Overspending on real estate is a temptation often hard to resist. It’s not an emotion restricted to houses, however as property is often the most expensive purchase most make in a lifetime – usually with the intention of making a profit from the proceeds – it’s a serious enough ‘habit’ to ponder the psychology behind it.
BY CATHERINE CASHMORE
This past week, the media has widely publicised RPData’s research, ‘revealing’ that homeowners experiencing negative equity rose to 6.11 per cent in December 2011, compared to the previous quarter which came in at 4.9 per cent.
The report measures ‘base line’ equity – so in other words, it doesn’t take into account debt levels which are based on individual circumstance and correctly observes most owners are covering interest payments on their home loans, as well as down paying the principal. It simply assesses the difference between what your home was worth then and what it’s worth now. A full breakdown of how RPData collate the information is described on their website and to give them their dues, they lead the way in such technology, taking into account not only location and property type, but also basic attributes of each listing such as number of bedrooms. However while this is valuable – especially when analysing broad market movements – it can’t accurately assess why two properties, with similar attributes including land size and location, may differ quite considerably in their sale price – did one owner overpay? To answer this, a physical inspection and subsequent assessment is needed.
RPData use an ‘automated valuation model’ which they’ve assessed – through ‘blind tests’ – to be “within plus or minus 15 percent of the actual sale price”. However while automated models are gaining traction as a credible tool even among time poor (and arguably underpaid) valuers, they simply can’t be relied on for an assumption of current market value, when the majority of Australia’s real estate market is made up of ‘homebuyers’ whose individual circumstance and needs are subject to ‘attributes’ that can only be assessed physically.
Last year the national capital city median dropped 5.5 per cent (RPData), which is a big enough drop to instigate a degree of concern. Yet RPData reveal that in assessing the disparity between the previous sale price of a home and its current market value, they can be anywhere up to 15 per cent ‘inaccurate’. Even if we’re generous and assume properties entered into their system fall closer to the mark, being just 10 per cent or maybe even five per cent out in terms of real selling price, it’s not a good enough analysis to make an assumption of the exact number of properties in negative equity – which is precisely what RPData have done. When valuing a home, certain aspects can’t be ascertained by an automated valuation model. These include physical condition of the property, the ‘feel’ of space, natural light and most importantly, the ‘emotional appeal’ unique to each homebuyer. All of these you can only assess via a physical inspection and yet all bare a significant impact on the final sales price.
Our lives are ruled by automated systems that churn out statistics which affect not only commodity prices, interest rates, market sentiment, but also bare an increasingly controlling effect on our society and the decisions we make for ourselves and our family.
We’ve had a year during which on paper the economy looks remarkably ‘okay’. Market sentiment has been blamed for the housing downturn, however large numbers of small businesses are struggling – numbers which are somehow ‘missed’ in various statistical models or eclipsed by the mining boom. This isn’t to dismiss the importance of transparent data, I’m simply drawing a line between where this data is useful and where it becomes an unnecessary, inaccurate intrusion, affecting the paths we take.
Property is an emotional purchase where beauty is commonly in the eye of the beholder. Spend enough time assessing a location, walking through open homes, attending auctions, gaining access to accurate sales data, understanding the demographics of the area and what may drive one property to sell higher than another and you’ll get easily within five percent accuracy on a property’s sales price 95 per cent of the time – something an ‘automated model’ can’t independently achieve. What a house may be worth to one buyer isn’t an indication of what it’s worth to another.
So are we really looking at 6.11 per cent of homes in negative equity? Well considering we’ve just been through a year where turnover has been at its lowest level for a decade and a drop in median value which has – in some areas and suburbs – eclipsed 10 or even 15 per cent, there’s no doubt those who purchased some three years ago at the peak of the market will be wondering if they didn’t overpay comparatively to today’s prices.
Additionally there are always those who didn’t research the market closely enough before jumping in, got carried away at auction and arguably overpaid. I see this often enough to genuinely believe that every homebuyer should be diligent enough to get qualified independent advice prior to purchasing.
Other concerns on price paid include the number of ‘off the plan’ sales which are fast rising in number. Trying to value an unfinished product considering the temporary oversupply that’s currently being erected in the form of high-rise apartments, is hard at the best of times – therefore in answer to the question above, we can assume there’s certainly a ‘number’ of properties that are currently experiencing negative equity.
The report suggests there are some – albeit one per cent – who have owned their homes for over 10 years that are looking at lower values. I would find this hard to perceive in any capital city area unless we’re assessing a location affected by floods or a regional location; the exact breakdown of these results would need to be assessed further to draw conclusion.
Therefore in short, yes, there are homeowners who may be suffering a temporary period of negative equity, but to assess ‘how’ many is quite simply impossible outside of a broad estimation.
Aside from what I’d assess to be a report that’s more of an assumption than accurate representation, there’s a tendency to overpay for real estate, which resides deeply in every homebuyer’s psychological makeup. I’ve worked with many investors and owner-occupiers with budgets ranging from $300,000 to in excess of four million dollars. Without fail, all desire one step more than they can reasonably afford and the more money they have to play with, the more grandiose expectations become. You can somewhat understand it when dealing with a first homebuyer or a family who need a house but can only extend to a unit. Genuinely ‘needing’ more than the budget can afford is a frustrating haphazard of a rising population. However it’s a little harder to relate to at the other extreme and no better is it demonstrated than in those who commonly have the purchasing power to own modern man’s equivalent of the ancient castle. This is also the demographic most likely to experience negative equity when trying to sell in a downward cyclical phase.
Since history began, housing has been an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for. Land was – and has always been – the ultimate symbol of power and wealth and owning it often holds more significance for the vendor than can be assessed in monitory value alone. In this instance, it’s not so much about need for shelter, but the desire to exhibit status. The higher the price paid, the greater the risk involved. For example, head out to the suburbs surrounding the capital, which fall into the highest median price bracket, with large land sizes complete with McMansions – suburbs such as ‘Toorak’ in Melbourne and Point Piper in Sydney – and the buyer market diminishes considerably. The further away from the ‘median’ price bracket you get, the more volatility experienced. Supply verses demand is what fundamentally drives market activity, therefore the less demand you have, the less opportunity for price appreciation. In a downward cycle, multi-million dollar real estate will be forced to drop further in price in order to sell. Therefore if you’re a bargain hunter, pick the right time – and this isn’t a bad place to start! Once the cycle turns, these areas will recapture the greatest gains in median value and make a tidy profit for the astute buyer who ‘timed the market’.
Meanwhile to each and every homebuyer, considering we haven’t experienced anything near to a 40 per cent drop in median value as exhibited in areas of the USA and strong indications suggest we’re unlikely to for some time to come, you can assume any talk of negative equity affecting your property is consequential of what a computer has assessed, not a home buyer. Once computers get to the level demonstrated in the film ‘I, Robot’ I’ll take a little more notice.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. She is Channel Ten’s property expert on ‘The Circle’ and a senior consultant for National Property Buyers servicing the needs – Australia wide – for homebuyers and investors.