In this week’s email newsletter, available for free by signing-up here, managing director, Louis Christopher, shares his experience of a Sydney auction that he attended in the Sydney suburb of Seaforth:
The three-bedroom, single level house in Sydney’s Seaforth was nice, but it was nothing special. Set on just 550sqm it is below the average size for a free standing house in Sydney. The rooms were bordering on the small side. The bathrooms were small. There was no garage or even a carport. Just a small spot in the open for a car. There were no views. Importantly parts of the house had been renovated PRIOR to the existing vendors who only bought less than 12 months back.
They had bought it in June 2014 for $1,350,000. From a professional basis I was very curious. Just what would a property that sold just less than 12 months ago, with no capital improvements added under the current owner, sell for today?
Mainly I was there to help my friend. With a new family and a good business, he is doing well in life and now is the time to settle in with a home. Nevertheless, even with all the good things going for him and his partner, they had been struggling for some time to buy into the Sydney property market.
I gave my good friend everything I had. We went through the current SQM valuation and most recent leading indicators. All up, the current local market evidence for Seaforth suggested a move higher of somewhere around 15% for this property since last year.
To start with, things were ominous – for the last four weeks, Sydney’s auction clearance rates had been at close to record highs. Worse, listings in Seaforth fell to their all-time lows in April – just 20 houses listed. So, after taking that into account, I thought the market might be bordering on a 20% rise, which would place this property at absolutely no more than $1,620,000 and more likely around $1,550,000.
Most certainly, the advertised ‘price guide’ of $1,350,000 (which represented last year’s sold price) was WAY below the mark. Most who turned up to the auction that day knew it.
Bidding started off at $1.4m and rose fairly quickly in $10K to $20K increments. There were five active bidders. A Caucasian looking couple, a buyer’s agent with his female client. And three separate Asian groups, who appeared to be of Chinese descent. One of them was Australian Chinese going by the accent. Plus, my friend.
My friend took the strategy advised to wait and not bid until the last two bidders had weakened and virtually knocked each other out. Then go HARD…right up to his limit. His limit was $1.6m.
The poor bastard didn’t get a bid in.
After just some moments, the bids arrived at $1,550,000. At that point, the bidding briefly stalled. A question from the crowd was thrown at the auctioneer. “Had the property reached the RESERVE?” The agent did not show his hand. He only responded that he would ask the vendor at the right time. Bidding resumed.
In a space of another minute we were at my friend’s limit…then over. The buyer’s agent who initially took the correct strategy of showing no weakness, faltered in the end, though it wasn’t his fault. Bidding had gone beyond the current market. His client walked away in disgust and loathing at what was taking place, even before the end was out.
In the end it was down to two bidders. The Australian-born Chinese husband and wife, and a young woman, who also seemed to be of Chinese decent. They kept each other in the game, stalling and lobbying in $1K and $5k increments. Auction bidding stalled again at $1,620,000, at which point the agent declared the property was selling as it had exceeded the vendor’s reserve. Once that happened, bidding started again and it kept going…and going. Until finally the young looking Chinese woman won out…at $1,720,000.
A full 27% price rise from its selling point not more than 12 month ago.
The woman of Chinese descent, who spoke in broken English, would not have been more than 30 years old. She was bidding alone. She was never on the phone and from what I could see, there was no one else there supporting her…other than the agent egging her on!
You could tell even at this price she was agitated. She had bought over her budget or at least the top range of what she wanted to pay. She had paid 27% over what it sold for only last year.
And that was it. The crowd gasped. The unsuccessful bidders, saddened and angry, walked away, wondering what their future was now. There were some claps, presuming from the neighbours; happy to know they too now are nearly multi-millionaires.
And for my mate. What could I do for him? Easy done, we went for a couple of Saturday afternoon drinks to reminisce and, eventually laugh it off – $1.7m for a box? They can have it!
While I have taken a line in the past that the fear of the Chinese pushing up our housing market is just that – fear; when it comes to the heat of the moment it is easy to see why suspicions arise. How does such a person of young age have the money to spend $1.7 million on a house??
There, of course, could be a host of reasons. Maybe she has worked very hard in this country and her local business has done well. Maybe she has recently won the lottery…and then…maybe she is a Chinese student with her parents back at home, using her residency to buy Australian property on their behalf – we will never know.
What I do know is this – the Sydney housing market is now as strong as I have ever seen it. It’s like a wild bushfire – out of control and setting alight everything in its path. Our revised forecasts of 11 to 15% price gains, up from the original 8 to12%, now is looking very conservative.
The action now suggests movements of greater than 20% p.a. at least for houses. This is dangerous stuff.
Louis’ experience has been shared by me in Melbourne’s local government area of Boroondara, where I have experienced multiple auctions whereby homes have sold way over ‘fair market value’ to people of Chinese appearance that could not speak English (translators were there to assist).
Let me be clear that I am not in any way against Chinese immigration and their purchase of property. But while it is probable that some of these homes may have been sold legally to new migrants with residency, the sheer number of such sales, and the fact that they have only been occurring recently (i.e. the past two years), suggests that some significant portion is illegal.
The Australian Tax Office (ATO) seems to agree. Last month it revealed that it had commenced a data matching program of foreign purchases whose initial random sample “identified sufficient high risk cases warranting further action” [my emphasis]:
A weighted sample of data of 950 records has previously been obtained from the Foreign Investment Review Board, representing a random sample of 40% on the entire population in the top 10% by property value.
Based on analysis of this data a number of compliance risks were identified, including:
– Residency for income tax purpose
– Registration for pay as you go withholding, income tax and goods and services tax
– Foreign investors becoming residents for taxation purposes, but failing to declare foreign source income
– Capital gains tax issues, with either the vendor not declaring a capital gain, or the foreign investor subsequently disposing of the property
– Failure to declare rental income when the property is made available for leasing
– Goods and services tax related issues where the property is developed or extensively renovated
– Outstanding payment obligations.The pilot program identified sufficient high risk cases warranting further action. Cases identified are expected to result in departure prohibition orders and the issuing of default or special assessments under sections 167 and 168 under Income Tax Assessment Act 1936.
I don’t know about you, but that appears to be a clear statement that the ATO has checked 950 property sales and found something alarming. My guess would be that the 195 sales now being ‘investigated’ by the ATO are what they have found.
Apply that ratio to every last purchase of real estate by foreign nationals and there is a massive problem – and a major political issue.
Hopefully, the findings will prompt the ATO to audit all property sales over the past two years in a bid to identify and punish the illegal sales of existing homes to foreigners, which could number in the thousands.
