Property market interview - TV9 Finance Weekly

I was recently interviewed by TV9 for their Finance Weekly spot with Brenda Lee. In this interview I cover a wide raft of property market related issues: 

• Property prices, are prices becoming unaffordable?
• International property trends vs NZ  
• Forecast for the next 6 months - will the market continue to see prices rise?
• Houses not unaffordable - we don't pay ourselves enough
• Struggle for first home owners - plea for baby boomers to release equity to assist first home buyers
• The auction selling process

Gap between asking price and sales price narrows further

It is interesting to compare the expectation of property prices to that of actual sales prices, as in theory it provides a guide as to the state of the market. The closer aligned they are the more realistic are seller expectations, a situation more common in a rising property market. Conversely the more divergent, the more out-of-touch are the sellers’ expectations, usually as a consequence of a falling market.   

Today’s market is certainly not falling (well not at the moment) and presented below is the trending chart of asking prices and sales prices for the past 6 years covering this important period from just before the property crash, right up to date – May 2013.

It is only in the past 6 months that the divergence between asking price and sales price when seen on a 6 month moving average basis has reduced to below 10%, a level it passed through in 2008 on the way down to a gap of 15%.

Across New Zealand the stratified median sales price for property rose again in May to $415,325. That places the median price of property across the country some 9% above the peak of the property market pre-global financial crisis back 6 years ago in Nov 2007. These figures are taken from the REINZ stratified house price index, in my opinion the most reliable indicator of house prices. However when viewed against the bottom of the market in January 2009 the market is up 23%.

At the same time the asking price for NZ property has risen in May to a new record level of $454,795 based on the data collected by Realestate.co.nz in their NZ Property Report. This record high is up 7% from the peak of the market pre-global financial crisis back in January 2008. When measured against the bottom of the market in November 2008 the asking price expectation has risen a more modest 14% over the period.

Auckland Property Market

In the Auckland market the gap between asking price and sales price is much closer than across the whole of NZ. It is now back with sales price within 5% of the asking price on a 6 month moving average basis. A significant tightening as compared to the 15% gap back in early 2009.

The stratified median sales price for property in Auckland rose again in May breaking through the ceiling of $600,000 for only the second time. That places the median price of Auckland property some 19% above the peak of the property market pre-global financial crisis back 6 years ago in July 2007. However what is somewhat more alarming is the fact that since the bottom of the property market in Auckland in November 2008 the stratified median sales price has risen by 39%. 

At the same time the asking price for Auckland homes has risen to see in May a new record level of $631,656 based on the data collected by Realestate.co.nz in their NZ Property Report. This record high is up 16.5% from the peak of the market pre-global financial crisis back in January 2008. Since the low point in asking price of October 2008 the mean asking price has risen by 26% to the new high of $607,600.

As to the future, the analysis of the past shows that on the way down as we can see in 2008 the asking price lead the change to reverse the decline as vendors started to establish a base of asking price expectation which at the bottom of the market was met by demand and that began to fuel a rise in sales price. This time around we will need to watch for a turn in sales price as this will lead the asking price trend by at least 3 months.

Asian interest in NZ property is strong

The latest survey carried out by the BNZ through the real estate industry into the proportion of sales being made to overseas buyers shines a powerful light on Australians as the number one overseas buyer group. The survey found that Australians are the biggest single group of overseas buyers with 22% of all property purchases by foreigners. Chinese are second at 20% and British at 13%.

However there is further insight to be gained on this subject from within Asia through the real estate websites in the region who carry out their own surveys.

One such website group is PropertyGuru which is Asia’s leading online property group and operates in Singapore, Malaysia, Indonesia and Thailand. The company undertakes regular property sentiment surveys, the most recent of which is the Property Affordability Index for Q2 2013 which provides a benchmark for property affordability in PropertyGuru’s four key markets. The survey takes into account survey measurements for overall satisfaction, future price perceptions and intention to purchase property as well as perceived government effort. The survey also identifies interest in overseas investment sentiment based on the 1,282 respondents to the survey who indicated intention to purchase overseas properties in the next six months. This interest is especially strong for Australian properties amidst growing concern over expensive domestic property prices in Singapore, Malaysia, Thailand and Indonesia. The survey also includes questions in regard to New Zealand property investing.

The trend to invest in NZ is not as strong as that of investing in Australia, but there is still demand especially from Malaysia and Singapore. Out of all respondents from Malaysia and Singapore who are looking overseas to invest, 1 in 5 have indicated that they are looking to NZ.

In terms of ranking, Singaporeans rank NZ in 5th place after the perennially favourite markets of UK and Australia and the recently booming property markets of Thailand and Malaysia.

In the case of Malaysia, NZ was placed fourth after Australia, UK and the neighbouring Singapore.

For Thailand and Indonesia investors are far more focused on investing within the South-East Asia region before considering NZ or Australia.

The commentary to the report indicated that demand for overseas investing is also driven largely by growing dissatisfaction about real estate in each of the local markets. In particular, 3 out of 4 respondents have highlighted overpriced properties and an expectation of further property price increases as the main reason that fuels interest in overseas investments. The exception is in Singapore, where despite prices for all property types are seen as costly, 40% of Singaporeans do not anticipate a further increase within the next 6 months as a result of the introduction of government policies on property in the country in Jan 2013.

Steve Melhuish, CEO of PropertyGuru Group “As South-East Asia becoming more affluent, increased property buying, selling and investing will inevitably drive property prices up and creates a ripple effect where investors will set their sights beyond their borders for cheaper alternatives”

PropertyGuru developed and started tracking the Property Affordability Index in 2010. In collaboration with Added Value-Saffron Hill, a Singapore based independent professional research agency, the quarterly survey aims to provide insights into the local property market through the consumers’ perspective and shed light into how property trends affect their property decisions over time. These perspectives are based on a representative sample of 4,062 online respondents aged 21-69 across Malaysia, Indonesia, Singapore and Thailand who are influencers or decision makers on property.

Auctions are getting out of control in Auckland

The latest data from the May property market as reported by REINZ states that of all sales in Auckland; 38% “went under the hammer” – up from 28% a year ago, outside of Auckland auctions are also on the rise albeit off a smaller base up from 7% of all sales a year ago to 9% in May.

The comments within the real estate industry as expressed by Harcourts Northern regional manager support these rises saying “Sellers are wising up on the benefits of auctions – higher prices with less fuss”! She went on to say “sales by auctions had shorter and more thorough marketing campaigns that limited ‘stress periods’ for vendors”

Sounds perfect – less stress, less fuss, higher prices!

The fact is, not only are auctions becoming more the norm, they are also being compressed into a shorter marketing period, which in my view is dumb and somewhat illogical.

Take the data for today (13th June) – in Auckland 185 new properties came onto the market. A pretty normal day, although Thursday’s tend to be busier (a hangover from the days when this is when the property magazines used to publish the weekly selection). Of these 185 properties; 98 (53%) were auctions, with 28% being marketed with a price and the balance for sale ‘By Negotiation’.

More than half of all new listings today are being marketed by the auction method of sale.

However when analysing the auction date for all of the 98 auctions, what I found even more alarming is that nearly two thirds of those new auction listings have an auction date of 3 week or less from today. A staggering 1 in 12 have an auction date before the end of June, with one providing only 9 working days between listing and auction.

Making the process of selling your house a rushed and truncated process is sure to do one thing – spook buyers.

Buyers who are already pulling their hair out trying to bid on houses with so little time to do undertake due diligence. As to the claim made by Harcourts Northern regional manager of ‘higher prices’. This is a claim that can never be truly substantiated, there is never a ‘control’ benchmark for houses; they are all unique in form, location and circumstances; measuring against CV is misleading as that is proven to be a poor benchmark.

So real estate agents who are paid a commission by sellers and who have the sole interests of sellers at heart, are constantly pushing auctions. Nowadays as the supply constraints grow larger these agents are choosing to recommend shortening the selling period. In my view this can only drive more potential bidders / buyers from the market, rather than as they hope, bring more buyers together to bid up the price.

Just imagine this scenario played out by an Auckland couple who are in the market ready to buy.

This young couple have been looking at buying a house for over 6 months, they constantly hear tales of super-heated property market and having already lost out on an auction or two already, stress levels are high! They get an email alert today for a property which meets their criteria. They review and decide to view at the weekend, they can’t do Saturday as they are away, so they attend on Sunday. They like the property a lot, but the auction is on the 3rd July, just 13 working days away. Now normally they would go back to view again the property on the second weekend before deciding if they are keen, but they realize the urgency. So they talk to their bank next Tuesday who show support for the price they think they can bid to, however the bank tells they will need a registered valuation.

The couple pause – they don’t want to spend another $600 for a valuation – after all they have only seen the property for 12 minutes so far!

They decide to wait until a second viewing at the weekend which goes well; so on Monday 24th June they decide to get a valuation. The valuer though says he cannot fit them in until Friday the 28th (just 3 working days from the auction). The next question is should they do a building inspection? – left with just 6 working days they decide to forgoe this, although they do request a LIM through their lawyer.

Days go by and the weekend of the 29th / 30th lets them see the property a third time, but with no real idea of the condition or what the valuer says he will value it at. By Monday pulling their hair out and loosing sleep, the valuer delivers the valuation placing the property at a value just below the level they had hoped based on their loan to value ratio. However all is not lost. One of the parents has said that if they needed they would lend them $30,000 to help if they needed it. They call up on Monday night to literally plead for help, however the access to the money is not available due to the money being on a term deposit. Whilst they could have bid at the auction and as they find out later with that $30,000 they would have been able to buy the property; they just gave up - totally frustrated on Wednesday night, instead of celebrating their new home, they drown their sorrows, vowing to give up on buying a house - they have a guts full!

(Note this is a scenario of a couple who are renting and don’t have a place to sell, just imagine the compounding issues if they had that property to sell, scraping together the cash deposit and then the panic about selling their own house).

So another prospective buyer fails to present themselves to the seller, unbeknownst to the agent. How many buyers are being squeezed out of the market by such circumstances? Equally how many buyers are buying without due diligence? This could be a dangerous long-term issue especially if there tuen out to be structural issues with the house.

Agents may well like short notice auctions. They may well get a sale and thereby service the vendor in a shorter period (this is clearly their idea of reducing 'stress') it certainly meets their needs as they get paid sooner with less work. Let's not forget that an auction requires less work by the selling agent around the process of facilitation and negotiation, the auctioneer actually does the negotiation at the auction.

Finally what about that claim about auctions provide 'more thorough marketing campaigns'? Auction marketing is no different to any other form of property marketing, except for the date of sale and the word ‘auction’ in the marketing material and of course the cost of the auctioneer. Properties all get loaded onto Trade Me and Realestate.co.nz in the same way and promoted online the same way regardless of the chosen form of sale. Arguably and perversely the shorter auction period is further reducing the relevancy of print advertising, as lead-times for print are measured in days rather than the seconds it takes to get a property online.

Auctions are undoubtedly the favoured method of sale by agents, this they detail to vendors citing the data of 38% of all Auckland sales being by auction, but beware of these number as sometimes what is reported as an auction was not a true auction sale. However the vendors should be more wary; they actually end up undertaking a sub-optimal marketing of their property by going for an auction or worse a short notice auction. They may actually end up eliminating buyers and thereby reduce demand for their house.

The underlying problem is that this situation in today's market not become transparent as due tot he current demand as long as they get just 2 bidders at the auction the property may well sell; but the question has to be asked, was money left on the table?

In my view marketing a property needs to be focused process undertaken with consideration. It should be undertaken with an appropriate period of time. Sufficient enough to allow prospective buyers to satisfy themselves of the property, undertake due diligence and approach the sale in a clear-headed manner. That period is probably between 3 and 4 weeks. I think a fixed date of sale is appropriate in fact I think there should almost be a sell-by-date. I favour tenders as a method of sale - it achieves the same outcome as an auction without all the hype, razzmatazz and undue very public pressure!  

Whilst on this topic it is relevant to reference the analysis undertaken by highly regarded ecomomists and authors of Freakonomics Stephen Dubner and Steven Levitt who, when analysing the sales of agents homes in the US (as the video below shows) and found that agents marketed their homes for longer; 10 days longer than their clients' homes, and they ended up getting a better price. Makes you think!

The 6 steps to selling your house

It almost seems too logical to write an insight into the process of selling your house, but sometimes it is valuable to spell out the steps in detail, after all real estate transaction is a process and in my view there are 6 main parts to this process.

1. Preparation

Selling a home is a major undertaking, doing it yourself or through an agent you need to think it through carefully. Is this the right time to move? It will take a fair amount of your time and focus for what could be a month or two or more. Selling for most people is alos at the same time associated with buying, as you are generally looking to move to a new home from your current home. Buying takes time too. So don’t underestimate the total time commitment.

Preparation is also about getting to understand the property market. Spend some time preparing yourself by visiting open homes in the area that are similar. Look to see how your house compares. Find out what these houses sell for, go to the auction or speak to a local agent. Be better informed.

Make sure you have discussed your financial situation with your bank or financial advisor so you are clear as to how much you can borrow based on your anticipated selling price.

2. Presentation

Selling a home is a task that requires you to present your property in the most appealing way to appeal to the widest audience. Make sure the house is clean, clear and everything works. Make it look its best.

When it is looking at its best get a professional photographer in to create an extensive portfolio of photos – get a wide selection from which to choose around a final set of 20 photos. A professionally photographed house is one of the most important things to do tin selling your house. It is in my estimation one of the most overlooked or "handed-off" tasks. It is madness not to invest in quality professional photography. It may cost you $500 but that amount will pale into insignificance in the context of how much the house is worth or how much you might spend on an agent, legal fees or marketing costs.

3. Marketing

The marketing of property today has become a whole lot simpler than it was a decade ago. Simply put the decisions about property marketing start online and then moves to decisions of additional media only after the main online campaign is set up and running.

Trade Me has to be the #1 focus. Choose the best 20 photos and select them in an order that tells a story and leads a prospective buyer virtually from the outside of the front of the house, through the house, finishing in the garden. It is so important for the first photo to be of the outside front of the house. The term “kerb appeal” is so relevant to the physchology of how prospective buyers see a house and creating that impression online is so important. The first photo appears in all search results and email alerts and marketing communication it is the image that will either attract or turn-off prospective buyers. If it fails to capture the interest in a search result everything else you do is lost as the buyers will never see the other 19 photos and inherent appeal of the house.

The fact is the online listing of a property for sale is all about images, as recent research has shown the key is the photos, the description is of lesser importance.

In terms of written information the best advice is to keep it short and highlight the benefits of the property rather than reiterate the features which are potentially self-evident or else already detailed on the listing. By this I mean don’t talk about '3 bedrooms, 2 of which with ensuites', describe the benefit of the ‘master bedroom with ensuite and dressing room is set apart from the other bedrooms providing privacy’. Talk about the convenience of local shops and public transport which is only 3 minutes walk, rather than blandly say “set in this beautiful suburb".

Having set up the listing, the next stage is to actively promote it. Marketing is all about capturing attention and this is where money is well spent. Go for a feature listing to place it in the top section of search results and also look to splash out on a super feature to really make sure your property gets more views than others. It’s a competitive world online and you need to be seen to capture interest and these promotion campaigns generally double or more the number of views – that does not mean it doubles the number of buyers but every bit of exposure helps.

All of the above online promotion and listing should apply to Realestate.co.nz if your property is listed with an agent, these two websites and their respective apps should be your primary thought when it comes to marketing your property.

As to other media devices. Well a ‘For Sale” sign still has some merit, although in today’s world less relevance as people are less taken to drive around a neighbourhood – the web is the most efficient means of search and so much cheaper. Print advertising in newspapers and magazines might make you feel good to see your house beautifully presented in glossy colour, but you have to ask yourself “who is going to see it, and are they not as likely to see it online?” There is no doubt that property supplements in newspapers and property magazines get viewed, but given their focus on real estate companies sequentially branded pages they are not the choice of serious property hunters. My advice – spend the money online and then, decide if you want to spend almost the same amount again for a print advert!

4. Facilitation

This is the part of selling a house which gets to test the capability of the selling agent. Houses seldom sell themselves without the necessary follow up by an agent to those prospective buyers who have shown interest by contacting the agent or visiting the open home. This persistent follow up and seeking out of information is where the value in an agent really shows through. They do this work day in – day out and know how to look for the signs of interest and to be subtly persuasive. They know how to keep buyers interested and get them to visit again.

Most of all what they are good at is getting buyers to commit – that first critical step of making an offer. They know the contract and terms to steer that would-be buyer to make the initial offer.

5. Negotiation

This is the challenging part. The agent representing the vendor is seeking a favourable outcome, one where the vendors’ interests are paramount. The buyer is generally cautious and seeking their best interest. The value in the agent is to maintain the buyer commitment to the purchase of the property whilst negotiating the best terms that meet the vendors’ requirement. The agent is adept at knowing when to ease off and when to quicken the pace and move things along.

6. The Close

Whilst the close is a natural consequence of the negotiation the ability to close a deal is probably the most important capability of any salesperson and when it comes to property transactions this skill is ever more important. The whole process of property buying is emotionally draining and challenging but at the end of the day the vendor wants to sell and ideally the buyer wants to buy, but you cannot simply assume that the contract will be signed. The close, as with all good selling techniques will utilise a myriad of options all seeking to get that agreement for both parties to sign.

From the signed agreement, so starts the legal process of completion and settlement, not a time to sit back and assume everything will complete satisfactorily and it is likely your agent will be diligent to see all components are taken care of right until the date of moving and the handing over of keys. 

If you are about to sell - good luck. My advice is get involved, even if you are using a agent take control - especially when it comes to marketing. It is likely int his day and age that you have bought and sold more household items on Trade Me than will have an agent and this actually is a skill you probably didn't realise you had, so use it. 

Auckland inventory levels plummet

It may be hard to believe but a year ago there were 11,272 properties on the market for sale across Auckland. At that time an average of 2,000 properties a month were sold across the region. Leap back to the current time - May 2103 and there are now just 7,557 properties on the market across Auckland, a drop of nearly a third in just 12 months. Over the same period sales have risen over 20% on a moving average to around 2,500 per month.

Auckland is very nearly running out of properties to sell.

Based on the seasonally adjusted sales matched to available inventory if no new property came onto the market, the Auckland property market would stall, with the very last property being sold on 23rd August, just 12 weeks away!

Now this is a hypothetical calculation but for context look at the Auckland property market over the past 5 years as seen in the chart below tracking sales on a 12 month moving average and the representation of inventory using the Property Dashboard from that time.

Five years ago in April 2008 you couldn’t give property away! – there were 18,266 properties on the market, which is virtually two and a half times as many as there are today. That total at the time represented over 60 weeks of equivalent sales. From 60 weeks to 12 weeks in 5 years, how the property market has shown its cyclical nature!

Whilst this is the current picture, the real question looking forward is – when will things improve?

By the nature of cycles they do self-correct and tend to overcompensate, so at some stage the Auckland market will move out of being a sellers’ market. However don’t wait for this flush of new building (estimated at 30,000+ over 3 years) to ease the problem, the issues are more immediate, new builds take 12 to 18 months before they appear in inventory in a best case situation.

The picture tracking new listings and sales looks pretty dire as the chart below shows – sales are growing at a year-on-year rate of 20% whilst listings are falling on a comparable year-on-year rate of over 25% and actually getting worse!

This decline in listings is actually the result of the low inventory in what is becoming in my opinion a downward spiral. Property owners, ready to sell, know full well now that property sells quickly in this sellers' market, yet at the same time they also know that such a tight market with rising prices means that they are being held back from selling because they fear not being able to buy.

This problem is also potentially being exacerbated by the focus on auctions as the predominant  method of sale. Whilst auctions might well favours sellers, they do not suit buyers who themselves need to sell their house in order to complete the desire transaction.These buyer/sellers' therefore are cautious about making unconditional offers and finding the necessary 10% deposit when there own house is not sold, or even on the market.

How to unblock this log-jam? 

This situation could be alleviated by agents moving away from auction as the preferred method of sale. Not a likely scenario as it is their own favoured method. What is more likely to happen is that at some point, and in my view we have reached this point within the inner ring of Auckland suburbs, auctions will start to falter, resulting on property moving to ‘sale by negotiation’ which then suits conditional offers thereby allowing those buyers to then put their house on the market and create some liquidity in the market.

What we have witnessed in the Auckland property market over the past 18 months to 2 years has been a kind of tidal wave of property activity and increasing prices which started in the top suburbs, the inner ring of city suburbs and is moving out to the outer suburbs now. This tidal wave heightens demand and sales volumes which sucks up inventory driving prices, before we see this situation self-correcting as property sales stall and inventory rebalancing.

Data for this analysis is supplied from the Realestate.co.nz NZ Property Report

Auctions causing buyer frustrations – I blame technology!

As someone who has spent over 7 years advocating the adoption of technology by the real estate industry in NZ, I must now adjust my position and state that I believe that it is technology that is frustrating buyers in the stressed Auckland property market.

The stories have become so commonplace that I sense we feel like we have almost been with these buyers in some vicarious way at their endless frustrating auction.

The young couple with the necessary deposit and pre-approved mortgage eagerly awaits the auction of their chosen dream home. The research tells them that the property is within their means with a maximum budget of $475,000, the property has a CV of $410,000 and the agents tells them that at their budget they should certainly be bidding. However the bidding exceeds their budget with the property selling for $585,000.

So what’s going wrong and why blame technology?

Simply put the web is the first and only place people look for property. It’s logical, buyers love the ability to search around their chosen parameters of location, size and price. However the greatest attribute of the search process turns out to be its greatest downfall – the search range of price.

Take this scenario of our hypothetical couple – they have a budget with a max of $475,000 so on Trade Me and Realestate.co.nz they search within their chosen suburbs with the range of $400,000 to $500,00. Website have price bands of $100,000 increments (Trade Me does have $50,00 increments up to $450,000). Their dream home came up in this search because the agent had included in the property details sent to Trade Me and Realestate.co.nz a 'Non-Display" search price of $500,000. The property was being marketed as an auction and therefore the agent did not want to display a price on the website, but it is mandatory for all listings on property websites to have a search price which is not published to power the search function.

It is my view that these wide price ranges are creating a false expectation amongst buyers and potentially misleading the public. To back up this view I have done some research to test my thinking.

I took a random sample of 10 properties on the market today, all marketed as auctions in Auckland City. These properties were in suburbs such as Onehunga, Mt Wellington, Mt Roskill, Blockhouse Bay and One Tree Hill. All properties were identified through the search price range of $500,000 to $600,000 being the average property price in Auckland today. I then went about undertaking a process to identify the exact search price or search price range for each property as inputted by the listing agent. To do this you need to use the Advanced Search feature on Realestate.co.nz which allows you to specify your own chosen price range in increments of a dollar; by doing this I was able to see at what price these properties appear or disappear from results. Also for reference and a sense of benchmarking (despite my dislike for CV’s) I got the Auckland City Capital Value for each property.

The results of this analysis were very interesting. Eight of the ten properties had a single search price inputted by the agent. The search price as compared to the current CV varied widely from 3% below the CV to 47% above the CV. The average was 23% above the CV.

However the thing that was most interesting to me, and what could potentially be construed as misleading, was the way these property appeared in a wide range of search results based on price ranges. Remember all of these properties appeared in the search range $500,000 to $600,000.

Property #1 with a CV of $470,000 appeared in all 3 searches from $400,000 to $700,000 as the agent had specified a search range of $500,000 to $600,000.

Three properties (#4, #5, #7) with CV’s from $410,000 to $440,000 appeared in the range $400,000 to $500,000 – all had a search price by the agent of $500,000 so clearly the agent was indicating a sales price of over $500,000 yet if you had a budget of say $425,000 these 3 properties would appear to be within your range.

Property #6 with a CV of $620,000 appeared in the price range of $500,000 to $600,000 as the agent had chosen a search price of $600,000, yet clearly the expectation was a selling price of over $600,000.

It is clear that the current wide price range search parameters could be leading to misinterpretation by buyers. To fix it the websites concerned could offer more options with smaller price ranges, as noted Realestate.co.nz in their advanced search function does allow for individual discrete price ranges to be entered. However there is a simpler solution.

Real estate websites could make a slight adjustment to the underlying code of search results so that search increments become $99,999 instead of $100,000. This would mean that when a search is made in the range $400,000 to $500,000 it only returns property with search prices between $400,000 and $499,999, thereby ensuring that a property for which the agent has selected the search price of $500,000 will not be found in such a search. In that way technology could help home shoppers match expectation to realistic budget better.