Australian property market could be in for a long-term stalemate

Australian property market could be in for a long-term stalemate
Australian property market could be in for a long-term stalemate

Now we’ve established that the spring selling season has not immediately transformed the housing market from its winter of discontent, and the barrage of "spring has sprung" headlines have once again done the rounds and subsequently been exhausted.  We can perhaps start looking at the reality that’s facing a rather sick real estate market, which needs a little more than a Paracetamol to recover from recent lows.

It’s easy to come up with excuses to explain the current malaise.  Consumer confidence is a favourite – albeit overused – term.  However, it tends to suggest the market doldrums are nothing more than a brief bout of post-winter blues that simply require a short-term prescription of Prozac to recover.

The sickbed approach to market movements always assumes healing will eventuate sooner or later and based on the well-quoted premise of historical cycles, it’s not an altogether foolish assumption.

After all, although we’re consistently told the consumer has a new aversion to debt, it doesn’t stop Australians over-spending in areas where they perceive value – areas such the recent surge in overseas travel for example, and the lending boom for new and used vehicles – both of which have been influenced by the strong Aussie dollar and recent tariff cuts.

We’re fickle creatures when it comes to finance and completely subject to our ever-changing emotions.  How we gather our perception of confidence or fear in an economy broadly dictates how we spend or save our dollars –although, as the cost of living rises, there are limitations to every budget.

But for the housing market, at the very floor of sickness, lies the fear a far more serious diagnosis could be at play.  It may not be the long-awaited Armageddon bubble pop, however over the past two to three years many vendors have experienced a slow deflating puncture of lost equity as the weakness in home loan data and lower rates of turnover continue.

Even with previous and prospected interest rate drops there’s been little to motivate an uplift of market movement, and it’s clearly going to take more than a monetary stimulus to produce lasting recovery.

The problem reflects a game of stalemate – consumers have a need to purchase real estate but no desire to spend big in an arena of slowly deflating equity.

Unlike other industries, where price drops can attract a flurry of spending, Australians have been somewhat brainwashed by a decade-long credit-inflated property boom. Consequently, residential real estate is broadly considered a vehicle for investment over and above its basic value as a place of shelter.

It’s therefore highly debateable whether further drops in median values would motivate purchasers to perceive a bargain and get out their credit cards as they would for a local retail sale.  Furthermore, because the selling price is set with a large dose of emotion, it’s harder to recognise if a drop in price represents a true bargain.

As a general point, the last thing owner-occupiers will let drop in times of uncertainty are the mortgage re-payments.  The perception of security home owners gain from their principal place of residence is a tonic in turbulent times.

Not only this, but the home is an extension of the occupant’s life – a place of precious memories and personal passions that dictate why we often see vendors withdraw from the market rather than sell for a price they don’t consider worthy.

The owner-occupier market (which forms the largest market in Australia) splits the real estate landscape between the need to sell owners and those who’ll only budge if they can get their pre-conceived price.  This is the price they have formulated based on invested emotions and one that often bears little relation to the dictates of today’s property shoppers.



Although we’ve seen an uplift in forced sales on the vendor’s side – and affordability issues on the purchaser’s side – the vast majority of purchasers and vendors are not willing to meet midway (hence low rates of turnover) - and with nothing on the horizon to suggest Australia’s economy is on the precipice of financial disaster or conversely about to flourish into another boom of growth, I’m afraid we could be looking at a long period of property market stalemate, which won’t be broken by the cliché of spring headlines, interest rate cuts, or mortgage lending sweeteners.

Vendor expectation is such a fundamental part of any acquisition process; it deserves a lot more attention than simply stating that vendors currently have “unrealistic” ideals.  “Vendor education” – the commonly used term by realtors who are charged with breaking high ideals in order to achieve a sale – is a fine-tuned art that splits those who are experienced in the industry from those who still have “stars in their eyes” of easily earned commissions.

The barriers dissuading vendors from taking a monetary loss are not clear cut and form a game of behavioural economics.   Broken down you could term it the “endowment effect” – the differentiation between  what a person is willing to accept compared with a what an individual is prepared to pay.

It was the American economist Richard Thaler who first made inroads into our irrational emotions and their concurrent effect on economic data – an effect that often hinders analysts from making predictable assumptions.

He aptly demonstrated how we place a higher value on emotional objects we own compared with the price we’d be willing to pay for a replica offered for sale.  In the 1990s, he demonstrated his theory with a famous social experiment involving coffee cups.

A group of students were divided into two. One half were handed mugs while the other were given dollars.  The two groups were then asked to separately devise both an asking price and a selling price.

The sellers valued their mugs at $5.25, while the buyers were only willing to pay $2.25 to$2.75.  Even though it was assessed that the sellers would not consider paying their own inflated prices should the shoe be on the other foot, they were unwilling to drop the mug price below their preconceived notion of value.

A different experiment was derived to see if the effect carried over into non emotional items – items for which a value has already been pre-determined.

One set of students were given a token and each student assigned a mythical sell value. The other half were given money and each assigned a fictitious buy value.

In line with rational thinking, when token holders were offered more than the pre-consigned value, they agreed to sell.  Equally, when the buyers were offered a “deal” less than their pre assumed value, they purchased.  It was a perfect example of basic buy/sell economics.



The difference between the two experiments comes down to the value we place on property and possessions – or in the context of this article – real estate.  We have a tendency to be truly irrational about our homes when it comes to placing monitory value on the holding.  An irrationality that has no place in basic economics, yet affects a market that in Australia is worth an estimated $4 trillion.

To emphasise the point, I was recently in discussion with a developer who wanted to offer a home owner two and a half times the value of their block to induce a sale.  The developer naturally saw the deal as a win-win for both parties.

The home/land owner would receive a windfall, enabling them to upgrade from their principal place of residence and move no more than a stone’s throw away if desired.

The developer, on the other hand, would reap the benefit of acquiring a piece of land, which was strategically located to enable his personal commercial endeavours to profit over the long term. For the developer, the inflated price he was offering was a worthy investment.

The developer naturally felt a valuation and market appraisal of the block would be enough to form the basis for a calculation of appropriate compensation.  What he hadn’t factored in however, was “endowment effect”.

Despite all available evidence proving the home owners would reap over half a million tax-free profit on top of comparable market value if they accepted the developer’s offer, they still considered the figure unworthy of the personal emotional commitment they had invested in their home.

It may seem crazy to those reading, however it’s a very real example of our irrational relationship with property.

If a deal such as the one above can’t achieve success in a highly deflated buyers’ market, you can clearly comprehend why Australia’s property market is not moving at a more microscopic level. In other words, forget about analysing a “property clock” – because it’s simply not ticking!

Whether purchasers have the dollars or not, they’re not likely to profit from the downturn until vendors are forced to change – and with nothing forcing vendors to change, we’ve got a long chess game ahead before someone knocks over the queen.

With this in mind, current conditions favour the investor who can hang out for that nugget of gold while at the same time identifying the property owners who – for personal reasons – have little choice but to reduce expectation.

Home buyers or existing owner-occupiers, however, face the challenge of finding a suitable home in a sea of advertised listings, few of which tick their “ideals” with a price tag to match.

Keen negotiation skills are the key to shifting the current game of checkmate – however, this can’t be achieved without ample on-the-ground due diligence, patience, and legwork. Unless a buyer is prepared to leave their emotions at the front door prior to entering into negotiation, they may find the current well termed buyers’ market frustratingly difficult.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

Catherine Cashmore

Catherine Cashmore

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.


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