After over 4 years of intense competition between buyers (and crazy resulting $ prices!), the Melbourne market is finally calming down.
Sellers are no longer calling all the shots – Buyers are now increasingly finding themselves in the driver’s seat.
According to CoreLogic, house values in the average Melbourne suburb have increased about 65% in the last 5 years. In English… A house that was worth about $600,000 in 2013 is now worth nearly $1,000,000. Without spending any money on renovations or extensions, that owner would be about $400,000 better off today than he/she was 5 years ago. No wonder we stress the importance of compromising expectations in order to get into the market.
House Prices are still up compared to this time last year, and we expect prices to continue to rise throughout the year (though at a significantly slower rate than seen in the last few years).
So, why then are we so confident that leverage has shifted substantially from Sellers to Buyers? Apart from anecdotal feedback from dozens of agents throughout Melbourne, and our own experience in buying and selling, the most obvious sign is Auction Clearance Rates.
A brief explanation of how Auctions work in Melbourne…
Before an auction starts, the Seller tells her Agent the minimum price she’d be willing to accept for her property (this is called the ‘Reserve’)
If the auction bidding fails to reach that minimum price, the property is ‘Passed In’
In this instance, the highest bidder is invited to negotiate 1-1 with the seller behind closed doors
If there was no bidding, or negotiations with the highest bidder don’t result in a sale, the property is usually listed for ‘Private Sale’ the following week (occasionally, the Seller withdraws the property from sale entirely)
If the auction bidding reaches the minimum price determined by the Seller, the property ‘Is on the market’ and will sell under the hammer to the highest bidder
Think about that scenario for a minute. A property will only sell at auction if a buyer is willing to pay what the seller wants; if more than one buyer is willing, then the price ends up being more than the seller wanted because the buyers compete against each other.
In recent years, auctions have often resulted in sale prices substantially higher than sellers would have accepted.
Auction Clearance Rates are determined by dividing the number of properties that sell at auction by the number of properties that go to auction. Clearance Rates above 75% mean that 3 out of 4 vendors are selling for a higher price than they would have accepted – at this rate, the market is booming. Rates between 70-75% mean the market is reasonably balanced between Sellers and Buyers. Rates below 70% mean more disappointed Sellers. And, Rates below 65% mean that 2 out of 3 vendors are ultimately selling for a lower price than they wanted – at this rate, the market is softening, competition between buyers is weaker, and those buyers who are interested in a property have solid leverage when dealing with the seller.
The above graph shows Melbourne’s monthly auction clearance rates over the last few years.
For much of 2016, competition between buyers was very high, as indicated by rates well above 75%. This continued into the early months of 2017, but then 4-5 bidders turned into 2-3, and the trend over the entire 2017 calendar year was downward. The heat gradually came out of the market, and we’re now mainly seeing 1-2 bidders at auctions, if that.
Since June 2017, more than 30% of auctions have been passed in. In 3 of the last 5 months, rates have dipped below 70%, and in 2 of the last 5 months, they’ve been at 65%. At this rate, a large proportion of auctions see no bidding.
Over the last few months, more and more properties are failing to sell at auction.
What does this mean for the average Seller over the next few months? She will have to get very good advice about the true market value of her property, then advertise a realistic price range, and ultimately set a reasonably conservative reserve price. When the market was booming, most agents would advise against selling prior to auction, but in this flatter market that’s emerging – characterised by less competition between buyers – sellers would be well-advised to seriously consider negotiating with a genuine buyer prior to auction.
What does this mean for the average Buyer? There are good buys to be had before and after auction. If the selling agent is unusually keen – calling, texting, emailing – then there’s a good chance that you’re one of the only genuine Buyers for the property. Consider making a fair offer prior to auction. Conversely, don’t be too nervous about the property passing in at auction. As we’ve written previously, post-auction buying is good buying.
The market is more skewed towards Buyers than it has been for years.
With the heat coming out of the market, both parties in negotiations are beginning to approach transactions more rationally. Advice from professionals is increasingly important. Gone are the days where buyers will casually spend an extra 5-15% on a property, confident of near-term price growth. The banks continue to tighten lending, foreign buyers have wained a bit, and investors are thinking seriously about how well property will perform compared to the last few years. There will be some good buying opportunities through 2018, particularly for savvy developers who know how to crunch their numbers and negotiate effectively.
