We’re in the downward phase of a typical market cycle that won’t last perpetually. The rate rise has been blamed for the lower clearance figures; however the drop in market activity has much more to do with buyer sentiment than affordability.
BY CATHERINE CASHMORE
Rate rises only have a major influence on first homebuyers who find it difficult to absorb high loan repayments. However, it’s not first homebuyers who affect clearance figures. After much activity earlier in the year, they’re no longer a major competing force in our market and they certainly aren’t prevalent in the inner and middle ring suburbs where most properties are auctioned. The average first homebuyer loan is approximately $280,000 and most are only able to purchase in outer Metropolitan areas.
However investors and second homebuyers do have an effect on clearance figures and they’re in no hurry to buy into a market that’s attracting negative press, which may indicate prices will drop.
Let’s not forget, this year has been unprecedented. We’ve had a long run out federal election with no clear outcome, resulting in a hung parliament. A Victorian state election is around the corner, which also looks set to reach another ambivalent 50/50 spit. There’s talk of a double dip recession in the United States, inflation worries surrounding the Government’s ongoing stimulus and the Aussie dollar at parity. We’re not out the woods yet, and none of this is instigating any sense of security. Considering all the above Melbourne’s market has been resoundingly resilient!
Uncertainties surrounding bank ‘regulation’ and potential stamp duty cuts are also putting the brakes on the market.
Neither party will be drawn on what they’ll do regarding stamp duty. Ted Baillieu has described it as “a very painful payment” but refused to outline any plans he may have to improve affordability. John Brumby has promised a cut for pensioners, but on the other hand cuts for anyone else were ruled out with the blank statement “we’ve got a limited pot of money”.
The market won’t move while issues like this are still on the negotiating table and none of this bodes well for vendors.
Buyers can step in and out of buying whenever they perceive conditions to be advantageous; however vendors are committed to follow through with a sales campaign once they’ ve enlisted an agent.
Therefore at present we have reduced buyer activity whilst still maintaining a high surplus of stock.
However any vendor thinking about putting their home on the market in the new year will see conditions aren’t favourable and will no doubt hold off. As the above ‘sticking points’ are resolved and buyer activity once again resumes, stock supplies will have started to decline, and we could expect to see a swing back towards a seller’s market around March or April of 2011 as demand once again outstrips supply.
Although sharp hikes in rates have an initial stagnating effect on the market, historically the effects are not felt long term. As inflation rises, property prices rise and this results in increased equity for homeowners with a greater ability to leverage into other investments. However, rates moving upwards push asset poor first homebuyers, who rely on income alone, back into the rental market – which in turn puts pressure on the limited supply of available rental accommodation and subsequently yields rise. The flow-on effect improves cash flow for investors covering higher mortgage payments, making further acquisitions appealing.
While our market and economy looks good for savers and investors who have purchased wisely and reaped the rewards, we must make it a priority to encourage and enable Gen Y to step back into the market. This can only be done if we make the move outwards a lot more appealing than it is at present. Improved transport facilities to the outer suburbs coupled with significant incentives for first homebuyers willing to commute into regional locations should be top of the list if we don’t want to end up with increased homeless issues as rents and bills rise. For those not able to move into regional areas, a much better first homebuyer savers scheme would provide a leg up and also encourage sensible saving for a credit loving generation. Our population is ageing and it should concern us all that home ownership really is just a ‘dream’ for a growing number of potential buyers.
As for investors and existing vendors – there is a brief window of opportunity to take advantage of the lacklustre sentiment surrounding the market now before it starts to take off again next year.
Catherine Cashmore is a senior property adviser and buyer advocate for JPP Buyer Advocates – the largest dedicated buyer advocacy in Melbourne. With extensive experience in all matters regarding real estate, JPP successfully purchases and negotiates over $100m worth of property each year for clients. http://www.jpp.com.au
[...] – Click here for the rest of the article (Source: API Magazine Website) [...]
Pingback by Other | Suburbs — March 7, 2011 @ 9:45 am
Hi Catherine, Now that we are in May, how do you see the market in its progression since you wrote this article? Why is it that Southern states are almost twice the stamp duty as other states, and will we see a stamp duty cut? Would you recommend a first home buyer to purchase an investment property and rent where they want to live, or purchase a home they can live in themselves? Lets disregard the advantage of FHOG for this example. Thanks.
Comment by anomynous — May 11, 2011 @ 2:33 pm
Hi – Thanks for the questions. I see the market tracking sideways at the moment, however quantity of stock outweighs quality – and this is generally what splits the market between the homes that sell, and homes that linger (until they are withdrawn or vendor expectation reduces.) There was 8.7% growth between the first quarter of 2010 and the first quarter of 2011 and by the end of the year I expect the top third of suburbs in Melbourne to appreciate at a similar level.
Clearance rates have been in the 60’s but sales still consistently over 1000 per week (according to the REIV.) These numbers are down about 15% from the unsustainable levels of 2010 but only about 8% down on 2009. The difficult question to answer is ‘what is this going to do to price?’ On many occasions turnover numbers give a good indication of how strong the market will grow. With sales numbers down on the last two years, and the population continuing to grow, tremendous pressure will be put on tenants paying rent – and with lower than expected growth, landlords will be looking for a return on investment.
However although sentiment is cautious – (and rightly so, it pays no one well to see unsustainable growth figures – the best market is one in which both lenders and buyers factor in sensible budget restrictions) – the real growth this year will be seen in those properties that market well to ‘owner occupiers’. There have been more than 20,000 high-rise apartments approved in Melbourne over the past two years, however these types of dwellings do not attract buyers, and neither are they targeted towards the buying market – they generally accommodate student renters, and therefore make poor investments from a growth perspective. For buyers that want to get the most out of current market conditions, it’s important to tick the ‘three p’s’ – Price, Position and Potential. Buying well is an art in any market – and even more so in a flat market simply because it’s a ‘negotiators playing field’
The “price bubble” argument cannot be sustained whilst we have inordinate population growth squeezing into our metropolitan areas. Therefore as a first home buyer and investor, my advice would be to purchase in an area where you can afford to buy a property that will hold attraction over the long term – remember, it’s owner occupiers that push growth, so purchasing with this in mind is important. Obviously purchasing an apartment in an inner city ring suburb (5-15km from the CBD) will hold potential to provide better growth than an apartment in a middle ring suburb (say 15-25km from the CBD) However, if all you’re able to afford in an inner city ring suburb is a small ‘rabbit boxed’ size dwelling with no off street parking, or one of 100 or so others in the same street, it’s better to move out 3 or 4 suburbs out, so you can tick the essential boxes and own a property that has the potential to attract competition in any market (both soft and hot). If you want to live in Hawthorn, but can’t afford to buy there, then as you suggest, renting where you want to live, and purchasing an investment property, is a good way to get a foot onto the property ladder.
As far as stamp duty is concerned, as a first home buyer, if you settle on or after July 1 2011, you’ll be eligible for a 20% reduction in stamp duty. Why is our stamp duty so high? It makes the Victorian Government a lot of money!
I hope this helps you a little
Catherine
Comment by Catherine Cashmore — May 12, 2011 @ 10:43 am