Due to the increase in the cost of construction, material and a shortage of trades, properties which require a certain level of renovations are subject to bigger vendor discounts and are taking longer to transact over that of properties which have been renovated or of a newer construction.
Timing the Market
Although the property market continues to show signs of slowing down and buyers no longer sensing a fear of missing out, it’s easy to see how professional property speculators and professional economists are making waves.
There is no element of doubt that market conditions have changed significantly since 2021 and while there may be some bargains to be had, it’s worthy to note that these bargains are for a multitude of reasons, none of which apply to quality A grade properties which are to this day commanding good competition and demanding above reserve prices.
So, while it may be easy to get caught in the media tailwind and family projections around the dinner table, there is no alarm or public notification which sounds when the market has bottomed out. The reality is that once the masses have caught on that the market is again robust, it is too late as a hearsay and data lag of approximately three months will jeopardise any plans of catching the bottom of the market.
On the flip side, as many – not all properties are taking longer to sell and more pass ins at auction taking place, the time to commit to buy knowing that you have bought well and in a suburb which only a few months ago would have been out of reach is no better than now.
The time to negotiate conditions have never been better, particularly for those wanting to enter into contracts with a subject to finance or building inspection clause. With vendors now more likely to take any and potentially all conditions onboard, taking advantage of this while competition is low sounds like a reasonable time to enter the market.
Historical Downturns
According to Domain.com.au research, Australian property booms last more than three times longer than downswings. When prices fall, they typically only lose a fraction of the gains made over the upswing.
Although previous downturns have been relatively short-lived, it’s expected that the current correction will last longer as we now also contend with increasing mortgage rates, which to date have been increasing month on month since May 2022. The official cash rate is now at 1.85% with forecasts estimating that this will peak at 2.6% by the end of the year or at least until it feels that the level of inflation has been curbed.
Looking back at past downturns and if we were to take the longest and sharpest in history, we are yet to see a decline of the projected 30% some are forecasting. Some of the historic house price declines across the combined capital cities have been larger than corrections in recent years, however prices have fallen an average of 5.3% with downturns lasting on average 6 months.
In 2018/19, interest rates weren’t rising, however the property market was affected by a credit squeeze reducing borrowing capacity for buyers and in a period of weak wages growth and a soft labour market.
Fast forward to 2022 where the there is a tight labour market with unemployment at its lowest August 1974 and households also sitting on large savings accumulated from the onset of the pandemic will hopefully buffer any prolong financial burdens.
With forecasts for the cash rate ranging from the mid 2% to the early 3% range, even the best case interest rate scenario indicates that variable mortgage rates will roughly double from their current level.
For a household with a $750,000 mortgage, a cash rate of 2.5% implies a variable mortgage rate for a new buyer of 4.81%, adding around $1,011 per month to mortgage repayments relative to the record low rate setting prior to May 5. A cash rate of 3.5% would add approximately $1,477 per month to the cost of a $750,000 mortgage.
As borrowing power is eroded by higher interest rates, and rising household expenses due to inflation, it’s a reasonable expectation that further loss of momentum in housing demand will weigh on vendors and buyers but on a more positive note, it’s reported that this interest rate hiking cycle may be short and sharp, with financial markets and some economic forecasters now factoring in interest rate cuts through the second half of next year. Interestingly we also note that some of banks have now also reduced their five year fixed term rates, a sign of things to come maybe.
Insights
Brisbane also tipped into negative territory for the first time since August 2020, with values down -0.8%, while Canberra (-1.1%) and Hobart (-1.5%) were also down over the month.
Still riding the upswing (only just) is Perth (+0.2%), Adelaide (+0.4%) and Darwin (+0.5%), however most of these markets have recorded a sharp slowdown in the pace of capital gains since the first interest rate hike in May 2022.
We expect that conditions will continue to worsen as rates edge higher over the months to come with CoreLogic’s Research Director, Tim Lawless saying “Although the housing market is only three months into a decline, the national Home Value Index shows that the rate of decline is comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s.
Unit values across the combined capitals are recording smaller falls in values relative to house values, down -1.0% and -1.5 per cent in July respectively.
Auctions
While auctions remain a challenging environment, surprisingly over the last couple of weekends, some good results across Melbourne for quality properties that remain in good demand have been reported. The flavour of the month remains quality family homes in inner suburbs that offer the option of moving in without having to make significant changes to accommodation or living options and good quality properties within the selling range of $700,000 to $2,000,000 catering for first home buyers to upsizes.
The levels of properties being passed in at auction has decreased slightly for the month of August 2022 with preliminary figures returning a final clearance rate of 60.8%, the first time a clearance rate has come in above 60.0% since late May 22. Melbourne is set to host 832 auctions this week, with Sydney taking over with 859 homes scheduled to go under the hammer.
Source: CoreLogic Acution Preview
There were 2,697 reported auctions in July 2022 with 1,763 of these sold representing a clearance rate of 65.4% for the month combined.
Frankston North was the only Melbourne metro suburb with a clearance rate of 100% with 13 properties sold with the regional town of Warrnambool selling 13 properties at auction. Murrumbeena, Vermont and Mentone all led the pace with a clearance rate of above 90 per cent. Reservoir reported the highest number of auctions at 60 with a recorded clearance rate of just over 50.0%.
Property Management Update
LIFE WILL GET WARMER……
Spring is upon us. The time when we can say farewell to grey, cold and still winter months. Time to invite action, inspiration and commitments to fresh starts.
With what has been such challenging times, we are starting to see an increase in interest in the inner Melbourne and surrounding suburbs which we expect to be heightened as we head into spring.
While the number of properties available to rent has continued to shrink, there has been a small bounce in new listings. Regardless, the supply of rentals remains tight.
From the start of the pandemic, we saw an increased demand for rental properties with competition heating up especially in regional areas. This was possibly due to lockdowns and at the expense of many inner and middle areas of Melbourne.
To date we are still seeing some properties take a little longer to lease than in the past however we have recently seen a pleasant increase in demand for rentals across inner Melbourne. Though, demand has started to ease somewhat in the regional markets (that were very popular during the past few years) highlighting the shift back towards cities as life returns to somewhat normal. Despite this, rents in most inner areas of Melbourne remain lower than they were pre-pandemic.
A heightened number of potential renters continue to battle for a reduced supply of stock available for rent. While more investors will alleviate the imbalance between demand and supply over time, it seems likely that the volume of stock for rent will remain insufficient over the near-term, creating more upwards pressure on rental prices.
If you are thinking of purchasing your first investment property or adding to your existing portfolio, don’t hesitate to contact our team who can assist you though the purchase process as well as the end to end property management.
Property Purchases
The changing market conditions continue as we continue to deliver great results for our clients for both buyers advocacy and vendor advocacy services. Here are a few below:
Home Buyer Purchase – Mentone
A very excited and nervous referred client came to us wanting help with finding the right first home which would fit in with her criteria, budget and preferred location. While units are a dime a dozen in certain pockets of Mentone, this oversized and perfectly maintained 2 bedroom unit sitting on an allotment of land of over 1200m2 shared amongst only 5 other units will no doubt perform very well for our client for the years to come.
Vendor Advocacy – Hawthorn
Our client engaged us to oversee and manage the sale of the family home presented for sale for the first time in 60 years. The delicate nature of the sale meant that we had to work closely in conjunction with the selling agent to ensure a smooth process and that we obtained to best selling price for our clients. A successful outcome was achieved in tough selling conditions.
Tip Of The Month: Strata, Stratum, Company Share or Torrens
It is important to make sure you check and understand the different titles which pertain to a property as this could have significant impact on future value and also the saleability of your property.
Whether it’s a house, townhouse or unit, it pays to know which title it comes under and each come with slightly different legalities depending on which state or territory the property is in.
- Freehold title
- Strata title
- Stratum title
- Company title
Freehold title
Most standalone houses in Australia is sold under a Torrens or Freehold title, as opposed to apartments, which are sold under strata title. This means the title holder fully owns both the property and the building within the property boundaries.
Strata title
If you’re buying an apartment, villa or townhouse it will most likely be part of a strata scheme. It’s important for prospective buyers to conduct a strata search as part of their research to make sure they’re familiar with how the owners’ corporation operates and that the strata plan is being managed properly.
You’ll need to adhere to bylaws, pay regular levies for maintenance and other expenses and attend annual general meetings run by the strata management company.
Stratum title
Stratum title is a combination of stratum and company titles. An owner will hold the strata title for the portion of the land that is theirs, while a company title would cover any land that is shared, which would be part-owned by each individual in the group. Typically, this is common land such as the driveway.
Company title
Company title is less common than strata title, as most buildings have chosen to change to strata title but in some areas company title remains the norm. Owners here don’t own the title, but simply a “share” in a company that owns the title.
Because of this, company title properties often sell more slowly than strata title properties and bank will many most instances not fund these purchases.
