How much did they pay? And why?

How much did they pay? And why?
How much did they pay? And why?

Over the past twelve months house prices have been on the rise, led by Sydney, but also in Melbourne and Brisbane.

Alongside this trend we have seen many high profile and extensively publicised auctions and pre-auction home sales with prices reported as well over the reserve having been paid.

We have also seen a number of apartment projects released for sale and sold out in only a few hours. Meanwhile, in parts of Sydney there's an ongoing land rush, with buyers camping out to buy a block of land in Sydney's booming north-west and south-west.

This sort of activity has not been an aberration, it's the type of market we are seeing more often than not. So called 'Super Saturdays' when big numbers of auctions come onto the market in one day are no longer the exception.

In Sydney in particular, we have almost an entire market showing strong demand even as prices continue to rise. On a slow news weekend this is the stuff of everyday drama, and so it's reasonable to examine why the market is acting this way.

Real Estate is a very different commodity

Against this sort of market environment setting the 'right price' might be starting to look like a somewhat scary prospect for real estate agents, for buyers and for sellers, for either a single private treaty sale, an auction or an entire apartment building or land estate. Real estate is a unique commodity, it is fixed in time and place.

Supply is very inflexible - you can't simply call up the assembly line manager and ask for a new delivery of homes, apartments or land. And we can't over look the overarching role of finance as a key driver of supply and demand.

Can we define value?
When we set-out to define value, there is no lack of academic study or case law in this area but much of which comes from 'gentler times'. But none the less it's well worth considering. When looking at value there is the general supposition that firstly any buyer is perfectly acquainted with the property they are looking to buy, that the buyer does the necessary homework to size up the market, which today, thanks to so much published data is a far easier task than it used to be.

That buyers are alert of all the circumstances, which might affect value and the open market price, aspects both good and bad and ticking off a property's location, quality, access to facilities and the surrounding features. That buyers also understand the present levels of demand and the likelihood of what competition they might face, for example at an auction, from other buyers.

And then having either the ready cash or access to secure finance in a competitive market among those capable of buying a particular property. It all sounds very reasonable, very sensible, but then the factor of emotion enters the mix and any neat formula all of a sudden looks less useful.

So we might ask: what are the factors driving the 'emotion' in the market?

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Every Property is Unique

While economics defines the rules of supply and demand, the pressures of market over and under supply and the mechanism of price every property remains unique. As such, they rarely only attract one willing buyer.

As cities grow, there will always be competition and that's on the increase.

We should not overlook the impact of population growth. Currently, according to the OECD, Australia has one of the highest population growth rates in the OECD at near 1.8%, while in NZ its 0.9%, in the USA 0.7%, Canada 0.85% and in the UK its -0.8%.

We are fast heading towards a population of 24 million. This one factor alone helps to explain why homes are in such demand.

In New South Wales and Victoria, growth is being strongly fuelled by overseas migration and a big drop in the outflow of population to states like Queensland and Western Australia.

There is a finite supply and, yes, while you might be able to create more apartments or houses, every location is itself unique and so is the local community. They're not possible to replicate.

You can't put extra supply on a freight train and move it. It's fixed in place and time and is always influenced by local conditions. We also have a problem in the amount of time it takes to get new developments off the ground. The DA process at times appears to be stuck in the slow lane.

And because markets are so local, it's possible to have both under-supply and over-supply, which can't easily be fixed, if at all and so prices will always respond. If there are not enough properties for sale, then prices will always rise. Even in new estates or in development areas where more homes can be constructed it takes time to deliver new stock and so prices will rise.

People want to buy and secure their position now, even when this is via an off-the-plan purchase.

Property is local by nature and auctions clearly show how after reflecting upon all of the market factors (like those outlined above) the price paid will always reflect the scarcity and demand at any point in time.

Supply and demand in real estate isn't easy to balance, it takes time and supply needs to be in locations that buyers are after, that buyers want. Buyers are influenced by a range of external factors like the availability of jobs and local services and their needs can be very specific – schooling for a young family, university access for a more mature trade-up family or, for an aging population, medical, recreation and security might be the big issues.

Buying a home, an apartment or an investment in exactly the right community and neighbourhood is not that easy. So it's possible to see why supply and demand is always a local and very personal issue.
When there is ready access to finance the competition will remain intense for limited opportunities and prices will always respond. This should not come as a surprise.

Demand and the prices paid for real estate are influenced by many factors including lifestyle options, investment goals, development constraints, population growth, demographics, off-shore buyers and finance. All of these then combine to influence supply and demand, and in today's market many of these factors are instantly recognisable.

 

Peter Chittenden

Peter Chittenden

Peter Chittenden is managing director for residential of Colliers International.

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