The Block 2012 unlikely to get Dorcas Street clean sweep as the Melbourne $1 million-plus market struggles: Catherine Cashmore
Everyone’s keen to address affordability in the housing market. It’s top of mind for struggling first-home buyers and the average Joe holding a mortgage. Each time the RBA sit down to assess the economy, the concentration around interest rates dropping is always flagged in headlines of “good news for mortgage holders”, with only a few remembering to mention hard-working savers and self-funded retirees losing out as a consequence.
A drop in rates may help those struggling with loan repayments (assuming the banks play ball and “pay it forward”), however it hardly inspires confidence in the economy. In the eyes of us regular folk, sharp rate cuts are akin to putting on the emergency breaks – it waves a red flag of concern. There is broad opinion in the housing industry that the established market will respond to the drop and “recover” recent loses – however for the “non-economist” the data is confusing. We’re told the Australian economy is in “good nick” by Wayne Swan, with low unemployment, “on target” inflation and accelerating growth. After being told GDP would flag in lower than expected, the final quarterly figures exceeded all expectation at 1.3% (4.3% over the year). On paper out economy is rocking along, yet rates being cut give the impression of just the reverse – I greatly doubt it will inspire spending spree.
Of course, doom and gloom in the housing market is rarely out of the media spotlight. It’s been a drab couple of years for established dwelling prices as far as growth is concerned. However, considering the growing number of buyers getting locked out the market and only a drip feed of first-home buyers to represent a new demographic, lower prices in established suburbs where most want to live, work and play is no great tragedy. I’d go so far as to argue it’s exactly what’s needed.
RP Data released figures last week showing the national capital city median house price dropped in May by 1.4% – with the largest drop of 2.7% evidenced in Melbourne. However, it’s important to remember the median house price is simply the middle number of all properties sold, and therefore not helpful when it comes to working out individual values. The pull back in Melbourne’s house prices – showing little recovery despite May’s rate cut – is understandable when you take a close look at the historical data.
Figures pulled from RP Data-Rismark's new daily hedonic index series and featured on Christopher Joye’s blog last week prove the extraordinary boom that occurred in Melbourne over the Jan 2009 – Dec 2010 period, during which prices rose a whopping 34%. This level of growth is unhealthy and clearly unsustainable. Therefore a correction was necessary, as a subsequent 9% in the median to date (most of which has occurred since April this year) proves. However, the average home buyer shopping in the established housing market may be wondering why he or she not noticing a great drop in prices considering the lacklustre clearance rates and falling median prices? For this, we need to delve a little deeper to assess exactly where the price drops are occurring.
Thanks again to Christopher Joye’s blog which has a wealth of interesting data, further information based on RP Data-Rismark’s house price data reveals the median house price is being pulled down principally because of weakness in the top end of the market. Once broken down, the most expensive suburbs nationally (accounting for 20% of the market) – have experienced the largest falls to date (3%). However, the middle 60% of suburbs have sustained market prices and properties in the lower price bracket – the cheapest 20% of suburbs – have shown a marginal upswing in growth.
This largely corresponds with on-the-ground agent feedback. Weekly I attend eight to 10 auctions across Melbourne, covering a broad range of house prices and wide span of suburbs. There’s little evidence to show properties around the state median (currently $490,000) are dwindling. Providing the property has been marketed and priced “at value” and appeals to the predominant home buyer demographic shopping in that particular suburb, it’s more common to experience relatively strong demand and competitive bidding. Many times, I’ll walk away from an auction because a property has exceeded comparable value – on some occasions of late, it’s been well in excess of 10%
Along with this, AFG (Australia’s biggest mortgage broker) – processed 7,600 mortgages in May, which tops all other months since March 2009, clearly indicating there’s increased activity in the market. A breakdown of the Victorian data indicates the average size of those loans was $379,130 with an LVR of 68.65%, therefore it’s clear where the major buyer demographic sits – not in the luxury housing market! However, based on the above housing data, a cut in rates is not needed in the established housing market, albeit other areas of the economy would no doubt vehemently disagree.
You’d be forgiven pondering the unfortunate circumstance this year’s rate rocketing Channel 9 television series The Block has landed itself in. Not only have producers managed to pick what seems to be on paper the worst-performing mainland capital city market since the GFC to date (beaten only marginally by Hobart). They’ve also chosen to turn this year’s ugly duckling properties into “luxury” $1 million-plus houses, which, as shown above, is the sector of the market suffering the greatest losses.
Even taking into account the latest interest rate drop, it’s unlikely they’ll be any evidentiary effect on buyer sentiment by the time these properties are auctioned. Obviously I’m not a fortune teller, however with clearance rates in Melbourne still struggling to break into the 60% bracket, which is in line with market conditions when the 2011 series finale was recorded, it’s highly unlikely the properties on Dorcas Street, South Melbourne will sell under the hammer. In addition, the 60% clearance rate is not a good indicator of “under the hammer sales”.
The Real Estate Institute of Victoria releases the most comprehensive auction data for
It’s not unusual to get the figures posted on a Saturday evening with a large number of auction results unreported. This can often be as much as 16 or 17%. When the results are finally gathered up in a mid-week round up, the clearance figure “corrects” – nine times out of 10 falling a percentage or two further.
For those familiar with the auction process, it’s clear the unreported results are down to a larger than usual proportion of selling agents trying to tie up deals for properties that failed to attract an adequate amount of interest to sell under the hammer. Negotiations can take time to finalise, and therefore the results are subsequently late arriving. This doesn’t mean the property will necessarily sell for less – a good negotiator will still be able to extract a fair price for the home. However, it doesn’t make good street theatre for the 50 or 60 or so neighbours who’ve turned up hoping for an entertaining boom result.
Last years The Block grand finale was heralded a huge anticlimax principally because the Richmond houses failed to attract competitive demand on the night. It didn’t seem to concern Channel 9 – the series attracts fantastic ratings and a level of advertising sponsorship that would no doubt pay for the houses’ end value twice over. However, I have no doubt it will be of concern to the selling agents, who will be relying on the publicity to raise their individual and company profiles. The last thing an auctioneer needs is an audience of millions watching a property pass in on a vendor bid on national television.
Ruth Roberts – one of last year’s auctioneers – fell under much criticism when she failed to sell Josh and Jenna’s house under the hammer. It’s a shame she didn’t get more positive press when she managed to negotiate the fantastic post-auction price of $1 million – which I’d assess to be above market value considering the location. (Lesson number one when choosing a sales agent – hire the best negotiator!)
The price paid for the Richmond homes last year was far above reasonable market value. By the time stamp duty, holding costs, and planning permits had been accounted for, the properties were already valued above $1 million. The price of $3.8 million (not including stamp duty of $209,000) paid for this year’s South Melbourne properties is a fairer price. The position is better than last year’s Richmond location, however when all the planning and renovation costs have been accounted for, the properties still need to sell past current market value to achieve a reasonable return.
There have only been six auctions on Dorcas Street thus far this year – two sold at auction, one sold prior to auction and three passed in at auction. From the results, the closest comparable to The Block properties is 349 Dorcas Street, which passed in on a vendor bid of $1.15 million in April – finally selling one month later for an undisclosed price. To date, the clearance rate for South Melbourne is trending below the state average (63%) at 58.3%. Thus far, it’s not looking good for this year’s contestants.
As entertaining as they are, programs like Channel 9’s The Block play to the concept that it’s possible to renovate and “flip” a home immediately back onto the market, covering costs and gaining a healthy profit on the outlay. Updating an older-style home through a carefully thought-out renovation is a fantastic idea if the owner is a) careful not to over capitalise and b) holds the property for a period of time suited to market conditions. The first rule is perhaps the most important, because one person’s tastes are not universal. Most potential owner-occupiers want to place their own stamp on a home, so while a good floor plan and effective use of interior space will provide a backdrop for a new buyer to do this, few want to pay a premium for someone else’s extravagance, and it takes experience to recognise how to finely balance the difference.
Interestingly, from all the “serious” buyers who viewed the properties used on The Block last year, three of the four homes were purchased by investors and subsequently rented for around $1,000 per week. No doubt most of the home buyers would have been interested in adapting the renovation ideas to their own tastes rather than paying a premium for a completed version not specifically tailored to their needs. It really was a perfect example of over-capitalisation. Though clearly that was half the fun of the program and proved great entertainment. Whether the properties will attract current yields in years to come as the initial shine wears off, especially considering the compromised position of the homes opposite a multistorey car park and bottle shop, is debatable.
Australia’s obsession with renovation is not unique or arguably harmful for those doing it for personal enjoyment. Furthermore, altering the floor plan of an old Victorian dwelling to improve the arrangement of the bathroom’s proximity to the bedrooms while creating a nice environment suited to our modern lifestyles is a requirement for today’s market and adds value for most home buyers who would be willing to pay a good deal extra for the service. However, it’s a fine line – particularly in a soft market – that separates what buyers will and won’t pay for. The Block renovations obviously over-step this line as, was evidenced last year.
Interestingly enough, it was argued back in 2010 by Phillip Lowe – assistant governor at the Reserve Bank – that Australia’s obsession with renovating and extending established dwellings was fueling the desire for bigger and better homes, thereby stagnating investment into new housing, which is necessary to reduce inflation. Investors make up roughly 35% of our housing market, and our negative gearing policies direct the purchasing power to properties that historically prove good rates of capital growth – principally the established housing market.
At the root of this obsession lays the widespread acceptance that property always goes up in value. It’s looked upon not so much as a place to live, but a key to building wealth and establishing financial security. With the ability to also claim tax incentives for capital works on an investment property, it’s no surprise to find homes not just being improved to make them comfortable for renters, rather they are renovated to inspire premium prices.
However, if you analyse individual house data, the stark truth remains that even in a rising market, renovating and “flipping” expecting an immediate profit can achieve little more – once costs are accounted for – than a small return at best. To do so successfully requires numerous calculations that not only include the initial outlay, time plus cost of improvements and an analysis of recent sales to establish the likely ‘end’ selling price. It also requires an expert assessment of the major buyer demographic in the neighborhood to ensure it ‘meets’ relevant demand without overreaching.
On top of this, market conditions – often unpredictable – have the untimely ability to change as months pass, always leaving an element of speculation in the equation. Therefore, have a go if you must, but do so knowing the risks and understanding in many respects it’s a gamble.
As for The Block – enjoyable as it is – I’m laying my own bets on another finale re-run of last year.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. She is Channel Ten’s property expert on The Circle and a senior consultant for National Property Buyers servicing the needs of property owners Australia wide.