'Buyers are Over-bidding'

'BUYERS ARE OVER-BIDDING' 

Residential property is the hot topic throughout the free world and whilst much has been contended, like the predictions during the Pandemic, much is wrong. Selective journalism would have you believe that ALL categories of residential property is rising at a rapid rate and that is just not happening.

In a recent article in “The Conversation” authored by Peter Martin we are reminded of some truisms that go a long way to explaining a clearer picture of where we are at and, maybe, where we are heading.

Statistics show that the supply of places to live in (dwellings) has kept pace with demand but the supply of places to own has not. The 2000 Census showed that there was a 10% excess of supply in dwellings which then rose to 12% in 2016. Over the same period home ownership fell from around 71% to under 66% whilst the number of Landlords increased by 30%.

The motivating factor occurred in 1999 when the Howard Government changed the mode of calculating capital gains from inflation indexed to a straight 50%. The Baby Boomers couldn’t believe their luck to be able to claim negative geared losses in the year incurred but only have to declare 50% of the long-term options.

For most of this century international student numbers have been growing exponentially and this surge has mopped up the boom time supply – until the Pandemic.

As much as we have tried, the market has been unresponsive to rent increases of any major consequence. It is clear that, other than the household sector, the rental market is over-supplied and will remain so until student numbers revert to their original form but how far away is that.

Reverting to the headline let’s give an example of what I mean.

The numbers are indicative only of a recent sale of a family home on a standard sized allotment. The property was valued last year at $560,000 and marketing began in May 2021. I would advise the vendor “let’s add $50,000 to our original figure because of the strength of the market”. We offered the property for sale by Private Treaty in the range $600 - $660,000. One genuine enquiry, in answer to the standard question “have you interest enough to want to make an offer?”, responded with a figure of $670,000. Here was an example of a buyer over bidding beyond the quoted range. It appears that buyers of family homes are of the opinion that agents who are game enough ‘like me’ to quote a price range are prone to under-quoting and accordingly they over bid by offering in excess of the top end. The circumstances here were that an offer within the range was going to do the deal. 

In analysing the market it is clear that 3 major events have come together to create boom time conditions. Interest rates, Government incentives and the significant increase in household savings generated during the lock down periods of 2020. Lock downs are starting to slow down, Government incentives have stopped and interest rates do not have to go any lower. In the example above the movement in the market over the last 6 months is 20% but what portion of that will stop at an instant once buyers realise that they don’t have to over-bid. Even if half of it could come off it would still present vendors with satisfactory outcomes. This reversal will create a change in the attitude of sellers when they see that the prices are slipping. Suddenly supply would increase and this will match off against the undersupplied home-owner market particularly in the second time home buyer sector. 
 
The residential property markets throughout the world are in a state of high volatility driven to some extent by panic and emotion. This level of irrationality will always end in tears. Sometimes it’s better to wait awhile and let this settle. As much as buyers may still pay 10% today than they did 12 months ago that is small change in the big picture when you consider that the markets generally have done very little since the GFC.
In my previous blog I can contended that “when the yield on property exceeds the cost of borrowing then tenants become buyers.” It is cheaper to be paying off a mortgage than paying rent to a landlord. As an investment most established (not new) rental properties are no longer able to be negative geared. I currently have 4 such properties that are positively geared which means that the tenant is paying off your mortgage (based on an 80% loan at 3.2%) and you still end up with $4 - $5,000 in the bank.

Perhaps when the buyers stop over-bidding on the household sector there will be a swing over to the investment properties.