Build a budget buffer

13th May 2015By: Charles Tarbey

Over the growth cycle starting in June 2012, the combined capital cities have recorded a 24.3% increase in dwelling prices on average, according to CoreLogic RP Data.

However, it has been Sydney and Melbourne that have provided the majority of this growth. Dwelling values in these cities increased by 38.8% and 23.6% respectively over this period. In contrast, Hobart, Canberra and Adelaide have experienced growth over the same period of less than 10%.

Supply and demand

While I appreciate that the current interest rate environment has helped to propel this growth, there has been another factor that has helped to drive prices up in Sydney and Melbourne much higher than the rest of the market. Supply and demand dynamics are dictating the prices paid in Sydney and Melbourne, aided by the low rates. There are a low number of properties available in many areas, and a high number of buyers competing for these properties.

In an environment like this, the reality is that buyers have very little, if any, negotiating power. The current market environment dictates that if a seller is offering the right property in the right location, and the demand is there, all they have to do is wait (often not very long) for a buyer to arrive. The lack of supply has taken control of the market in Sydney, and to a lesser extent in Melbourne, and it is my concern that if stock levels do not increase, an environment might be created in which it would be possible for a bubble to exist.

I believe that this is a situation that is exhibited only in certain locations, where supply is extremely low and demand is high.

In times like these, new real estate agents enter the workforce, appearing to believe that selling real estate is an easy job. However, that is only true for a small percentage of the time, such as in a growth market like we are experiencing now. Most of the time, real estate agents try to get a buyer to agree to a seller’s asking price, and try to get a seller to agree to a buyer’s offer.

Right now in Sydney and Melbourne, there is a growth market. I hear almost every day from an agent announcing how they sold a property at so many tens of thousands of dollars above a buyer’s asking price. I don’t believe that it is the skill of these agents that result in these prices. Rather, I believe that it is simply the lack of supply and high levels of demand dictating these results.

When the market returns to normality, the agents who are able to present a property well, and who are excellent negotiators, will be the agents who continue to provide a valuable service.

Where to from here?

Interest rates are at record lows, Sydney and Melbourne have experienced large price increases, but many other locations are still seeing normal growth rates. It is my hope that the real estate market will return to stable growth. I believe that it is in the best interests of market participants to act rationally when thinking about purchasing real estate. There are property owners who may have experienced capital gains, wishing to start realising some of those gains. When supply increases again, buyers may find that they have more negotiating power.

It seems to me that stable growth is preferable to growth that is fuelled by low interest rates, low stock levels and high levels of buyer activity. With that in mind, I believe that it would be wise for buyers to carefully consider their next move. With interest rates so low, the Reserve Bank of Australia is running out of room to move them too much lower. Eventually interest rates will have to come up again. Buyers must ensure that they have room in their budget when this happens.

Charles Tarbey is the chairman and owner of Century 21 Australasia.