State of Play: Property Market Falls

Dominique Grubisa
Dominique Grubisa

Published 4:31 am 29 Jan 2021

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Hi there, and welcome to our State of Play. You probably read it, headlines, that property market drops. We need to look a little bit further behind that because it hasn’t quite fallen off a cliff or anything yet. In fact, when we really get it in perspective, what happened at the end of financial year 30 June Encore Logic released their property market update and data. And so Tim Lawless, you may remember Tim from live streams and webinars we’ve done with them, he went on the record and gave a few insights into the market. So it’s not all doom and gloom when we look at the numbers in perspective.

So yes, dwelling values fell, but by really small amounts. So they were down like for example, 0.8% in Sydney, 1.1% in Melbourne and 0.4% in Brisbane. And then if we look at some other markets like Hobart or Darwin or Canberra, for the month, dwelling values went up even a little bit. Over the quarter, again, minimal changes, probably Melbourne was most significant, but only 2.3%. And then if we put it in perspective, if we look at the whole month, the whole financial year, so June 19 to June 20, they were actually up. So up 13 odd percent in Sydney, 10% in Melbourne, 4% in Brisbane and so on.

So property prices are still not bargain basement prices. So for example, we’re looking at median values. You’re up near nearly at seven figures in the Sydney market, 875,000 for just an average medium price property. So probably further to fall, because remember we’re still on life support. Our property prices are being boyd up by government stimulus packages like job keeper, job seeker really, really low interest rates. Bank deferrals of loan repayments, banks have done all sorts of shuffling to help people through COVID, and there will probably be more of that. So Scott Morrison has said, “Look, we’ll look at something. We won’t just cut everyone off cold come September with job keeper. We’ll have to have some other stimulus.” And similarly, the reserve bank are talking about the economic stimulus. They probably won’t drop interest rates to zero, but they’re not going to go up anytime soon, and I’m talking years. And the banks have said we’re going to work with our customers. So the banks aren’t going to just put out their hand come September and say, “Okay, payday. Loans back to normal.” So they’re helping us transition.

Probably for everyone’s own selfish purposes, the government wants the economy to get better. It’s good for them. It’s good for tax dollars. It’s good for everyone. Similarly, banks want to help people trade through this, but there will be casualties of the war. And that’s what they’ve said. They’ve said, “Yes, some people will have to fail, but our aim is to get the bulk of people through this.” So that’s what’s happening right now.

So when we look at the actual change, yes, the market fell a tiny bit, but market activity that is transactions, properties on the market actually improved. So everything froze. Remember we went into an induced coma or hibernation when CoronaVirus first hit. So April was a real low. We had the shock at the end of March of, oh my gosh, the world’s changing. And then everything just went on ice for April. So what we’ve seen is, after we sort of started to slowly thor out and come out of lockdown, we saw a 21 and a half percent rise in sales activity. People started listing their properties again, and that was in May and in June. Encore Logic estimates another nearly 30% rise on top of that.

So the fall in home values, we’re only talking fractions of percentages, so not massive yet. We may be in the calm before the storm though.

Capitol city dwelling prices on average then, if we looked at the average across the market, nationally went down 1.3% over the last two months, so since COVID hit. There are still low stock levels still. So what is being advertised as for sale is quite low. There’s still a kind of like a black market, if you like, there’s behind the scenes, off-market sales happening through agents and connections and networks. We’ve still got significant, billions of billions, of dollars of government stimulus underpinning our economy, really, really low interest rates and forbearance from banks and lenders. So that’s propped the market up for the interim at least.

The other thing that’s really helping is that people are not that depressed. Remember they said in the great depression, Roosevelt said, “We have nothing to fear, but fear itself.” Similarly, consumer sentiment at the moment is not too bad. So it went really down in April. Everyone was so afraid and that was the flight, fight or freeze response that happens reactionary when we’re in a state of shock. But once the dust sort of settled in that, it improved in May. So Westpac measured that sort of stuff. They say from April to May, consumer sentiment went up 16 and a half percent, and then another 6.4% in June, people started to feel better. They got back to normal. They started spending money again. And as at the 28th of June, the Roy Morgan poll showed that consumer confidence had risen by 42% since COVID hit. So at the end of March, when we were all fight, flight or freeze, till the end of June it was 42% better.

And historically, consumer sentiment links with property prices. Now, it still means we’re still a long way below where we’d be. So consumer confidence is normally a lot higher, and there’s talk of recession. So it’s not like we’re out of the woods, but it does explain why people came into the market sort of when we came out of lockdown in May, people started listing their properties for sale and other people started buying those properties. So the market is still active, and it’s not all doom and gloom because consumer sentiment is improving.

And the other thing that we look at to gauge the property market, so the toe in the water and the real indicator is auction clearance rates. So clearance rates aren’t too bad. So since mid May, clearance rates are nearly 60%, which is pretty much an average trend what you’d see in a normal balanced market. They were at a real low, like 30% in April because we were in lockdown. So they weren’t able to even have onsite auctions at properties. Withdrawal rates. So people who had their properties listed for auction and then realize we’re in COVID, we’re in a crisis, it’s a once in a hundred year pandemic, they’d pulled their properties off the market. They just withdrew them altogether and the auction didn’t go ahead. And most auction sales were negotiated prior to the auction. So 80% didn’t go under the hammer. They just were fearful. The sellers were fearful. If there was a buyer, they just went, “Yep, let’s just do the deal before auction.”

Since late May coming out of lockdown, that’s all changed now. So the ban on auctions has lifted. Withdrawal rates are as low as 10%. So people who’ve listed for auction are going, “Yeah, we’ll go through with it.” So they show some level of confidence in the market and most are just going under the hammer. So the property sellers, the owners are going, “Well, I’ll roll the dice and I’ll see what happens on auction day,” which shows some confidence and the auctions are working and those properties are clearing.

If we want a bigger perspective, like a 12 month period, we can see what’s happened. We can see Sydney’s gone down 0.8% past three months. It’s held steady at 0.8%. If you look at a three month average in Melbourne, though, it’s down 2.3%. and we can see over the past 12 months, you can see whether there are gains or losses. We can see the Perth market’s gone backwards a bit further in a 12 month period, and so too has Darwin. They were always falling markets. And you’ve got your regional areas there as well and property prices and how they’re tracking in regional areas. Usually never big swings in regional markets because there’s just not big upheavals. There’s not a changing massive population. Jobs are usually what they are and property transactions are normally what they are. In other words, it’s not like big markets like Sydney, where suddenly there’s a major employment hub and 10% of people there are suddenly unemployed.

Another gauge that RP data have published is the amount of listings. So we can see the yellow line there on the left. What that’s showing us is that listings fell off a cliff like March and in April. And they’ve started to rise again, come May, June. But if you look at the graph on the right, what you’re seeing is the take-up rate. So it seems that demand has exceeded supply. So if we look at the yellow line again, compared to other years, we can see that of the stock that’s come on the market, we see that that line has leveled out there. In other words, there was a hungry market. There was demand. There was not enough stock. And all of the stock that suddenly came on the market in May and June has been snapped up by the buyers there. So that just shows that the supply and demand are pretty steady. That just shows the auction clearance rates in graphical form. So you can see that it really plunged down pre June and then bounced back once auctions were open again and the property market was in business.

And if we wanted to know what areas, what sectors of the market were most affected, it’s the top end. So, that black line there shows you the top quartile, so the top 25% of the market. So the top quarter of highest priced properties in the market are the ones that are most volatile and that have had the most severe downturn.

If we’re looking at the middle, and one of my mentors once told me to always buy in the middle of the market. If you look at it as a bell curve in any market, there will be properties that are at the high end for that suburb. There’ll be properties at the low end. Maybe it’s on a main road, maybe something’s wrong with it, but in the middle is the medium, and that’s where most people are looking. So most buyers in that market are expecting to pay that middle of the market price. You never ever want to be the most expensive in the suburbs. You never ever want to be the cheapest in the suburbs because most eyeballs and people looking to buy, those qualified purchasers are looking in the middle of the market. So that’s kind of where you want to be placed. At the extremes, that’s where you suffer the most losses.

And if we look at rental markets, they’re pretty much down, especially in some areas. So Melbourne and Sydney CBD, a lot of the rental uptake there was foreign students, travelers, Airbnbs, that sort of thing, wanting to be in the CBD. And now that market’s completely gone. So there’s a lot of excess stock, apartments that were Airbnb’d and rented out on short-term lettings, are now coming into the rental pool seeking longer term tenants. And the demand for people who had a little pad in Sydney because they worked remotely and flew in a few days a week, that sort of thing, the world has changed. So those rental properties are excessive. Law of demand and supply means that rents have gone down.

It also shows that probably the biggest sector of people buying in the property market now are people who are buying a home to live in, not so much investors or people who are speculative, buying the properties and having a bet on the property market. Investors aren’t getting yield. In other words, if you buy a million dollar property, you want to see some return on that investment. You want to get $2,000 a week rent. That’s not happening. You’re sinking a million dollars to get $400 a week rent. And unless there’s going to be massive capital growth, it’s not a good investment. And for those of you who saw our live stream the other weekend with Robert Kiyosaki, he said, negative gearing, waiting for capital growth in property and coping a loss in the meantime, and claiming a tax deduction is just a joke. You want property to go up in value. You want to have it all. You want it to go up in value and you want it to pay you. You want cash flow on a yield on it.

So investing and longer-term property investing is probably not as attractive. And that plays out too in loans to investors. So they look at that data, banks lending to investors or owner occupiers, and it’s more so an owner occupier now. And where people are borrowing money is where they’re purchasing. So they look at the number of loans granted, to look at the heat in the property market as well.

So here, I can make this slide available. If you’d like, let me know, and we can pop that up on Facebook or send that out to you. But that’s just showing the broader picture of what’s happening with home prices across capital city markets, as well as regional markets for a 12 month period. So it gives you a snapshot of what’s happening in the market.

And there is a huge opportunity in this market. For those of you who tuned in to Ask Dom today, a lot of questions from our community around the property market, and what’s happening, people are saying, is this a good time? Is this a bad time? What should I be doing now if I’ve got money? Is property a good bet or not? Or should I sit on the sidelines and wait it out? There’s basically, if we look fundamentally at economics and markets, there are two ways that you can make money. One is taking advantage of different price differences in different settings. And they call that arbitrage. So for example, if I can buy something low and sell it high, then I’m going to make a profit. An example of that may be like in the early 90s, when eBay came around, a lot of people got into sort of trading on eBay and they’d say, “Okay, well, I can buy a wedding dress in the secondhand clothes section, but I can buy that for $50. But if I sell it in the bridal wear section, I can sell it for $200.” So different markets, different settings, different buyers are going to pay different prices, even though it’s the same timing.

And the other way that you can make money is just timing the market right. So buying in a low market, holding and selling in a high market, and that’s taking advantage of the laws of supply and demand, some sort of competitive advantage. And good businesses are able to do that over time, so always buying in the right market and selling in the right market. Timing the market is difficult because sometimes it’s counter-intuitive, sometimes you have to go against the herd, don’t you? So when a market’s hot, it’s really tempting. We all get that, we all just jump in and ride the market up. And that’s when you get bubbles and that’s when things crash. And we have had a bubble for almost 30 years.

Now, the market goes up and down and there’s economic cycles in that time, but we’ve never ever had a recession on a whole scale like we’re coming into now. Nobody’s fault. It’s almost enforced upon us, isn’t it? You can’t say, oh, airlines are bad or people in the tourism or hospitality industries were stupid. They had thriving businesses and through no fault of theirs and something, what was a black swan event, almost unforeseeable. I know Bill Gates gave a Ted talk on it and it was predictable, but a lot of people were totally blindsided by this. And as a result, there’s going to be economic fallout. Government’s going to limit that. But where is the opportunity in that?

If we look at arbitrage and having a competitive advantage, can we have superior knowledge and get on top of a ground level opportunity? It’s pretty much an accepted economic fact that to do really, really well, you have to go against the herd. So consensus means what everybody else is doing, that’s when you get the bubbles, that’s when, if everything’s going well and you buy into a hot market, you probably pay too much. Contrarian is when you go against the market, you buy in the lows, the smart money always buys in the downturns or the lows of the market. Either way, it’s a risk. It’s always a choice. So you can get it wrong on both counts.

Contrarians, those who go against the herd tend to get it wrong more. That’s like here, if you look at it as a horse race, that’s like a hundred to one odd. If you lose, you lose, you get nothing. Whether you’re putting your money on the odds on favorite, paying a dollar 20 or something, or whether you’re putting it on the a hundred to one dark horse long shot, either way, if it doesn’t come in and it doesn’t win, you’ve done your dough. If you get it right though, then you get a payout.

Now, if you bet on the dollar 21, the favorite in the race, everyone else is betting. So imagine the pool of that race, the pool of money to be divided, and everybody’s on the same horse. It’s going to be divided amongst all these winners. You’re going to get less for a pretty much a sure thing. You’re going to get a lot more on the hundred to one, aren’t you? Because no one else is going with you, and no one’s betting on that horse. And you’re going to get all the winnings or most of them. So you always get the outsized returns when you go against the herd. Problem with that is that it’s more difficult to pick the winner going against the favorites or favorite for a reason. Where the real returns are though, the big wins are being contrarian, going against the market, buying into a falling market. That’s where success is.

Charlie Munger, great investment partner of Warren Buffet, one of the most successful men on the earth said that mimicking the herd invites regression to the mean. If you do what everyone else does, you’re always going to get the results that everyone else does. You’re not going to be super, super rich and successful. You’ll just be average because you’re doing what average people do, what everybody else does. And that’s what most people do. Average people rise in a booming market because we’ve all got the family home or whatever, they have the assets that they have in a rising economy, they go up in value, but in a falling economy, they lose money. So you will always rise and fall with the tide if you follow the herd.

Warren buffet put it a little bit differently. He said, “Most people get interested in stocks,” he’s talking about the share market, obviously, but no different for any investment class. “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” Similarly, you can’t go with consensus and do well. Even if you win, you’re only going to get average returns. So the trick is to be contrarian, to get the outside returns, to buy into the down market, but to do so with a competitive advantage. A competitive advantage can be anything, but most usually it is knowledge. You want to know more than the next person. You want to know, for example, if it’s a horse race, you want to know that the favorite is not looking so good today because it’s raining and he can’t run in the mud. And you want to know something about the dark horse, a hundred to one odd, and that is that he’s been training really hard and that he’s got a different jockey today who’s got a superior bit of knowledge that’s going to get in there. You want to have that competitive advantage so that you can get the superior returns and you can be contrarian.

And the trick to doing that is not in timing the market, not in negative gearing, not in buying low, holding on waiting for the market to do the hard work for you. The trick is to be able to buy into a market where no one else is buying, because they’re all scared, to be able to buy really, really well, because you’ve got that secret information about the horse, to be able to buy low and well below market, and to be able to do really well because you make your money, especially in real estate when you buy. So you need to be contrarian, not consensus. You want the outsized returns, but you need to have the superior knowledge so that it is not a risky bet. The risky bets, the contrarians usually lose, that’s why it’s risky. You can get a streak of luck, you can have some superior insider information, or you can just bet on some small stock, and suddenly it’s a gold company and they mine and they hit gold or oil or whatever, and the stock goes off the charts.

However, when it comes to most contrarian, small stocks or the hundred to one, they never usually come in, that’s why they pay so well. So imagine if you could mitigate the risk and still have all the upside, and you do that with superior knowledge. So there’s going to be a massive opportunity shortly. So come the end of all the stimulus packages, the market’s still good, there’s still buyers out there, there’s still people fighting for stock, and pretty much market price is steady comes September. The stimulus packages are going to end. Banks are going to get stricter. They’re not going to be giving the holidays and the concessions that they have been, and it will be a day of reckoning. It will be time to pay the pipe. Banks know this. They will help as many people as they can. They don’t want everything to go up in smoke. They want to maintain steadiness in property prices, but there will be distressed opportunities where they won’t refinance, they won’t help them trade through, they’ll want to pay the piper. And that’s where your opportunity will be to be contrarian and to get the outsized profits.

So if you’re ready now, and you’re up for it, sharpen your pencil because this is the time to get the knowledge, to get that insider knowledge about that horse so that you can have the contrarian bet and reap the upside of those rewards. And knowledge is power.

So what I’m doing for those watching this State of Play session is get ready, get skilled up, get the knowledge. I’m giving away my Real Estate Rescue Program For Beginners, that will show you what is available and the possibilities and what it is to have the contrarian advantage in this particular market with what lies ahead. So I’m going to pin the link to that in the description section, as well as into the comment section here. It’s in modules, it’s quick, easy modules to just get your skill set up. So if you go to that link now, you can start doing that and you’ll already have a competitive advantage when it comes to a contrarian opportunity and a time for bigger wins. So go there now and get started, and I look forward to seeing you on the other side.

And don’t forget to follow us on Facebook to get regular updates and share this with your friends. They’re welcome to do the program as well, the little mini course for beginners on real estate rescue, opportunities to buy distress property under market value right now. And so just tag your friends in the comment section. If you’re watching on YouTube, like and subscribe. Hit the bell if you want to be notified every time we release new content.

That’s it for today, stay safe, take care, and we’ll talk next Tuesday on our State of Play.