prices were to double as they are in Europe, it’s a massive change out of how much money you’ve got left over to feed the family and have a holiday and pay for schooling and get some luxuries in life. So, the cost of living is a really crucial thing over the next 12 months and part of that will be if interest rates go up. Now, the Reserve Bank have just the other day decided they’re going to leave interest rates on hold and the market commentators have all said that it’s probably more likely to be for a longer time, maybe 12 or 18 months that interest rates will remain at the record low level of 1.5%.
And even Shane Oliver of the ANZ Bank indicated he believed the next move could well be down rather than up. But, the contradiction to that is that the banks, if there wasn’t a royal commission into the banking system right now, you might find that they would move already but they’ll probably wait for the dust to settle after the royal commission makes some appropriate moves that make them look like good people and then they will get on with…after having believed they’d provided some goodwill, with an interest rate rise. Because they’re shopping for their money in the worldwide market and that worldwide market involving Europe and Japan and America, all of those countries, the interest rates have risen.
So, Australia is competing for money in the worldwide pond of available finance and so they’ve got to pay more for their money, bring it back to Australia and so they may well have to increase rates slightly, despite the Reserve Bank holding the mandatory level at 1.5 and the probability, according to the economists of the major banking houses, may even be a drop next time rather than an increase. But the cost of a home loan, more than likely, will go up, bill rates are going up, over one, two and three-year forecasts and so the probability of a rate rise on your home loan is more likely to be than not to be.
So, petrol prices up, electricity prices up over a very cold winter here in Melbourne and, if mortgages were to rise, well that means less money available for other things around the economy. Retail shopping might get affected and your car sales might get affected, people will borrow $425,000, not borrow $450,000 as your affordability to fund the $450,000 doesn’t exist because they’re shifting money in their household budget into other things, petrol and electricity and interest rates, as I mentioned.
The banks are already affecting the marketplace in regard to their lending policies. And, so some back room deals maybe? I don’t know. From the Reserve Bank to try and quell the surging property market over 2015, 2016 and 2017. And so the banks have had a look at what their loan to value ratios have been. So, instead of getting 80% of the value of a home, if you want to buy a home, say $1 million and you wanted to borrow $700,000, that would be called a 70% loan to valuation number, $700,000 against your purchase price of $1 million. But they’ll now say to you, “Look, we’ll lend you $680,000.” So they’ll lend you 68% of the loan to value ratio against your purchase price. Well, the next thing is the valuer is a bit more conservative as he’s not sure…he or she is not sure about what’s going on in the future. And so, they come in and value the home not on the $1 million contract price but on the basis of their conservatism. And so they’ll say, “Oh, we think it’s worth $980,000.” So you’re now getting 68% of $980,000 and it works out to, call it $20,000 or $30,000 short of the $700,000 that you intended to borrow.
If you are borrowing the maximum that you can and you’ve put all your equity in to try and get to the $1 million mark, you can’t get that $20,000 or $30,000 that you’re now short by way of lower loan to value ratio and lower value. You can’t get that anywhere. And so what we’ve seen is a couple of occasions in Sunbury and Gisborne where we’ve had to renegotiate sales that had been sold subject to finance and the adjustment in price has been borne by the vendor taking a fractionally lower price to get the deal done. One occasion was where they had bought somewhere else and so they were really reliant on this sale going ahead and the people who bought had been told by the bank three months ago it was okay to go to these levels. But when they got to the bank, made their application, the bank actually changed the rules of the game. So that is something to watch going forward.
In terms of the growth across Australia, in Melbourne we saw a -0.4% growth but annually we still had growth to 3.9% and a median price of $716,000 across the metropolitan area. Sydney was down 0.3% for the quarter to June 30 and -1.6% but still had a median price for the year of $870,000. Adelaide and Hobart were the only two capital cities that had positive growth for the quarter and the standout, absolute standout and winner for the year, Hobart, with 18.3% growth and that’s now at $436,000, nearly double over probably the last 5 or 6 years in capital value.
Now, in terms of rental returns, Hobart is also 5.5%. Now, high rental returns has always been the opposite, the polar opposite of strong capital growth. Where you’re getting strong capital growth, people will accept a lower rental return. But Hobart, with 5.5% approx., gross rental yield in that capital city, also has 18.3% growth for the last year. And that’s really something I haven’t seen for a very long time where the second highest rental yield, and clearly by a long, long way, the highest capital growth, being in the one capital city is really unusual.
So let’s keep an eye on Hobart and see how it goes. But the other things to note, well, Melbourne is the lowest rental yield at about 3.5%, Sydney 3.7%. We’ll keep an eye on those going forward. Melbourne is down near the 1.7% or 1.8% vacancy factor I think and thats another thing to consider in regard to rental yields and I haven’t got the number here but I’ll make that something for next time to talk about what the vacancy factor is in Hobart as well.
In other parts of the market place, it’d be interesting to see what happens with development sites because we are seeing that it’s one thing to have a permit, it’s another thing to get it built. We’re finding that the banks’ preparedness to lend, to develop is diminishing significantly and they need a higher percentage. In some cases I’ve been told 65% to 70% of either the volume of units or the dollar amount of off the plan-sales to be in contract with 10% deposit unconditional before the banks will allow funding of the development to go ahead.
If it is an off the plan to an overseas buyer, they will only attribute 25% of the value of that sale in two terms of unit volume or dollars for your gross realization of a particular project. So it’d be really interesting to see over the next 6 to 12 months if there is a flurry of development sites where people just say, “I can’t get this built. I can’t get enough sales.” And they either bring in joint venturers and get them built or they will sacrifice the sale of the land and move it on.
With the changing marketplaces, everyone is predicting it’s tightening up a little bit. Experience counts and for years and years, our training at work has been involved in improving people’s techniques if things change and things are changing, there’s no doubt about that. On the world stage but locally, state and federal government policies, mandatory policy, anyone can swim with the tide. The tide will take you along and the great market place has dragged a lot of people along. Not only in real estate but many other businesses as well and so you’ve got to have a really good stroke to swim against the tide and we’ve worked strong in training on what a good stroke is about. What are the techniques that will survive good and bad marketplaces? People’s disciplines about doing the right things in practice, having the best software, the best social media platform. We’ve gone and delved into that and working in a market that is changing, we’ve got experience.
I’ve worked since 1974, so I’ve seen so many volatile markets, high interest rates, declining property prices, buoyant property prices, low interest rates, there’s nothing that I haven’t seen and Noel, Greg, Rodney, Bruce, Andrew and Craig Teal and in rents, Prue, Felicity and many others, they’ve all seen it before. We have many experienced people, we’ve seen multiple market places and only when it’s tested does that experience come to the fore.
And if things do, and we don’t suspect that they’re going to be as bad as what people might think, people have already planned for interest rates to rise. They’ve built buffers. They’ve changed game plans. It’s been something the Reserve Bank and the government and the media has been talking about for 12 or 18 months. So it’s no surprise that interest rates might rise. It’s no surprise that things might toughen a little bit and that little bit of headwind as I referred to. It’s all part of what Brad Teal Real Estate has seen before. We know how to react to it and that’s what we can bring to the table if you want to avail yourself of that because only when you look back do you say, “That experience was really valuable to me,” and that’s what Brad Teal Real Estate can bring to the table.
So, thank you for listening and I look forward to talking to you soon.