Bye Bye Brisvegas?

There's been much written of late about the state of the property market here in Australia with (predominantly) foreigners insisting that there is a subtsantial housing bubble, while most 'locals' insist there isn't. The RBA and the main lending banks deny it, as you'd expect them to, while journalists in the mainstream press are either crassly ignorant or simply paid-up cheerleaders for the residential property market. The group, meanwhile, who claim there is a bubble is largely made up of prominent hedge fund managers and a handful of publications of reasonably high standing, The Economist, among them.

But rather than contribute to the already crowded intellectual debate on whether a bubble exists or not, I thought it might be time to look at what's going on at the coalface, so to speak -- look at some hard evidence. I live in Brisbane's Western suburbs and have been "in the market" since June 2010. Having kept a close eye on things and been involved in several "situations" in an attempt to get onto the housing ladder I like to think I have, by now, a reasonable feel for what's going on around these parts. Of course, this is simply an area of Brisbane and perhaps not reflective of Australia as a whole, but Brisbane is certainly one of the more 'affordable' cities in Australia so any housing stress, such that any exists, should be felt across other metropolitan areas, you'd expect.

While the market in these parts appears to have peaked in early 2010 (perhaps late 2009), the latter part of 2010 appears to have been the period when the froth was finally lopped off the stimulus-induced housing spike. The following situations stood out for me in 2010 (from June).

Firstly, two transactions which got the denizens of Chelmer and Graceville very excited about the future prospects for house prices in that area during winter 2010:

41 Richmond Street sold for $2.7m in July 2010 and it was a transaction that was hailed as highly significant given it was the best ever price achieved in the area (at least, on a per square metre basis). On the basis of this, prices in the area were heading to the moon according to the RE agents and the residents. This transaction may well have been significant but I'm not sure it was for the reasons trumpeted by various parties: interestingly, prior to this sale, the property last sold for $2.25m in December 2006 and if the property value had simply matched the aggregate rise in Brisbane house prices (using myRPData stats), 41 Richmond should have sold for north of $2.9m. But that's not the end of the story. The people who owned it between Dec '06 and Jul '10 actually spent a lot of money on the house (I don't know the sum exactly - the agent wouldn't say), but adding a modest amount for renovations to the $2.25m purchase price and then adjusting for the rise in Brisbane Met over that period suggests that the property should have been worth closer to $3.2m (assuming it was matching the broader market). So, although the headline number was impressive, Chelmer was actually underperforming by some margin -- I did similar studies for a number of other properties that sold in the area at the time and they confirmed this underperformance.

45 Mortlake Road, Graceville went to auction and sold for ~$902k. It was significant because the house is a knock-it down job and therefore this gave the market some idea of what pure land value is in the area. The price achieved was some $150k north of where many expected the property to trade. It set the new benchmark, according to all those in the know.

In amongst the highlights were some transactions which estate agents were a little more coy about:

7 Jaora Street, Graceville: sold in May 2010 for $1.7m and sold again in October 2010 for $1.4m (after a comprehensive marketing campaign and auction).

22 Lama Street, Chelmer: sold in October/November 2010 for ~$1.8m (PT) having originally been on the market in January 2010 with a guide price of mid-$2m. An offer in the "low 2s" was knocked back during the January marketing campaign, apparently.

225 Dewar Terrace, Corinda (absolute riverfront): another with a guide price of mid-$2m that sold for $1.8m (PT) in August 2010.

12 Wylie Street, Graceville: yet another with a guide price of mid-$2m early in 2010. The original agent was eventually replaced and the price with the new agent was $2m+. When it failed to sell at the new level, the house went to auction where it was passed in at $1.51m, which I can only assume was the last real bid because the vendor bid would surely have been closer to $2m. The house was withdrawn from the market not long afterwards and remains unsold, to my knowledge.

8 Long Street West, Graceville: was purchased in mid-2007 for just under $3.5m and was put on the market in winter 2010 (PoA, but one assumes north of 3.5m) and is now on the market for what is a "reduced" $3m+. It has been on the market for well over 6 months now and failed to attract any interest at the lower price BEFORE the floods. The owner is apparently committed elsewhere.

The above is a handful of examples -- admittedly at the premium end of the market, which is traditionally more volatile --but I think they perhaps reflect the subdued mood in the market in the latter half of 2010 overall, especially in the 1m+ bracket and, although this segment only makes up a relatively small proportion of the overall market (single digits percent), I believe it is very relevant for reasons I'll reveal below.

Now to 2011, and the market genuinely looks weaker: sales in metropolitan Brisbane have fallen off a cliff YoY while the number of properties on the market at the end of 2010 was up 60% on the prior year. If there is a shortage of property, as is often claimed, then the shortage exists in the "affordable" segment of the market. And this appears to be the problem -- the premium end of the market, say $800k+, is egregiously oversupplied and appears very vulnerable to a collapse as a result. Property developers (both professional and amateur alike) have spent the past few years turning $500k properties into $1m properties and there simply aren't that many buyers in the $1m+ bracket. This segment is grossly oversupplied at a time when interest rates have risen sharply, government stimulus has been scaled back (first home buyer grants) and utility and grocery bills are rising sharply -- not to mention petrol prices of late. With owners across the board (in all price segments) now under pressure there will be little support for the premium segment from below.

A couple of anecdotes from the past couple of weeks:

227 Dewar Terrace, Corinda: this riverfront renovator in one of the Western suburbs' most prestigious stretches of road was sold in July 2010 for $1.72m and went to auction last week after a high profile marketing campaign and a reasonable amount of cosmetic work to make it presentable (no idea of the cost). The property attracted one bid of $700k and it was eventually passed in on a vendor bid of $1m. The owner is selling because of "changed circumstances" -- or perhaps the original purchase was purely speculative as has been the fashionable thing to do until recently. More than one real estate agent in 2010 recommended "just buy property, sit on it for a while, then sell!". When there's apparently free money on offer, you know there is bad news just around the corner.

I was shown a house the other day (not officially on the market) belonging to a local estate agent that he/she wants $1.5m for. A superior house in the area that is in far better condition and better located struggled to fetch $1.15m just recently. Go figure - the bull market clearly hasn't ended in the minds of some people!

The example of 227 Dewar Tce, again, may not be representative of the broader market -but this certainly serves as a warning shot across the bows of anyone who feels vaguely bullish about resi real estate here in Brisbane.

Apart from the above there is the usual glut of hard-luck stories from developers who have frantically been trying to kick properties out and wearing some large losses along the way (again, I have had some privileged access to a number of situations in past months). There are several properties that are still in the process of being completed and will need to be shifted ASAP.

And then there are all those owner-occupied properties that have been on the market at nose-bleed prices for several months. In the past few weeks a number have been withdrawn (not flood-related) to wait for "better market conditions", but others undoubtedly need to sell and the (ahem) "huge price reductions" (2-5%) are beginning to come thick and fast. Intuitively (given recently acquired knowledge) I'd say reductions of 10-20% for the better properties and 20-40% for the dross are required to get things moving, but I stand to be corrected.

In the meanwhile, a recent article in the Financial Review reveals that the major banks are now loosening lending standards in order to attract more borrowers and beef up those mortgage books -- alarm bells, anyone?

I will follow up this blog with more local sales anecdotes (as balanced as I can make it) and also discuss the subject of the apparent "low" loan-to-value of the major lenders' mortgage books and how things may not be as rosy as they like to make out.