Melbourne Market--Reality Check?

[brop]

I bought a property in Brighton East in 2006 via Metropole Projects, who managed the preparation of plans, and planning permit approval, for two townhouses. Purchase price in 2006 was $750k. I had done a lot of my own research at the time and was quite happy with the purchase.
Fast forward two years. I had my Brighton East property up for auction yesterday. Metropole attended on my behalf, as I live in Perth. I spoke with the auctioneer on Friday to discuss the reserve price. During the discussion, he talked about a drop in Melbourne prices of 20-25% in the last 9-12 months, and a drop of 10-15% in the last three months alone (and he was referring to good suburbs). Now this did shock me—I simply could not believe these numbers. I suspect he was trying to influence my reserve price. So-- how did the auction go?
20-30 people turned up. Auctioneer started it off at $800k. Vendor bid at $850k. Not one bid from the crowd. Given the state of the economy and generally poor sentiment, I suppose I shouldn’t be too shocked. Timing for the auction was not the best. But after two years (with reported stellar growth in good Melbourne suburbs in 2007), plus the added value of a planning permit for two townhouses, I was expecting more (a lot more). In fact I had a bank valuation close to $1M at the start of the year, which closely reflected available sales evidence at the time.
My question to forumites familiar with the Melbourne market: what are your observations on price movements over the last 9 months, and in particular the last three months. Is there some substance to the numbers bandied about by the auctioneer?
Appreciate any response from informed forumites.

 

[Belu]

brop there has been a drop at the top end, and as a lot of people with money had a lot on the stock market it isnt surprising to hear those numbers.

Melbourne is a very heavy auction market, and things havent been going well on the auctions lately. http://reiv.com.au/home/inside.asp?ID=142&pnav=141

That is the REIV's weekly report and results of auctions in melbourne - the clearance rate was 53% which is the lowest ever i think, last week was 56%. this time last year it was 80%+ to give an example.

Hope this info helps.

Ben

 

[The Y-man]

Your numbers sound about right. Very illiquid at present.

We are trying to sell our Prahran property. Winter is traditionally quiet - so our agent suggested we do a spring auction - traditionally a strong season.

The turnout to our Auction - ZERO - and it's not a top end property.

Not only that, subsequent queries to property after auction - ZERO (normally would have had several queries by now).

Cheers,

The Y-man

 

[brop]

Thanks Ben. Useful website. Checked out the results for Brighton East. One private sale, one auction sale, and 10 passed in at auction. An even more telling statistic for Brighton East is that all 10 appear to have been passed in on vendor bid.

 

[landlubber]

Brop, I think you'd agree one heck of a LOT of "water has flowed under the bridge" since the start of 2008 when you got your $1M valuation. And I'd say your result was pretty normal for Melbourne now. It's simply not the time to be selling in Melbourne ( ..or most other places!) We still have some of the highest interest rates in the developed world, the share market is in tatters ( imagine the margin calls) and we're talking global recession or even depression. Now, for property, I think it all depends on how fast they drop IRs ...and how long (some) investors can "hang on". Good luck.
LL

 

[Peter Parker]

My question to forumites familiar with the Melbourne market: what are your observations on price movements over the last 9 months, and in particular the last three months. Is there some substance to the numbers bandied about by the auctioneer?
Appreciate any response from informed forumites.

Looking at units around here, I'd say there's been a drop, even though advertised 12 monthly figures indicate double-digit growth. Some asking prices have dropped by 25%, but that's rare. 6 months ago if you asked an agent if you could buy a 2br unit around here for under $200k he'd say you couldn't. But I've now seen a good number around $220k and one advertised under $200k.

I don't know about houses around here but something for well under $400k should be doable.

 

[brop]

Yes, certainly amazing times. What I have to decide on now is whether to continue with ongoing marketing costs or withdraw from market for the near term at least. Shouldn't be too difficult a decision!

cheers - brop

 

[RightValue]

Yep values in that price range have definitely been affected this year, anecdotal evidence is that it is suffering more now.

For example I valued a townhouse in near Essendon last week. They apparently had it valued at $500k last November (same bank different valuation firm). They had an estimate of $570k, told me they needed $545k to be able to borrow to buy the couch and re-tile a perfectly good bathroom) .. I was generous at $490k!

I work in the West of Melbourne and most of the properties I look at (7 a day) are around the mid $300k; that market is holding it's own. The top end is suffering, for example one I am valuing in a suburb with about a $400k median price was bought in Oct 07 for $660k .. at the peak of the market .. A very similar property opposite sold in Feb 08 for $610k and they will likely get a value of $600k .. against an estimate of value to the bank of $750k.

Meanwhile at the other end, those in the sub $270k market the values are actually rsiing .. suburbs like Deer Park, Kings Park, Albanvale, St Albans, Delahey - all 16 to 22 kms from the city. This market took a $20k jump in Jan, moved streadily during the year, took another $10K jump a copule of months ago. What would have cost $195k in Nov 2007 now costs at least $235k..

It's about affordability .. The interest costs are less than the rent ..

For example I have been renting in Camberwell for over 7 years .. it was cheap at $220pw for a 2 bed flat. 18 months ago the rent started to rise and is now $300pw.

I don't like paying interest that is not deductiable and was happy to rent on a 3% yield.

I just bought a 4 bed 1 1/2 bath house in one to those suburbs I mentioned for $235k on a block that should easily be subdivisable ... even if not the interest will be less than the rent I am paying and I will save 1 1/2 hours driving a day and $100pw on vehicle expenses. The rental on the property would be around $270pw.

A lot more people can afford the bottom end than the top end, supply is far tighter below the median melbourne price range than at it or above it.

These suburbs saw little of the metoric 2007 price rises which were mostly evidenced in the inner and Eastern suburbs. It looks like just as the share market has given back all of the last years rise, so too are some of the suburbs that rose so far and so fast last year.

cheers

RightValue

Addendum:

Firday I valed a house in a $300k'ish suburb. Was going to Auction with a reserve of $320k in a couple of weeks. Agent got 4 offers of $330k and one of $335k when they decided to put thhe property up for sale last week. Nice house 3 bed 2 bath rumpus good landscaping etc .. another affordable home in an affordable suburb.

 

[landlubber]

Yes, certainly amazing times.

Well I'm sure some of our share-market fans are using more colourful descriptions at the moment. Imagine the margin calls that must be being made and are still to be made. The knife is still falling !! This has to flow through into the property market sooner or later as they just sell "anything" to raise cash.
LL

 

[boomtown]

I remember a study done by the ASX in 2007 which was quoted on this board which showed given a 50% LVR a balanced share portfolio outperform property everytime.

How those guys on 50% LVRs feel about those margin calls?

 

[Belu]

and that is the thing, i would much rather buy smart long term properties at 80% LVR than shares at 30% LVR.

 

[pieman]

Maybe not a great time to sell, lots of stock and no buyers. This can only mean one thing, those that need to sell will have to cop it and those that dont should just hold off for the time being.
I know your market and have seen vals for established houses in Brighton come off 10-15% this year, thats it not, 20+% they quote. They RE's will try to crunch you when there's no punters - they want a sale.
Wait till rates come down and boy are they on the way down. The holding costs will dramitically drop so it may be in your interest to weather the storm.
Its like we're all standing on the beach looking at this tidal wave comeing round the point. No one knows what's going to happening and as such people have put their wallet in their pockets.
cheers
pieman

 

[RightValue]

I remember a study done by the ASX in 2007 which was quoted on this board which showed given a 50% LVR a balanced share portfolio outperform property everytime.

How those guys on 50% LVRs feel about those margin calls?

I wote a book in 2005 about Listed Property Trusts. In it I compared the long term accumulated returns of LPT's (now A-REIT's) to resi property using Melbourne median property as a comparison.

In 2004 LPT's finally overtook Resi Property as a better investment... it would have stayed that way up until last year ... now the AREIT's have lost over 50% of their value this year .. Resi property is the real winner and will stay on top for a long time if not forever.. I daren't update that graph.

I have certianly changed my tune ... Thankfully I stayed long Resi Property.

cheers

RightValue

 

[nonrecourse]

Our Brighton perspective

We live in Brighton and attend 6-8 residential and commercial auctions a week year in year out. For most of last year we were amazed at the prices paid per square meter. The prices paid were so far above the fundamental land values that earlier this year I started making the call that commercial values would drop 50% and residential would fall 40%.

The thing you have to appreciate is that Toorak, Brighton, Camberwell, South Yara are the first to drop in a down turn and usually are the first to go back up just prior to a turn around.

The difference this time is that because of the financial tragedy that is unfolding you need to take a much longer term view. If you cannot afford to hold it for 7-10 years you may be better to take a loss now rather then next year when the fiscal tsunami really hits home.

The other side of the coin is that in Brighton weekly rents are now around $800 per week for a very ordinary 3 bedroom house.

If the house you have in Brighton East is on the beach side of the Nepean highway I would think because it is new that you would easily attain 800-1000 a week depending on the quality of the finish.

On walking around Brighton tonight it is amazing how many unfinished new properties there are and no further work is being done. I suspect a lot of people have been caught in the share market collapse.

Our call is rents will continue to rise but there will be at least another 25% drop to come in property values early next year.

 

[chilliaa]

I dont see what all the fuss is about, Melbourne had a very good year last year with property prices up 20%+.
So if you have purchased well located property at a decent price at a decent yield and with reasonable borrowing costs then just hang on.
Things go up and things go down.

The big problem is those people who thought that property doubling every 10yrs means property has to go up each year. Property may well stagnate for the next 9 yrs and then double in year 10 who knows.

Residential property investment is a long term investment and should be treated as such.
Personally as a property investor im quite happy for things to go into a cool down period for a while. It means less chance of a major plumit later on.

 

[sash]

I am of the opinion that the top end of the market can come off a lot in hard times. In the last recession......40% came of some sections of the top end. So this is not unusual!

I have had debates with various buyers agents in this regards...and it is in fact the top end of the market that can take a hammering hard times! It looks like it is repeating again.

I spoke with the auctioneer on Friday to discuss the reserve price. During the discussion, he talked about a drop in Melbourne prices of 20-25% in the last 9-12 months, and a drop of 10-15% in the last three months alone (and he was referring to good suburbs). Now this did shock me—I simply could not believe these numbers. I suspect he was trying to influence my reserve price. So-- how did the auction go?

Appreciate any response from informed forumites.

I have heard the West is travelling well. I was talking to agents in Hoppers Crossing and Werribee and they are also reporting steady activity. The lower priced homes are doing well....up to the 300k mark is doing well. People are more cautious ....also high interest rates have made people look at affordability.

Cheers
Sash

Yep values in that price range have definitely been affected this year, anecdotal evidence is that it is suffering more now.

I work in the West of Melbourne and most of the properties I look at (7 a day) are around the mid $300k; that market is holding it's own. The top end is suffering, for example one I am valuing in a suburb with about a $400k median price was bought in Oct 07 for $660k .. at the peak of the market .. A very similar property opposite sold in Feb 08 for $610k and they will likely get a value of $600k .. against an estimate of value to the bank of $750k.

Meanwhile at the other end, those in the sub $270k market the values are actually rsiing .. suburbs like Deer Park, Kings Park, Albanvale, St Albans, Delahey - all 16 to 22 kms from the city. This market took a $20k jump in Jan, moved streadily during the year, took another $10K jump a copule of months ago. What would have cost $195k in Nov 2007 now costs at least $235k..

It's about affordability .. The interest costs are less than the rent ..

A lot more people can afford the bottom end than the top end, supply is far tighter below the median melbourne price range than at it or above it.

These suburbs saw little of the metoric 2007 price rises which were mostly evidenced in the inner and Eastern suburbs. It looks like just as the share market has given back all of the last years rise, so too are some of the suburbs that rose so far and so fast last year.

Firday I valed a house in a $300k'ish suburb. Was going to Auction with a reserve of $320k in a couple of weeks. Agent got 4 offers of $330k and one of $335k when they decided to put thhe property up for sale last week. Nice house 3 bed 2 bath rumpus good landscaping etc .. another affordable home in an affordable suburb.

 

[rastus2]

brop there has been a drop at the top end, and as a lot of people with money had a lot on the stock market it isnt surprising to hear those numbers.

Melbourne is a very heavy auction market, and things havent been going well on the auctions lately. http://reiv.com.au/home/inside.asp?ID=142&pnav=141

That is the REIV's weekly report and results of auctions in melbourne - the clearance rate was 53% which is the lowest ever i think, last week was 56%. this time last year it was 80%+ to give an example.

Hope this info helps.

Ben

Please find the actual numbers attached.

Quite a bit uglier than the 53% that you were quoted I believe... You might find that the newspapers numbers are usually wrong... (higher % rather than lower).

 

[Twitch]

I suspect even the 45% figure is optimistic.

 

[DavidMc]

Cool. Once the media picks these up maybe 1st/2nd quarter 2009 will be a good time to buy. Or are people thinking now?

 

[BayView]

Cool. Once the media picks these up maybe 1st/2nd quarter 2009 will be a good time to buy. Or are people thinking now?

Early - mid next year, and assuming we get another interest rate cut or two.

By the way brop; why are you looking to try and sell right now?

Not a good time.