I bought a property at auction for a client last weekend with a simple but effective strategy – wait for it to go on the market, then bid hard.
Every property, campaign, and auction is different, so this isn’t a one-size fits all approach (i.e. I use different strategies depending on circumstances). But, I reckon the following advice is useful to non-professionals…
Auctions are designed to benefit sellers. Firstly, it’s the vendor who is calling the shots. Going into an auction, nobody knows what price the vendor wants – even the selling agent sometimes! This unknown keeps everyone interested and on edge.
Secondly, most auctions are conducted in public, in front of a large crowd. The vast majority of people attending aren’t there to bid; they’re simply looking to enjoy a show. But, serious buyers see everyone as potential opposition, and their competitive instincts go up.
Without going into 5 more reasons why auctions favor sellers, it’s all about emotion. Buyers don’t want to miss out!
So they compete with other buyers, and many bid much higher than they originally intended. What’s another thousand dollars? Five thousand? Ten thousand?! The motive can often evolve into beating the other guy instead of securing the property.
The key thing to recognize as a buyer – if the bidding doesn’t reach the reserve price, then the vendor will be forced to negotiate in a more rational environment, and that involves putting their cards on the table and ultimately saying ‘We want $X for the property’. Their proverbial pants get pulled down, ideally without a single bid being placed.
Auctioneers make a big deal of affording the highest bidder the first opportunity to negotiate with the vendor if the property passes in. Yes, this is a risk for those who don’t bid. But, a good way to alleviate this risk is to tell the agent prior to auction that you are seriously interested in purchasing the property. If it passes in, and negotiations with the highest under-bidder commence, the agent will advise the vendor that they know of another interested party who may be willing to pay more.
In this particular situation last weekend, I knew the selling agent pretty well, and was open with him immediately prior to auction, telling him that my buyer wanted to purchase the property, but I wanted it to pass in. He replied that I better be the highest bidder so that I could be the one to negotiate. But I planted the seed in his mind.
The auction started with a vendor bid of $0.900m, and after a big song and dance, someone finally put in $20k. It went back and forth slowly between 3 bidders, up to $1.116m, and then it faltered. The auctioneer pointed to me, saying ‘Andrew, you’re awfully quiet mate?! I’m sure you’re interested’. To which I replied ‘Is it on the market yet?’
That little interplay helped me enormously, because it told the vendor that I was a serious 4th bidder, interested in getting involved – but only on my own terms. If the vendor wanted the auction to continue, he had to put it on the market. If he didn’t put it on the market now, then it would most likely pass in, and the leverage would swing towards me and the other buyers during post-auction negotiations.
After another song and dance, Jack conferred with his vendor inside, and came out excitedly exclaiming that the property was on the market at $1.116m (clearly a bit lower than the vendor wanted, but it was in his interest to take advantage of the emotional environment and keep the auction going). I went straight in at $1.120m. Bidder #2 went $1.121m to which I bid straight back at $1.125m. Knocked him out of the bidding.
Going once, going twice… then bidder #3 came in at $1.126m. Me at $1.130m. Him at $1.131m. Me at $1.135m. Him at $1.136m. Me at a winning $1.140m – we secured the property under the hammer for $10k below budget.
A key part of this strategy involves bidding with authority, quickly, and without reducing your increments.
I’ve seen an auction go up over $100,000 on $1,000 bids alone. An emotional, non-professional bidder can get consumed with the thought of not losing out on a property for a measly $1,000. Never mind that the $90,000 over budget he’s already gone! And, by keeping larger increments, you give the impression that you’re capable of bidding much higher.
So, that’s a simple but effective strategy for auction bidding… 1) Tell the agent you’re seriously interested immediately prior to auction. 2) Don’t bid until it goes on the market. 3) Bid strongly without reducing increments.
If it passes in to the highest bidder, you do run the risk of missing out, but if the agent recognizes you as a genuine buyer, then he will tell his vendor about you, and will most likely come back to you later in the afternoon or early Monday.
Melbourne property prices continue to tick up. They’ve been increasing by about 10% per annum for the last 3 years.
Historically, double-digit price increases don’t tend to last more than a year or two.
Our economy isn’t exactly booming. Consumer confidence is flat. The global economy is pretty sluggish and uncertain. And the political scene leaves a bit to be desired – to say the least!!
So, why is there seemingly no end to price growth? Lack of stock.
If you’ve been looking for a home, investment, or development site, you know this. And, you’re not alone.
There simply aren’t as many properties going up for sale to satisfy demand. Lack of stock is contributing to greater competition at auction – often between frustrated and emotional buyers. And, emotional bidding leads to high $ sale results.
Try not to get frustrated buyers! Spring is upon us, and more properties are coming onto the market.
Make sure you only bid at auction with a firm maximum bid in mind. Better than that, employ a good Buyer’s Advocate to source off-market opportunities and/or negotiate a purchase for you.
Melbourne house prices have risen substantially over recent years. But property development is predominantly about future market prospects… What will these townhouses be worth once built -24 months from now??
As Real Estate Analysts, we know House Prices tend to increase in response to low and falling interest rates, and to an average Aussie Dollar. Markets respond kindly to cheap debt finance and strong demand from foreign investors (amongst other variables we monitor).
So, we’re reasonably bullish about future price growth. An important question beyond that is – How will specific market segments perform??
The most expensive, affluent suburbs generally see higher price growth in good times than other suburbs do. To illustrate this, I’ve compared how Stonnington’s Median $ House Prices have changed over time (currently $1.75m) to how Nillumbik’s have (currently $0.59m). The highs are clearly more dramatic in Stonnington.
In a rising market, I prefer to develop in premium suburbs so as to take full advantage of increasing house prices. A good example is one of my JV projects in Ivanhoe, where the current Median $ House Price is $1.32m.
My partner and I purchased in March last year for $925,000. If Median $ House Prices in Melbourne increase by 6.3% p.a. (according to RP Data – Core Logic, this is the 10-year capital city average), then, all things being equal, our block will be worth about $120,000 more over a 24-month projected timeline.
If Median $ House Prices in Ivanhoe increase by 8.5%, then we should see about $160,000 growth. That’s a difference of $40,000. And, this is in addition to the growth we’ll achieve proactively through plans and permits, and construction.
The likely future direction of the market should play a major part in determining the type of property development you pursue, and where you seek to purchase.
Before purchasing in a suburb, stop to people watch. It’s the people who live in – and want to live in – a suburb who determine property prices.
There are specific Ages to watch for when considering a suburb’s future $ price growth prospects…
This graph shows the Age of Melbourne’s population: 6% of us are 0-4 years old, 6% 5-9 years old, etc.
Coloured in blue are those ages statistically proven to drive future $ house price growth. Suburbs with a high proportion of inhabitants aged 20-44 AND a high proportion of inhabitants aged 70+ have significantly outperformed the broader Melbourne market over the last few years. We call these suburbs ‘Newly Wed & Nearly Dead’. (Not the most sensitive label, but I’m not terribly PC).
Of Melbourne’s 400+ suburbs, we’ve classified just 30 as NWND. This graph shows how $ house prices have grown in these suburbs compared to others.
Over the last 3 years, median $ house prices in NWND suburbs are up 37.7% – a full one third higher than other suburbs’ with more typical age mixes. So why on earth do these suburbs grow so much more?! It’s pretty logical when you think about it…
People aged 70+ are generally interested in down-sizing from the large (often tired, land-heavy) family homes that they’ve owned for decades. Those homes on larger blocks are often snapped up by developers, who turn one old home into multiple brand new houses/townhouses that appeal to younger buyers (aged, say 20-44) who are willing to pay a premium for modern, open plan homes.
And those properties not suitable for development are overwhelmingly purchased by ambitious, energetic young married couples who renovate/extend, and collectively contribute to suburb gentrification.
Put simply, old properties turn into new properties – where oldies sell up and young folk move in. Importantly, these type of suburbs are spread all over Melbourne, with a diverse range of $ prices.
We’ve studied all types of other demographics and socio-economics, but if you’re not into people watching, and spreadsheets of data don’t appeal, simply look for gentrification. Are there lots of new developments, renovations, and/or new builds going on? If not, pause to think about what that could mean for future $ price growth.
More properties are listed for sale in Spring than in Winter.
But serious buyers don’t generally take a ‘holiday’ from property inspections just because it’s cold outside. In fact, the need for a bigger, better home is more poignant mid-year as we’re forced to stay inside more!
So Demand from Purchasers is broadly the same in Winter as it is in Spring, but Supply of Properties for Sale is dramatically less in Winter. The result is as expected…
This graphs shows that % Auction Success Rates were significantly higher last Winter than they were last Spring. Lower Supply of properties for sale translated into less choice for buyers, and hotter competition At Auction.
As we move into Winter, buyers will inevitably get frustrated by the lack of stock available to them. But try not to make emotional purchasing decisions – in other words, don’t decide to bid higher just because of limited choice. Look rationally at the property, and know that it’s only a matter of time before other similar properties are listed for sale.
And if you’re a vendor thinking about waiting until Spring? Wake up!! Ask yourself why you wouldn’t want to list when there are fewer competing properties for sale on the market.
For what it’s worth, I always prefer to sell during Winter. It’s pretty much the only period where I strongly consider selling my development properties off-the-plan. And as a Buyers Advocate, it’s the time that I work my network the hardest for off-market and newly listed opportunities.
Negotiation is about leverage. When purchasing a property, you have the most leverage when:
- It has been on the market for a long time
- No competition exists from other buyers
The first is easy to determine, and simple to understand. Every property will sell for the right price, and properties that languish on the market are either overpriced or poorly marketed. Vendors are more willing to compromise as time goes by.
When searching for development sites, sort suitable properties from ‘Oldest to Newest’. And, before running a feasibility, speak to the selling agent to understand how the campaign has progressed: Have there been any written offers, and if yes, on what terms? What are the vendor’s circumstances? Why no sale yet?
This leads to understanding the second leverage point. Follow these basic principles:
- If the agent isn’t forthcoming with info, and isn’t asking you questions, then assume they’re pretty relaxed, and there are probably other interested parties
- If the agent is asking you questions (What type of property are you looking for? What are your pros and cons for this property? Have you been looking for a while?), then assume they’re eager for an offer, and there’s probably little active interest
- If the agent volunteers a lot of info about the campaign, the vendor, and the property, then assume that he/she is anxious, and you’re quite possibly the only real interested party
The following is a case study in how to use leverage during negotiations…
I recently purchased a development site for a client where the property had been on the market for over 6 months. The campaign started in Oct’15 (a busy selling season, where lots of properties were available) with a BIR of $1.25m-$1.4m. Given this advertised range, most buyers would consider vendor expectations around $1.5m at auction. The property Passed In on a vendor bid.
It turned into Private Sale with a BIR of $1.20m – $1.32m. Over-pricing is the kiss of death for any Melbourne campaign, and the fact that no clear asking price was provided, meant that buyers would still expect a price north of $1.3m.
I quietly tracked the campaign, and in mid-April contacted the selling agent. He immediately told me about the slope of the block, the difficulties associated with managing 3 vendors, and the recent challenges that Chinese developers face in getting funds out of China.
“OK, my client doesn’t mess around. What is the absolute minimum the vendor would likely accept?“. He felt $1.1m was the barrier in his clients’ minds.
I quickly ran a feasibility, and the numbers looked good, with Total Return on Capital well in excess of 20%. My client was very interested indeed. Now came the fun part – negotiation!
I primed the selling agent with the problems – high construction costs due to the slope of land, single driveway design (body corporate), maximum dwelling sizes of 24 squares, etc. “I’m telling you all this so that you understand our offer of $1.05m with a 90 day settlement“. This was clearly not what he wanted to hear, but we both understood I had a lot of leverage to play with – the campaign was 6 months in, without any serious interest.
He came back within 5 minutes. The vendors hoped for $1.1m-$1.15m (then why was he advertising it at $1.2m-$1.32m?!). They may consider below $1.1m but not $50,000 below. He said “maybe $1.08m would get it done…”
My client was happy with $1.08m (heck, it was a great buy at $1.1m), but I persuaded him to let me negotiate further, because this is the perverse thing – vendors need negotiations to be tough in order to feel like the highest price is achieved. We went back with $1.07m, and a few conversations later, bought it for $1.075m.
Why did we get such a good deal? Leverage. After a botched 6 month campaign, the buyer was desperate, and the selling agent even more so. Just over 2 working days following my initial enquiry, we had signed contracts at $1.075m with a 90 day settlement. I love real estate!
The number of people borrowing to purchase, build and/or renovate properties has steadily been increasing since 2012. This is a good sign for the market – increasing demand generally leads to growing property values.
But a deeper look shows some cause for concern… From late-2013 to mid-2015, Investors accounted for about 40% of all Lending Commitments (the highest on record). Sydney prices boomed in part because of this, and so did Melbourne’s to a lesser extent.
But moving into 2016, Investor activity has subsided significantly. It appears that the impact of interest rate drops in recent times has largely flowed through the system.
This graph shows the changing nature of Lending activity, and suggests an emerging shift in buyer demand. Total Lending (Owner Occupier + Investor) is still trending upwards (good!!), but Investor Lending has been decreasing as a proportion since the middle of last year, and has been falling Year-on-Year in real terms since September.
These are national figures, and won’t apply perfectly to Melbourne conditions, but they do suggest we’re moving into a more balanced market, characterised more by owner-occupier activity than by speculative investment.
Simply put, the record-breaking Investor activity seen over recent years was unsustainable. While less demand from Investors will take some heat out of the market, don’t expect prices to fall in 2016: the VIC economy is robust and less resource-dependent than others; the state unemployment rate finished 2015 below 6%, and has been gradually trending downwards since mid 2014; net interstate migration is at its highest level in decades; and foreign real estate investors continue to see Melbourne as a top destination (particularly with an AUD at about $0.70 US).
As a homebuyer bidding at auction – look around. Chances are, you’re competing against other homebuyers who have similarly benefited from recent growth in their own home, as opposed to investors playing with cheap finance. I reckon this will make for a much happier and sustainable market place.
Last year in Melbourne residential sales volumes were up, auction clearance rates were high, and house prices increased significantly.
For the first 3 quarters of the year it was most definitely a ‘sellers market’. Auction Clearance Rates hovered around 77% (even with more stock on the market in any period since 2009) and as competition amongst buyers heated up, so did sale prices. The median $ house price reached nearly $700,000 in the June Quarter, and ticked up to a record-breaking $729,500 in the following 3 months.
Come September, supply of properties for sale finally caught up with demand from buyers, and auction rates subsided gradually from 74% in September, to 70% in October, to 67% in November (when a staggering 5,700 properties were taken to auction).
In September, year-on-year price growth peaked at about 14%, then moderated through the busy Spring selling season. Dwelling values at the end of 2015 were up 11% compared to where they were in 2014. This was a great result for homeowners and investors, considering values increased in 2014 by about the same amount as well.
2016 – What to Expect
Looking to 2016, it’s impossible to ignore the heightened global economic uncertainty whirling around us (think plummeting resource prices, share market turmoil, prospects of global recession, etc.), but it’s hard to predict how this will impact the Melbourne residential real estate market beyond making everyone a bit more cautious.
A continued slowdown in China will undoubtedly affect the Australian economy, but there are different schools of thought about repercussions for foreign investment in Melbourne real estate – on one hand, fewer Chinese will have the wealth to invest, but on the other, foreign real estate investment becomes more attractive relative to Chinese domestic prospects. Time will tell.
At a national level, investment lending has eased sharply since last September. Macro-prudential initiatives from the RBA have succeeded in curbing speculative lending, and it appears that the impact of interest rate cuts in 2013 and 2014 has diminished. But while investor activity has slowed, owner-occupier lending over the last few months has increased by over 20% year-on-year. Strong demand still exists for detached dwellings in particular.
Looking closer to home, there are a number of reasons to be reasonably optimistic about Melbourne residential real estate in 2016: the VIC economy is robust and less resource-dependent than others; the state unemployment rate finished 2015 below 6%, and has been gradually trending downwards since mid 2014; net interstate migration is at its highest level in decades; and foreign real estate investors continue to see Melbourne as a top destination (particularly with an AUD at about $0.70 US).
Moving into 2016, we expect a more balanced market, characterized more by owner-occupier activity than by speculative investment. With the 3-year Sydney growth boom coming to an end, and most other states heavily reliant on a declining resources industry, Melbourne will lead the way in capital growth over the next year or two.
Some people invest in property to increase their monthly income, where others invest in property to build long-term wealth – one group looks for ‘positive cash flow properties’, the other for ‘negative geared properties’.
Put bluntly, you’re making a huge mistake if you buy an investment property for positive cash flow (where rental income is greater than mortgage payments and expenses). Don’t do it. Instead, buy an investment property that is likely to grow in value – you’ll be far better off for it.
To illustrate, we’ve looked at the historical performance of a typical Brisbane City Unit (QLD), and a Heidelberg West House (VIC) below. You could purchase either right now for about $500,000.
This first graph shows how your Brisbane Unit investment would perform over a typical 10-year period. Rental surplus (positive cash flow) plus capital growth would improve your wealth by over $200,000.
This next graph shows how you’d fare investing in a Heidelberg West House. Each year, you’re rental income would be less than your mortgage payments (shown as Rental Shortfall), but, the Capital Growth would more than make up for it. Your wealth would be improved 10 years from now by over $380,000.
These are rough figures, based on some broad generalisations, but the lesson is pretty clear: positive cash flow investments can deliver passive income streams, but over the long-term, investing for capital growth is a much better way to accumulate wealth.
Where is the Melbourne residential real estate market headed? We don’t have a crystal ball, but we do know that the Aussie Dollar will have a significant impact on future house prices. Historical analyses prove this.
The below graph shows how Median $ House Prices in Melbourne have fluctuated over the last decade and a half (the blue bar shows whether median $ prices were up or down compared to the previous year). The graph also shows how the Aussie Dollar compared to the US Dollar during this time (green line).
The GFC of late 2008 to 2009 was an unusual global event that impacted markets very differently. If we treat this period as a unique anomaly, the correlation between Median $ House Price Growth and the Aussie Dollar is pretty consistent…
When the Aussie Dollar is low and/or trending downwards, Melbourne House Prices have tended to increase. The inverse is true – when the Aussie Dollar is high and/or trending upwards, Melbourne House Prices have tended to flatten or even decrease.
The explanation is fairly straightforward. Melbourne is a world class, multi-cultural city, with great education and employment opportunities; and, the Australian economy is open to (and dependent on) foreign capital. When the Aussie Dollar is low, Melbourne Houses become more attractive to foreign property investors, because their foreign currency can buy more.
The graph below shows the Aussie Dollar falling steadily for the last 4 years. This trend suggests continued foreign property investor demand moving into 2016.
There are certainly other metrics to consider when forecasting future Melbourne House Price directions (think Standard Variable Rates, Unemployment Rates, Consumer Sentiment, etc.), but the direction of the Aussie Dollar is an important macro-economic condition that rarely gets enough attention in real estate circles. It is a metric worth watching when considering a residential property investment in Melbourne.