The hard yards: Second hand stock is booming but new sales is a different story

Hope you enjoyed the Melbourne Cup.  It signals the end of the official property year.  Time to rest until Australia Day.  What a great industry to work in; three months off at this time of year and usually two weeks over Easter too.

We work so hard.  We deserve it.  It would be even better if it wasn’t for some elephants in the room.

Hard yards

I keep on reading about how strong the residential market is.  It might be for second hand stock, but then I suspect only in certain locales and for specific price points.

But when it comes to new sales, it is still very much ‘hard yards’.  I think it will remain so – outside of Sydney – for some time to come, if not for this entire cycle.  For mine, much of Sydney’s recent momentum in their new residential market was more due to the change in NSW stamp duties and first home buyer grants than anything else.

There is very little urgency elsewhere and for good reason.  New property often does not offer value in the buyer’s eyes.  Many new projects miss the mark; there is plenty of choice and whilst net returns (rent, less maintenance and depreciation) have been pretty good for new investments in recent years, there has been very little price growth in recently built new housing.  Even in boutique projects, price growth has been lacklustre.

True, new sales have picked up since early September – but that feels like pent-up demand (as many waited until after the federal election to buy).  Looking forward, new sales will be harder – especially this summer.

Buyers are easily spooked and every new sale is hard fought.

And property reporting isn’t helping matters.

As we noted a few weeks back, there are a lot of misnomers about price growth, with new builds, renovation activity and the actual way the statistics are compiled affecting the results.

For example, do you really believe that unit prices fell by 30% in Molendinar (Gold Coast suburb) over the last year?  Molendinar is apparently the second worst ‘performing’ suburb in Australia.

But when looking at actual resales – not changes in median values – no such drop occurred.  In fact, attached property values (based on resales) actually rose by 2.1% in Molendinar over the last 12 months.  This rate of growth isn’t much to write home about, but it is world away from a 30% drop in ‘value’.

By the way, there are 864 building units in Molendinar, about a third of which are commercial premises, many semi-industrial in nature.  Several of the 50 ‘residential’ unit sales reported last year in Molendinar – as part of 30% fall in values – were actually industrial sheds and not residential property at all.

These lists are now getting out of hand.

This is the first elephant in the room.

Everyone in the industry needs to start questioning the actual data being pumped out.

But I suppose that would require a bit of property knowledge and a tad more work than regurgitating the press release.  Nearly everyone producing such lists either has an agenda or (sadly) it isn’t worth their time and effort to clean up the results.  Doing so would be counterproductive after all - as few markets actually behave so erratically and where is the fun and media release in that?

Oh, and don’t you love the reasoning real estate agents give when it comes to explaining such wild leaps and bounds.  My favourite goes something like this: “That’s because there is better value elsewhere, come look at what I have listed for sale”.

How about we start questioning these lists and those producing them much more?  I will bet you that nine out of 10 times they are incorrect and nothing like that is actually happening in those locations that seem to make the ‘hot’ or ‘crash’ lists.  Yet many novice buyers take them as gospel.

And why aren’t we making such comments in the press?  Sure, we get asked, but I always ask to see the list first.  Sadly, the data is often embargoed so we refrain from commenting.

Sniper bait

For every new sale settled, two actual sales are actually made.  Often, more work goes into the ‘sale’ that falls over than the one that sticks.  That is the nature of selling new property.  It has always been the case.

Selling something new – often off-the-plan - via a few simple tools like a building model, reports, brochure and feature board – is quite difficult.  Many buyers get cold feet, as they cannot visualise what they are actually buying.

But today there is another problem.  Seemingly solid deals are being killed by deflection.  Those doing the deflecting are often those whom buyers trust the most – their account, solicitor or even financial advisor.

Investment sellers get a bum rap.  They are the sharks in the pool.  But at least they come at you front on.  It’s the professionals – those one or two steps removed from the sales process – who have the sharpest teeth and largest appetites.  And most of the time, you don’t seem them coming.

Let’s use a recent real example to illustrate.

A young resource worker is advised by this father to stop wasting his money and invest some of it.  An appointment is made to see a financial adviser.  The advice is to buy a residential property.  A new property is found – independently by the young gun – contracts signed, deposits paid and off to the accountant the contract goes.  The accountant heavily suggests that the said investment is a poor one and that a better investment would be to buy into project X.  This advice is taken – as the accountant is trusted and it is assumed should know about such things – the first contract is ripped up and a dwelling in project X is bought.  The buyer isn’t aware of the $10,000 kickback the accountant got for the sale.

This is another – if not larger – elephant in the room.

This, of course, doesn’t apply to the vast majority of property professionals but it is happening out there.  It is very hard to make a new sale when there are so many snipers in the trees.

If we are going to have a Form 27c in Queensland, then let’s at least outline the actual firms being paid a commission and stop hiding XYZ Accountancy or ABC Solicitors under ‘marketing or advertising’.  Many buyers, sadly, don’t read the forms that they sign, but some do.

End note

I also keep reading about the big lift in new housing approvals.  Lower interest rates are working blah, blah.  Yet many of these approved projects will not eventuate.

There is heaps stacked up against new property – GST, taxes and charges, long and opaque council approval process and NIMBYism, to name just a few.

Whilst we now have an undersupply of new property, the mismatch between demand for new property and its supply isn’t anywhere as high as many economists believe.   So the usual drill of need exceeding supply won’t work this time around as well as it has in the past.

The two elephants in the room – misinformation and deflection - aren’t helping matters.  Outside of Sydney, it is going to be harder to make the new sales (that settle) that many anticipate over the next couple of years.

And it is in the country’s interest that more new homes are actually built.

Here are some facts to ponder:

• Residential construction (not approvals) adds two percentage points of GDP growth

• Every $1 spent on residential construction has generated $1.31 worth of spending elsewhere in the economy

• Every $1 million spent on residential construction generates 17 jobs on a full-time basis.

Read Michael’s Blog or follow him on Facebook and Twitter or connect via LinkedIn.