Revealed: the hidden danger lurking in our property market

Well, we’re now well into 2018 and it still hasn’t happened. That much feared, much anticipated, property crash, or even correction, hasn’t eventuated.

Now, of course, you can’t rule out a market downturn. However there really is very little evidence that any sort of market malaise is around the corner.

Also read: Yes, we’re paying too much for home loans

Indeed the latest data on the property market is quite tame.

Right now though, property prices are not what buyers, or sellers for that matter, should be focused on. Something more sinister lurks.

Also read: Australia’s cheapest (and most expensive) rental suburbs revealed

Let’s explore the market first though.

No crash here folks

According to the CoreLogic hedonic home value index (a respected measure of national house prices), national dwelling values were unchanged in March.

The month on month reading comprised of a 0.2 per cent fall in capital city dwelling values, while the combined regional markets saw values rise by 0.4 per cent.

Trends across the March quarter showed that capital city home values were 0.9 per cent lower, while values across the regional markets actually tracked 1.1 per cent higher.

Also read: Here’s why AU needs to trim immigration levels

Market is in fact doing OK

Focusing on the capital cities, six of the eight capital cities recorded a fall in values over the first quarter of 2018, ranging from a 1.8 per cent drop in Sydney values to a 0.1 per cent fall in Darwin.

CoreLogic’s Tim Lawless explains it all this way:

“The broad-based falls highlight that the softening trend in the Australian housing market is largely due to weaker conditions in Sydney, however, most other capitals are also recording subtle falls”.

“Dwelling values were steady over the quarter in Brisbane and have continued their strong run of growth across Hobart, up 3.4 per cent.”

What’s happened is that restrictive zoning laws have meant demand (partly due to immigration) has met or slightly beaten supply in some areas. In addition, new restrictive lending conditions imposed by the banking regulator have put a cap on investment demand. So, the market coming off its peak, stalling, and falling slightly is totally consistent with those factors.

So, there you have it, no property crash. Not even a correction.

For those who have purchased in the past 12 months though, or perhaps for those still in the market, there’s another danger lurking – and one you should be made aware.

The hidden danger

So you’re in the market…trudging around and hitting the pavement looking for the place that’s just right.

If you’ve been in the market to buy a property for a while, you’ll know how anxiety provoking it can be.

Some hopeful home owners decide to take some control back by putting in an offer to the seller before auction day. It’s then up to the agent to act as the go-between — liaising with both the seller and the interested buyer.

But what if the agent takes on multiple offers for the property? And in that process, reveals to all bidders what each is offering? It’s known in the industry as a Dutch auction. It’s an ethical grey area that thousands of agents are exploiting around the country.

Why is it questionable? Well simply because you’ve know idea who you’re bidding against, or even if those other bidders exist!

McGrath’s top metro sales agent, Peter Chauncy, concedes half of all of his commissions come through Dutch auctions.

Both McGrath and the Real Estate Institute of NSW confirmed to me that you simply have to trust the agent to do the right thing.

McGrath also concedes it’s an ethical grey area.

Agents “shenanigans”

One independent agent I spoke to, Edwin Almeida, goes even further.

He argues that agents actually prefer Dutch auctions because it’s easy for them to single out investors. He says once the agent agrees on a price with a buyer (investor), the agent can then sell the property to the investor and receive it back not long after as a rental.

Mr Almeida put it bluntly, “If you think the cricket team’s got problems, our industry’s got even worse problems and they go back decades.”

He also argues agents use Dutch auctions to churn through commissions. You can see how running 4 or 5 Dutch auctions during the week would be more efficient than one of two auctions on a Saturday.

But let’s now turn to one other real estate industry danger zone.

Risky times ahead

The second round of the Banking Royal Commission kicks off again next week. It’s being considered a “show trial” in private circles by some but it will also have long term consequences.

Well the analysts at investment bank UBS think it will.

They claim homebuyers could see their capacity to borrow cut by up to 40 per cent as a result of reforms likely to be driven by the Banking Royal Commission.

Why? Well currently, about three-quarters of all home loans are assessed against the “basic” Home Expenditure Measure (HEM) benchmark. For a family of four, that is $32,400 a year.

UBS says the “lavish” HEM benchmark of annual expenses at $58,200 was much closer to what the Royal Commission was likely to recommend regarding banks making “reasonable inquiries” about a customer’s financial position.

What does that all mean? Well simply that the banks’ lending “super cycle” is over, according to UBS. Borrowers simply won’t be able to borrow as much in the future.

Of course, any sharp reduction in borrowing capacity would have a negative impact on the broader economy. In addition, UBS noted that there is also a “strong correlation between home-lending volumes and house prices.”

No cyclone… more of a cool change

The days of rising house prices, jam-packed theatrical Saturday auctions, and ‘liberal’ lending by the banks seem to be over.

We’re in a new era of relative stability, and perhaps as lending cools and prices fall a bit more, some opportunities will emerge.

With that in mind though, if you’re in the market to buy, don’t let an agent bully you into some phantom online ‘auction’. It’s either for sale, or it’s going to auction, or when you hand an offer to an agent, they come back to you with a ‘yes’ or a ‘no’ from the vendor. It’s the best was to avoid being taken up the garden path.

Alternatively, you could just find an agent you genuinely trust. What neat thought.

@DavidTaylorABC