Art of Advertising

If you have watched the Gruen Transfer on ABC you will have been entertained and educated about what advertising does, what makes the good ads good and the bad ones really bad.  There is a segment in which they give competing advertising agencies the challenge of selling the ‘unsellable’.

Even though these challenges are given out with the intention of being a bit of a laugh, a lot of these agencies do some amazing work. I remember one particular episode last year just before the elections. The unsellable product was the Greens’ political party.  This time around one of the agencies did it so well that the Greens Party actually contacted ABC to see if they could buy the ad. They were told no.  The ad was part of the show content and not to be considered an advertisement which would be contrary to the ABC charter. The reason why the ad was so good was not because of the ‘production values’ as they say, the high gloss, great acting and so on but because it made you think and made you consider something that you wouldn’t normally. 

If you reflect on property advertising even I must admit it can be pretty formulaic. They tend to talk about the facts of the property and try to make it more enticing by using words like ‘alfresco’. In fact one agent I know had the word ‘alfresco’ in more than half the property ads he had running on the internet in our area.

Real Estate agents are known for their tendency to describe places as magnificent when some of them are really nothing more than a box; so it is not surprising that someone decided to tell it how it really is in an effort to stand out from the crowd. This advertisement was for share accommodation so it wasn’t written by a real estate agent but it was picked up by the newspapers and real estate blogs because of the humour and the tongue-in-cheek truth that was used to capture the reader's attention. Some of the language is not going to be considered appropriate by all so I’ve replaced it were appropriate.

North Bondi – Rubbish place. Great location and view

Ludicrously overpriced, with carpet stained like an infant’s undies and a truly appealing paint job…. no, I meant a peeling paint job…… this 2 bedroom top floor North Bondi flat is perfect for the blind and/or less discriminating flatmate. Your potential bedroom is unfurnished although it does have the requisite four walls and ceiling so that’s a plus.

The bathroom has a bath which manages to retain water so it’s fulfilled its destiny. The kitchen has all the essentials but not a bit more and the place is furnished and decorated in a style best described as “junkie minimalism.”

So why move in? I’m glad you asked. The view and location is about as good as you’ll get as you’ll see from the photos. That is the view from the room. Impressive huh? And there’s a small balcony too. Plus, the hovel is within easy walking distance to shops and right at the start of the 333 bus route so getting in to the city is a piece of cake! You get a seat every time and you can laugh at the losers having to stand (it’s the small, petty things that keep me happy). And it’s got internet, washing machine and all the essential stuff.

If you have a designer’s eye and wish to play down the trailer trash aesthetic, please feel free to make the changes. I have absolutely zero attachment to the current furnishings and would welcome someone with the ability and desire to polish the presentation.

As for me, I work (as little as humanly possible) in media/marketing ergo, I’m a complete tosser. On a positive note, I am house broken and have no criminal record. The rest – 33 years old, male (as if you couldn’t tell), likes boy stuff such as televised sport, the consumption of take away food and I’ve recently discovered the joys of adding fabric softener to my washing. What a day that was!

I don’t mind who I live with but I would prefer not to live with a couple. Nothing personal against the loved up but you people make me sick. To live with that is. If you happen to be a girl, believe it or not, my past two flatmates were girls and I dare say that we got along quite well. Hell, I’ll even put you in touch with them if ya wanna check my bonafides.

No doubt like me, you read it all the way through with a smile on your face and like me you’re probably wondering if it worked. Well, I don’t know with any certainty but I read in one of the papers that it got an amazing number of hits on the internet (hits are the number of times people opened up the ad to read it or email it to others) but the unit remained unrented. While it is probably rented now and any problems it had with being rented were perhaps that the unit was too much like how the ad described it. As he would say ‘ergo, it’s a complete tosser’ i.e. no one liked the ad enough to want to live in the hovel. Then again, it could be because ‘readership by the many’ isn’t the same thing as ‘readership by the matched’.

By this I mean the person you want to read your ad is the person that the property ideally matches.  You see, for everyone else the property is a compromise. It’s good in some aspects but not the ones that really count. The ‘ideal’ buyer won’t walk in and say ‘this is perfect’, they walk in and say it’s not perfect but it has everything I really need. And by everything I mean those three of four main things, important things. Those things can be simple and subtle like lightness or openness. They may have lived in a dark house and swore they would never live in a dark home again.  

The buyer that pays the most for a property isn’t the one with the deepest pockets, it’s the one with the biggest smile when they inspect, because they know this is the one they want, this is the one that’s worth paying more for. They smile because the searching is over. If the size of a buyer’s budget guaranteed a better price I would sell every property to James Packer for whatever he would pay. Why don’t we?  It is because if James Packer looks at a property he doesn’t really want, he’ll only pay a price that makes it too good a deal to pass up. In simple terms people who don’t love a property but still buy it only do so because they love the price they pay, or should I say, the money they were able to NOT pay.    

Neighbours

Raise a question or have someone say something to you and your brain will instantly pull out the first bit of information it can find associated with the subject. As soon as I say the word 'neighbours' I immediately hear the sound track for the television show; I don't even watch it, which goes to show a lot about how our brains work. Memory primarily works by association. By that I mean, information isn’t stored in alphabetical order, date order or subject order but by association. One thing reminds us of another and so on. Here lies the problem with neighbours. 

When you have problems with your neighbours the first thing you tend to think about isn’t about solutions but rather previous problems you might have had and how they didn’t get resolved and so on.  You might also think about the obligations that you feel towards them or the need to keep things relaxed between you. Maybe you have never had any problems with your neighbours in which case you are one of the lucky ones. But for those that do, here are some suggestions on how to handle some common disagreements and disputes.

Strata won’t fix a maintenance problem

We are getting pretty good with tackling this type of problem with strata managers and body corporate executive members. The first question to resolve is, “who is responsible for fixing the problem?”

The Department of Fair Trading has a helpline that you can call to get advice as to whether strata is responsible to fix a particular problem or not. We have had too many occasions, when strata managers tell us that a particular problem is the owner’s responsibility when it is in fact their problem and responsibility. If in doubt ring Fair Trading and run it past them.

Strata Still Won’t Fix the Maintenance Problem

Body corporate executive members tend to be the main problem here, running their own personal fiefdoms; all the power rests with them and you will just have to wait. If strata won’t do something that is their responsibility we give them a letter outlining what they need to fix and setting a timeframe for them to come back to us as to when it will be done. Often we’ll hear nothing so our next step is to apply to Strata Titles for a hearing and an order to require them to do the work.

Strata Titles has its own tribunal that is designed to handle disputes in an informal and inexpensive manner. A referee listens to both sides, looks at any evidence and then can make an order requiring work to be done and so on. We have used this approach a number of times and found that strata council members will often come back to us with undertakings to take action prior to the hearing. If they say they will do the work but not until after the scheduled hearing date, we still go through with the hearing so that the agreement is formalised. After we have undertaken this process once with a strata, we never seem to have to do it again.

Noise and Strata

It is hard for strata managers to control noisy neighbours, particularly if they are tenants, but they aren’t powerless. The process of applying to Strata Titles for an order is exactly the same and the tribunal has the power to issues orders accordingly. What will often happen is that the managing agent will evict the problem tenant because if they fail to take action then the Tribunal will hold the owner responsible.

Fence Replacements

So many times in the past we used to have fences that were held up by props, rope and prayers and still the adjoining neighbour would refuse to pay for half

the cost of a new fence. The previous government set up a part of the land titles office to handle these disputes. We have utilised the process to resolve disputes and found it pretty effective and simple to work with.

Again, like other tribunals it requires that you make an application outlining what you want done and how much it will cost. With many fencing arguments a lot of the issues can revolve around property that has been built up or excavated next to the fence causing the old one to fall over.

With one dispute we managed, the owners were in agreement to replace the fence but the dispute was about who should pay for the retaining wall between the two properties that the fence sat on. We had a hearing at a local court, the referee looked at the quotes, asked questions and then came out to the property and personally inspected the fence line so he properly understood the issues. He made an order then and there as to who was responsible for what.

Two Ways to Handle a Dispute with a Neighbour

In our experience there are two ways to handle a dispute or disagreement, up front and without emotion or by nagging, complaining and manipulation. We’ve found the first way produces better results, better relationships with the neighbours and fairer outcomes.

Most people worry that if they take legal action that the situation will deteriorate into a battle worthy of A Current Affair. That can happen, though the vast majority of those are because people spent too long nagging, complaining and manipulating so that when they finally do take action, the step was seen as more aggression, not an effort to achieve resolution.

We are real estate agents and when we take matters to these tribunals we make it clear it is not personal but rather just a way of finding a solution that’s fair on both sides and without getting anyone upset. The dispute resolution cost in each of these processes is minimal because they were designed to avoid solicitors, legal fees and time consuming preparation.  

   

Pets and Strata

It used to be that you couldn’t have a pet in a strata title unit or villa without strata approval. Well someone didn’t think that was fair. They took a body corporate to a hearing and the referee agreed with them.

Now, regardless of the wording in the strata by laws, a body corporate is not allowed to refuse permission for an occupant to have a pet unless it can be shown that to do so would interfere with the other owners’ quiet peace and enjoyment of the lot.  So if you are thinking of downsizing your home to a villa or unit and you have a pet and are worried that you may not be able to take them with you, don’t.

Even if the strata have had problems with other pets of other owners, they must give you and your pet the ‘benefit of the doubt’ and allow you to have the pet in the property. If the pet causes a problem by continually barking or messing the common areas etc, then you may eventually have a problem but you are allowed to take them into the property in the first instance.

Ghostly Neighbours

This didn’t happen to us but one of our insurance brokers told us about it. It supposedly happened to another property manager at another agent. I reprint their piece below.

“I was in the office when one of my tenants came in and asked to see the property manager so I went out to see what I could do for her,” said Charlie. “I could see she was quite agitated and distressed so I sat her down and asked her what was wrong.  She said that there was a problem at the house that needed to be fixed so I grabbed my pen and notebook ready to write down what I thought was going to be a list of maintenance issues.”

To his surprise the tenant informed Charlie that there was a ghost at the property. “This ghost was apparently opening and closing doors and cupboards, and moving items around the home.  I asked her if the ghost was damaging the home at all, which she said it wasn’t, it was just being a problem.”  “It was obvious to me this was very serious for the tenant so I made a quick decision and asked her if she would like me to evict the ghost which she said she would appreciate. “So, I prepared the appropriate paperwork with a ‘notice to leave’ and advised the tenant to leave this paperwork out for the ghost for a few nights,” explained Charlie.

She left the office happy and Charlie believes his approach must have worked, as he never heard from this tenant again concerning her ghostly guest!

Whether you believe there was a ghost or you think the tenant might have been mentally unwell, I put to you that mental health and neighbours is a real issue.

I had an Aunt who suffered dreadfully from schizophrenia. She imagined all sorts of things until a medication was developed that kept the voices at bay. As property managers we do come across tenants that suffer from mental health issues and it is an area that requires understanding and a willingness not to be alarmed or afraid and sometimes it requires a bit of creativity.

I had one tenant who was an incredible artist and a schizophrenic. I did an inspection of his unit and walked in to find he had lifted up the carpet and thrown it out (never a good sign when doing a periodic inspection). Instead he had hand painted the concrete floor so that it looked like it was an expensive Persian carpet. I wanted to scream at him at the same time as congratulating his artistic skill.

Fortunately his landlord was the Anglican Church who gives us a lot of latitude when taking and dealing with tenants who would normally sit outside the profile of an ideal tenant. That said, these tenants are often some of our most reliable and long term tenancies and they teach us humility and acceptance. And that’s the upside of neighbours.

If you have issues with your neighbours don’t be afraid to give us a call. We can’t make them sane but we can often suggest ways you can approach issues to get things resolved.   

How Bad is the Local Real Estate Market?

Agents typically use words like ‘a flat market’ or quieter market, or they say ‘property is sitting on the market longer’ but they never say publicly in newspapers that it’s as bad as it is. This is because there is an unshakeable belief that if an agent is publicly negative, no one will list their property with them.

Well, let’s see….

Prices are falling. They are not flat, they are moving downwards. Let me give you a real life example.

Two homes in the same street in Ryde that sold 10 months apart.

First home

Sold                             May 2010               

Price                            $960,000

Land                            607 sq metres

Frontage                      3.4 metres

Construction               Fibro          

Bedrooms                   3                                      

Second home

Sold                             March 2011               

Price                            $895,000

Land                            683 sq metres

Frontage                      15.8 metres

Construction               Timber                        

Bedrooms                   3                                 

I was not involved in either sale but I know the agent that was. It was clear to the agent just how decisively the market was adjusting. Inspection numbers were lower than the previous year, but not dramatically. However, the case was that the number of people interested out of those inspecting was far less; moreover those few interested buyers are also more cautious. This now seems to be the way for all properties.

We are also seeing banks becoming tougher on their valuations. We can get a great offer on a property from a buyer, but when buyer goes to get their loan, the bank valuation comes in at a far more conservative figure; this then leads the sale to go dead.

Units are doing better than houses, at least relatively. They too are dropping but have not dropped as much and have not been dropping for as long. While house prices seemed to peak in March last year, units peaked a little later, roughly around November last year. It appears that the influx of investors kept the unit market prices up a little longer. Now because interest rates are uncertain and first home buyers are pretty thin on the ground, we can feel the unit market coming off, sorry I mean dropping.

Let’s look at two units in Ryde in the same block:

First Unit

Sold                April 2011    

Condition        Renovated 10 years ago   

Views              Partial Views  

Price                $400 000

Second Unit

Sold                 Now

Condition         Fully Renovated

Views              Uninterrupted

Price                Unable to get offer of $400 000

Yet, if you read the papers you get a pretty mixed set of figures. Its no wonder that people ask me about the market and then when I tell them these numbers and changes they say

“I guess no one really knows”.  If agents tend to talk too positively, owners who want to sell have a tendency to be ignorant to the actual state of the market; especially if that market reality might hurt their pocket. I guess it’s just another example of how we are all the same. 

All the talk inside the real estate industry is about how far the market will fall and the areas that are hit the worst. Publicly real estate agents are an optimistic bunch. Ask them and most will talk the market up and promise the upturn is just around the corner. Privately most are scared. Agents’ bravado is nearly world renowned. They talk positive even when things are terrible.  Part of the reason is because they hope that talking positive will rub off on buyers. The question is ‘who would believe a real estate agent?’ 

On the 3^rd June the front page a headline of The Financial Review stated that 10,000 people had left the real estate industry in the last year. This is about 1 in 6. This is a staggering figure. While the majority of those staff reductions have been agents in Queensland and Western Australia, Sydney is not immune. Three local offices of a local real estate went into receivership last year. We’ve watched as other real estate offices have cut staff, changed brands and downsized premises to survive.

 

Those of us that have been around for a while have seen this market before. Most recently it was called the recession we had to have, those wonderful years of the early nineties. Over a two year period the value of real estate in our area dropped 15%.  Further West the market fell 25%.

Since I’m in a rather frank mood I thought I might share with you our reality of our local market. By local I mean the geographic area bordered by Ermington to the West and Tennyson and Putney to the East; from the Parramatta River with Putney, Meadowbank and Melrose Park in the South to Marsfield, Macquarie Park and Denistone to the North. This area is often described as the Northern Districts, although the full northern districts area expands further north following the rail line up to Thornleigh and Normanhurst. Our part of the Northern Districts is pretty close to the geographic centre of Sydney.

Insert map of Northern District

People are holding off selling

According to our figures, in the first 3 months of this year 486 residential properties were listed for sale. Last year for the same period there were 636. That means the volume of property coming onto the market is 75% of what it was. People are delaying their decision to sell and staying put. Trouble is people are still out growing their home at the same rate as before, homes are still getting too big, old or too much work for others and so on. The need of people to sell property is still there, its just being tolerated by some about 50 households a month. Simply put people are waiting, hoping for the market to return. They don’t want to sell for less than what they could have been paid last year. Most common statement people say is ‘I don’t want to give it away.’

In the past this build up has gone on for 12 months or more. People avoiding the market started in October last year and became increasingly obvious in December when only half the property came on the market compared to the year prior. This lower volume of property on the market has to some degree helped slow the fall in prices. Unfortunately it hasn’t stopped them falling. The market is still coming down; it is just taking a bit longer. At some point the sellers that have been waiting to sell will hit the market as they are unable to contain their needs to move. When that happens, prices will take a second hit and only then will the market truly hit the bottom.  We don’t think that will happen until the end of this year and beginning of next.

Interest rate pressure and the economy does seem to be hurting locals    

We don’t have any figures that really mean anything to point to but we have plenty of anecdotal experience.  Last week I had a phone call from a finance broker who describes himself as a lender of last resort. He had been asked to lend on a unit in Ryde and wanted to know the minimum the property would sell for if it had to be auctioned as a mortgagee sale. I asked him how he was finding business and he said that unfortunately ‘demand is through the roof’. Not only was he doing the lending but then months later taking possession of the properties and having to sell them. I also have clients who are choosing to sell because it makes sense to jump before they are pushed. They are fatalistic about it.

Feeling the stress of increasing mortgages is less in our area than for those people in other areas and states. To give you an idea, on the Gold Coast in Queensland a salesman I know told me earlier this month that for every sale he has made this year, the property was sold for less than what the owners bought it for. Not one sale made this year gave the owners a profit. The only reason each of these sold was they needed to sell badly. In many cases, the sale prices are less than the mortgage owing. The only way these sales go through is if the owner takes an increased mortgage on their other properties so the bank can be paid out. Sure Queensland had the floods but the market was over inflated and running on an unsustainable belief that you couldn’t help but get rich. The floods lit the wick, they didn’t create the bomb.

The number of agents in our area is unstable

There were 90 different agencies handling the 476 sales listings during the first three months of this year. Talk about competition! About 40% of those agencies were from well outside the area and only handled maybe one or two listings. Of the more local agents, the one who handled the most sales had nearly 13% of the market while some of the small local agents in the area had only one or two listings in the three month period.

A real estate office can’t survive on just a couple of sales a month especially since most agents have only small rent rolls. I suspect we will see some more agents in the area stop trading. So, how did we rank? We came 5^th out of the 90 in the area. And we’ll be around for a while yet. We are one of the three agencies with the largest property management in the general area so our business is pretty robust.

It’s taking longer to sell, for some a lot longer than others

Average time to sell a property has been creeping up and seems to now be around 70 days. Back a year ago it was running at under 40 days. This is not consistent between agents. Many larger agents are still maintaining reasonable time periods. We averaged 45 days; a number of others were able to average less than 55 days between listing and sale. But the ability to find buyers is varying between agents. Many of our competitors are taking over 100 days on average to sell property and these agents and their sellers are the more vulnerable to the difficulties of the market.  

Sale Rates

The papers show Auction clearance rates each Sunday. These are drawn from agents reporting which of their auctions have sold and which were passed in. Sale rates of auctions are jumping around. I looked up the figures for each of the Australian states. Every state had an auction clearance rate of less than 50% during the first couple of weeks in June. Auction clearance rates are really a measure of what proportion of property being auctioned has been sold in the first 5 weeks of being on the market. They are used as an indicator how much activity and interest there is in real estate.  This doesn’t mean that auctions aren’t working or not working as well as private treaty or ‘for sale’. In fact they are working better than ‘for sale’ properties. In the first 5 weeks of a ‘for sale’ property being on the market. There are less than 40% being sold.  

According to our figures, in the first 3 months of this year 486 residential properties were listed for sale. Last year for the same period, there were 636. That means the volume of properties coming into the market is 75% of what it was. People are delaying their decision to sell and staying put. Trouble is people are still out growing their home at the same rate as before, homes are still getting too big, old or too much work and so on. The need of people to sell properties is still there, it is just being tolerated by about 50 households a month. They don’t want to sell for less than what they could have been paid last year. Most common statement people say is ‘I don’t want to give it away.’ People are waiting, hoping for the market to return.

The irony is the longer they hold off selling, the greater the chances of market prices to drop as they will likely sell at the same time.

Like our blog? Why not go to www.jacksonrowe.com.au to download all of our market reports and newsletters.

The Costs of Tenancy Turnover / Vacancy

Tenancy turnover is a measure of how long a tenant stays in a property before they move out. A low turnover of tenants is important to our clients because the longer a tenant stays (assuming they are a good tenant) the less vacancy a client has, the less fees they pay in having the property re-leased and the less wear and tear the property has with tenants moving in and out.

Tenants moving out of properties cost owners money. Clients can find that improvements they were planning to do perhaps in a year or two’s

time must now be done sooner if the property is to attract a new tenant.

Our figures show that when properties turnover they lose an average of about 10 days rent due to vacancy.  They require painting and carpeting more frequently, earn less income over the course of a year and pay more in leasing fees and advertising. You can see turnover is expensive and is the highest avoidable cost in property investment.

It surprises me that very few agents are concerned about this. We’ve worked hard researching how long we can maintain good tenants in our properties, which tenants are more likely to stay longer and what cause tenants to move on and our results form the basis of our tenancy strategies. Here are a few of our findings and how they are incorporated into our property management.

How we compare

Our tenants stay in our properties for an average of three and a half years or longer before they move out. The results in the industry vary depending on the region, property condition and agency practice but information we have been able to obtain indicates that most agencies report average tenant turnover of about one and a half years, with some are as low as nine to ten months.

The cost of turnover

Here are some of the costs associated with a two bedroom unit renting for $350 per week coming vacant.

Letting fee                          $385 (1 Week + GST)

Advertising                        $  50

Lease fees                         $  15

Vacancy                             $500 (10 days rent)

Increased maintenance     $600*

Therefore, Total cost of re-leasing =  $1,550

In our experience a property will generally need to be painted every three tenancies and carpeted every four tenancies. The changeover of a tenancy is when the most wear and tear happens and when the unsightliness is most obvious.

A property that turns over every 18 months will need internal painting each 4.5 years and carpeting each 6 years. A property with a tenancy that turns over each 3 years will need to be painted each 9 years and carpeted each 12 years. The higher turnover property costs double to maintain. The current cost of painting a two bedroom unit is around $2,500 and carpeting is $3,000.

Each 12 years the higher turnover property will cost $6,250 in painting and $6,000 in carpet. That’s $1,200 a year. The lower turn over property would cost half that.

To put that in perspective, that’s a loss of about one month’s rent. It would be cheaper to pay the year’s council and water rates TWICE. Even if we disregard the maintenance component, you are still likely to loose $950 every new tenancy. (Based on the above figures)

Next week I will explore avenues of avoiding and minimizing your tenancy turnover. Its one thing to know how much vacancy is going to cost you… but avoiding it altogether is certainly the preferred option!

Like our blog? Why not go to www.jacksonrowe.com.au to download all of our market reports and newsletters.

Part 1: 4 Things you should know before choosing an agent to sell your property

There are two completely different discussions I have with people who are looking to sell. It all depends on when they last sold a property and how well that sale went. With people who haven’t sold for a while the same questions get asked; How much can you get me? How much will it cost? Do you recommend auction or private treaty? These questions are quite reasonable; they just aren’t necessarily the best ones.

On the other hand, if I’m being interviewed by someone who has had their property on the market and not sold, the questions they ask are radically different.  In fact we find inexperienced sellers typically ask 5-6 questions about the process of sale and how the agent would approach different matters. Experienced sellers will ask over 20. And it’s not just the people who’s properties didn’t sell who realise there is more to selling than an agent who ‘seems nice’. Research carried out by our industry, shows that over 50% of sellers who sold would choose a different agent if they had their time again.

Over the next 4 weeks I will explore the 4 things that these ‘experienced sellers’ know that you may not. They are what you should ask when you interview an agent to sell your home.

1. Buyer Profiles are more Important than Buyer Budgets

The argument is that buyers who can afford more will pay more for a property. Seems sensible? Well if this is true then all property should first be marketed to the richest people in Australia, “Lets market your home to James Packer!” The logic is that while he can buy better the asking price is easily affordable for him so he will pay you more. The truth is no matter how wealthy people are they will always buy the home that they love, not the home that’s cheap. There is an exception. If the price is so cheap, cheaper than even market value, then they may buy it. But that’s because they will make money on the deal, money that you should be making. 

Similar to this is the idea that the more buyers through a property the better the sale price. The only way that will get you rich is if the agent is selling tickets at the front door. If all those buyers don’t like your home, any offers you get will be lower not higher.

Top sales prices are paid by the buyers who love the property more than the others on the market. Experienced sellers often learn this first hand and have horror stories of lots of inspections. People who have higher budgets find a lot more fault in cheaper homes. Good agents know how to profile buyers and how to match them to property they’ll like. In our business buyers are broken into 6 subgroups. When a new property comes on the market we run a targeted campaign to those buyers who best suit the property’s profile. From their feedback we know how to refine the marketing to attract more of the buyers who will want to buy the home rather than the ones who are ill-suited to it.  

The question experienced sellers ask; How will you find the right buyers that suit my home? If the agent talks about budgets then they are going to sell the home by luck. If they talk about buyer needs then they will sell it using its natural competitive advantage against other on the market and will get a better result. 

Next week we will explore the use of Marketing and how it can be used for good & bad!

Read more at www.jacksonrowe.com.au

Market Update (and because I have an opinion on everything... a bit of a prediction too!)

A lot is being written about the sales market and whether there is a “Bubble” or not; some are saying there is and others saying that everything is fine. The idea or concept of a ‘real estate bubble’ comes from the USA where the structures around real estate ownership and mortgages are so much different from ours. In the US mortgage interest rates are fixed. If you take a loan out for a home and the interest rates fall, you still pay the same amount. Virtually every housing loan is a fixed loan. In Australia, 80% are variable loans; interest rates rise, so do your repayments, interest rates fall so does your repayments. In the US rates fell, but mortgage repayments stayed where they were. The other difference is that in the US mortgages aren’t personally guaranteed.  If you can’t pay or don’t want to pay, you can walk away. They have a term called “Jingle mail”; its people putting the house keys in an envelope and mailing them off to the bank. The bank will take your home but they can’t touch you or your savings, whereas in Australia, if you don’t pay they take everything.

I saw some research on the difference between people’s attitudes to different debts in the US vs. Australia.  In Australia people will pay their home loan first, car repayment second and credit card last. In the US its car, credit card and home loan. Their way of thinking is that you need a car to work, you need a credit card to buy food, and the mortgage is luxury. And because mortgages are luxuries, they are volatile and so are the houses they go to buy.

In Australia, home buyers have so much ‘skin in the deal’. Lose the house and you lose everything. That stops our real estate market from being so volatile and is why our banks have very little to fear with a real estate bubble in Australia. Never the less we do have a bubble and the GFC and our government response helped cause it. We did two things; we lowered interest rates and the State and Federal government pumped in first home buyer bonuses and stamp duty rebates. The real estate market took off during a time when people weren’t even sure they would have a job. In Australia houses may come with an asking price of $950,000 for example but they are bought by buyers who are primarily thinking in terms of say $4000 per month in loan repayments. The loan repayment is tied to interest rates. The low interest rates that we had over 2008-2009 were lower than I’ve ever experienced. Hence our boom, but where to from here?

Macquarie Bank’s property research group look at a lot of numbers and economic data. One number that they watch and put a lot of weight on for predicting residential market movements is the ratio of average loan repayment to average income. When that ratio gets up to 40%, people struggle. The $4000 per month loan repayment I mentioned is just too much for them and too much for their bank to approve. As interest rates rise and take the ratio over 40% the balance between sellers wanting to sell and buyers able to buy tilts and the market wants to fall to correct.

I say “wants to” because the truth is it can’t; not easily anyway. Unlike the US, owners of a property have too much skin in the deal. If prices fall, it’s not the bank that looses, it the home owner. Rather than go backwards financially, we Aussies hang on, we stop using our credit cards. The retail market feels it first, shops & restaurants etc. The number of houses on the market fall as owners put off selling until things get better. House prices do drop a little, mainly because the people who do sell are those that have to because they really have out grown their home or they are close to or have fully paid it off. In past real estate corrections we’ve seen adjustments of 5-7% which happened in 2004-2006 or 15% which happened in 1991-1995. The 1990’s correction is interesting because it happened after the stock market crash of 1987. The governments’ collective action around the world was to pump money into their economies to stop them chain reacting. A year or two later they started to increase rates to stop the economy overheating. Sound familiar? 

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