We Need to Stop Talking About Price

Whilst all the talk has been around price and whether the bottom of the market has been reached or otherwise, it really is a moot point. The only thing price really does is impact someone’s on paper wealth and depending on where that price point actually sits compared to the point in time they bought the property; it becomes either the issue of the individual or the financier (sometimes both).

What we should be discussing is the actual volume of sales being achieved as a far more important indicator of the cycle and its contribution to the broader economy. When sales volumes are being made in good numbers, the cost of the transaction is spread across many different industries and professions. This is even more so when the property involved is new. An established property sale will invariably keep the doors of the local real estate agent office open which employs sales people, managers and administrative staff. Legal firms are involved to handle the conveyancing, the Government gets a few licks in through the process which, in theory, should go towards providing services and productivity benefits to the whole community. Downstream retailers benefit as the new purchaser goes on to make the home their own, thus providing more employment opportunities. New properties touch many professional and vocational disciplines as well as providing an enormous injection to the retail sector. Good times…

So whilst price might make us all feel richer or poorer, depending on one’s circumstances and timing in the market, the immediate benefits to the economy are often convoluted at best. The ideal circumstances are both an increase in sales volumes combined with a sustainable growth in prices. This is typically how most recoveries take place, we’re not quite there yet but we really do need to get there fast. Unfortunately most cycles aren’t rapid in their movement, and those that are, are usually brought about by extreme shocks.

What is clearly evident in the current market is that six out of the eight capital cities have experienced their lowest quarter of house sales since 2002, the starting point of the data. This is despite generally firm population growth, albeit international or interstate migration depending on the city. Four out of the eight housing markets have also demonstrated their worst annual rate of sales over the same period of time. This is highly significant because it demonstrates that the volumes are actually worse in many markets than what was experienced in the GFC period. So whilst many will have railed against the spending the then Labour Government pursued to keep the economy out of recession, the simple reality is that the conditions being experienced in the current market are equally, if not more challenging. Leadership at all levels is imperative and the surplus being touted may in fact be a promise kept, but really at what cost?

The Apartment and Townhouse markets have also proven to be difficult, though appear to trend more closely with the GFC lows. Having stated that, the worst quarter of sales volumes are the most recent, reflected in five of the eight capital city regions. The depth of the supply in almost all of these cities is unknown with numerous projects still trying to sell down their investment stock that was completed many, many months ago. Despite this, rental vacancy rates have generally performed above expectations. Yields in more recent times have generally been higher than the borrowing rate and the decline of cranes on the horizon suggest that many markets are now correcting of their own accord, rather than through external influences such as when foreign buyers and borrowers were largely legislated out of the market, investors were charged more for their borrowings and APRA took a much more influential role in Australia’s finance sector.

Whilst most of the media commentary has centred on declining asset values, the RBA I suspect would much rather see a strong rebound in sales volumes which would add significantly to kick starting the broader economy.  Once these sales volumes start to improve, many of the supply imbalances will be corrected.  Having stated that, property is much more than just a supply and demand scenario, to reduce it to these basic variables demonstrates a lack of comprehension of the broader economic influences that are having varying degrees of impact depending on where the cycle sits.  There are times in every cycle where supply and demand become almost irrelevant, reduced prices don’t stimulate buyers and as we are finding out right now, lower interest rates don’t necessarily translate to increased sales volumes or price growth.  Continued talk of a recession will help no one, which almost seems incomprehensible when the National unemployment rate is slightly more than 5.0%, the magical number for full employment.

 Markets have never been more segregated than they are right now.  Whilst one thing might work in one submarket, move as little as five kilometres in either direction and the outcome may be completely different.  The days of order taking in property have passed for the time being.  Understanding the customer and their journey will go a long way to unlocking sales.  We are now in the cycle of having to give a little bit, to get a little bit back.  Buyers are not lining up at the doors.  They are more educated than they have ever been, they are more patient because they can be and quality is no longer a buzzword.  Planting an immature tree is not landscaping, a swing with no shade is not a recreation centre and a white line doesn’t constitute a bike path.  The days of authenticity have arrived.

Matthew Gross | Director | mgross@nprco.com.au