A flood of spruiking for Queensland

After a week being disconnected from the outside world I have returned to Queensland to find that the real estate pushers have turned their attention to the January floods. Let’s start with Terry Ryder in the Australian.

Brisbane’s housing price performance is among the worst of the capital cities. It is also, from another perspective, the best. Brisbane home values have dropped 5 per cent to 6 per cent in the past year, according to researchers. Only Perth has recorded a larger decline.

But I rate this the best market performance among the capital cities because most analysts expected it would be worse. A lot worse. Brisbane has had to deal with forces no other state or territory capital has faced. The January flood had a serious impact on the psyche of the market and many predicted big decreases in property values.

The more extreme among media commentators suggested a 50 per cent collapse. That clearly has not happened, nor will it. Real Estate Institute of Queensland data shows prices across Brisbane, on average, fell 10 per cent in the six months following the 1974 flood. It also records that values recovered to pre-flood levels within a year of the event.

My prediction in January was Brisbane would do a little better than that this year, given it is now a more mature city and property market, with the river playing a greater role in the life of the community, and given the magnitude of the recovery effort proposed by various levels of government.

And, indeed, this time around Brisbane does appear to be doing better. To cop that level of devastation and suffer only a moderate drop in average values is commendable.

The RP Data-Rismark Hedonic Home Value Index records a 5.9 per cent fall in Brisbane home values for the year to May.

If anyone can point me to an article where anyone claimed that the property prices across Brisbane would fall by 50% because of the flood I would be most thankful.

What Mr Ryder neglects to mention is that even before January 2011 house price growth in Brisbane were already on the slide. In fact they had been in roll-over since Apr-May 2010 as the effects of the first home buyers grant boost faded and interest rates rises began. Until the flood occurred in January the spruikers were at a loss to explain this trend and I still don’t think I have seen a satisfactory explanation from any real estate group as to why prices are falling.Until very recently all of the bullhawks have been full steam ahead with interest rate hike talk.

As I noted in February once the floods occurred the industry was pinning falling prices all across the country on the disaster in a desperate effort to explain what was occurring in the housing market that had been so kind to them over the last decade.

Mr Ryder continues.

Another researcher, Australian Property Monitors, finds that the median house price for Brisbane fell 5.1 per cent during the same period and the median unit price fell just 2.5 per cent. RP Data actually reports a small rise in Brisbane’s home value index in May.

It was only 0.2 per cent (which effectively means no change) and is only one month’s figures, but to record any kind of increase is, in the circumstances, extraordinary.

The indications are, therefore, that Brisbane has held up better in the wake of this year’s flood than it did following the 1974 event.

As Mr Ryder mentions but then conveniently ignores a single months figures in the housing market are meaningless. As I have always said in housing it is the trend that matters and a quick look at the RPData-Rismark chart for Brisbane tells that story.

If you didn’t know there has been a natural disaster in Brisbane in January I am not sure you could even recognise it in the chart. If we compare Brisbane to another capital city that was unaffected by the disaster you would have to ask whether it had any real effect at all in broad terms.

As I have said many times previously, sales volumes are a very important leading indicator for house prices and in regards to that RPData’s latest report is very clear.

Sales volumes in April were actually below those of January suggesting that prices have further to fall. It would seem from that chart that  just 6 months after the flood event Mr Ryder is rather premature, even if the flood did have anything to do with the falling prices.

However, if Mr Ryder had done a little bit of digging, he would have found that until very recently the properties that were actually effected by flooding haven’t even been showing up in property transactions. There are many areas of Brisbane ( and surrounds ) that are still in insurance and finance limbo. Properties that have been directly effected by the flood are only recently starting to hit the market and if Mr Ryder thinks that 5% is all that has been lost in value in these particular properties then he is in for a rude shock.

Values of flood effected properties have actually fallen quite significantly. But you probably wouldn’t get that message if you read the articles in my favourite real estate hand-out. The Courier Mail is still doing what it does best.

The internal walls are missing, wires hang from the ceiling and the floors are bare. Yet potential buyers can still see the former glory of this flood-affected Indooroopilly home, which has scored more than 780 hits on its internet advertisement within a week of going on the market.

It is one of a number of flood-affected homes now coming on to the market six months after the January floods. Cheryl Edmonston, of Doug Disher Real Estate, is marketing 258 Indooroopilly Rd.

She said the owners wanted to move on and put the floods behind them. Nine people had inspected the property this week, phone inquiries were received and more people were expected to look at the five-bedroom home today, which goes to auction on August 13. Ms Edmonston said many potential buyers saw it as a chance to get into a market they may not previously have been able to afford.

James Freudigmann is one of those potential buyers undeterred by flood damage. He lives at Kenmore and would like to live at Indooroopilly, closer to the city.

“I have looked at a few properties (flood-affected) around the place but you have to be pretty quick,” he said. Mr Freudigmann said if he bought a flood-affected property they would do it up, live in it for five or seven years and then probably sell.

Just in case you wondered what James Freudigmann does for a living here is his linkedin page. Not that this should surprise you.

If you are wondering what “flood affected” means, here is a picture of 258 Indooroopilly Rd.

You will note that this particular property hasn’t actually been sold yet unlike some others mentioned in the article.

Geoff Smith of Ray White Indooroopilly said his office had now finalised several sales of flood-affected properties. He said the circumstances of those selling were all different. Some renovated before selling, others cleaned the houses, stripped them down to dry out and were leaving renovations to new owners. Others were selling because they had to.

Mr Smith said prices being achieved, depending on the damage and repair work needed, appeared to be 10 to 30 per cent down on what they would have sold for before the floods. He has an unconditional contract on a home at Witton Rd, Indooroopilly for $565,000.

The only house Ray White-Indooroopilly has for sale in Witton Rd is this home. It is a 5 bedroom, 3 bathroom house with a pool two streets from the river. It last sold in October 2003 for $600,000 and a quick glance at the first chart in this post will tell you just how much house prices in Brisbane have risen since that time. It is very clear that the statement “10 to 30 per cent discount on pre-flood prices” is extremely conservative.

He is marketing another in Dobell St, which was repaired and renovated after the floods. Mr Smith said buyers appeared to be willing to take the risk there would not be a similar flood for another 10 or 20 years.

Tony Poulsen of Ray White Graceville has also marketed flood-affected properties. Mr Poulsen’s agency sold a Corinda home for $350,000, which had some structural problems and another on Leybourne St, Chelmer, which would previously have sold in the high $500,000s and went for $410,000. His agency has also sold a home at Tennyson which had been repaired after the floods. It sold for $380,000 – about 30 per cent down on what it would have achieved.

I think it is much more realistic to state that these particular properties are selling for at least 30% less than their previous pre-flood estimates with some properties being discounted by over 50%. Something Mr Ryder took issue with in his article although I think he attempted to make it seem like a more extreme view.

So am I suggesting that Brisbane is about to see 50% falls in prices as suggested in Mr Ryder’s piece? No, I am not, in fact I am actually expecting to see a bit of an uptick in median values in July as people bring forward their property transactions to beat the rise in stamp duty from August 1st. However there is not much movement in the latest auction rates data to support that theory, even is I am fairly sure that is what we will end up seeing.

However, after July 31 I would expect to see another slump after the mini-boom of July and I certainly cannot see anything in either the sales volumes or credit issuance trends in Queensland to support rising prices. Until I do, I cannot support the notion that we are about to see a sudden rise in house prices and given the state of consumer confidence and various other economic factors I think the turn around is a fair way off.

Unlike other unlicensed and unqualified property opinions who would have you believe that house prices will rise because “they always do”,  I prefer to support my arguments with actual evidence.

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Comments

  1. In 1974 I’d suggest the average LVR was much, much lower than we have today, and therefore the capacity to ‘borrow-to-buy’ was much more feasible.

    • Torchwood1979

      Number one mistake economists make – the ceteris paribus assumption. This nonsense is reminiscent of claims that because house prices only dropped marginally during the 90-91 recession a spike in unemployment won’t cause houses to significantly fall now. Well, our mortgage debt was only 19% of GDP in 1990, compared to 87% now so all things are not equal. And I’m pretty sure nationally May 2011 YOY median prices have already fallen further than they did in 1991, and that’s in spite of our 4.9% unemployment.

    • Well said Torchwood – its one of the “outs” spruikers use to deny the possibility of house price falls because of the inherent “stability” of the current market.

      They forget that stability breeds instability, that servicing costs of mortgages are HIGHER than the 17% rates, and yes, that the debt is four times as large.

      The “full” unemployment figure is also dependent upon continued retail spending and services, which is reliant upon housing transactions and new credit growth. See Cam Murray’s chart on real retail spending per capita – with 4% annualised credit growth, retail spending is flat. If it decelerates further…..even to 1-2% annualised growth, retail spending will fall in real terms.

    • “In 1974 I’d suggest the average LVR was much, much lower than we have today,”

      Do you have any data? There was some data posted on the Australianpropertyforum which suggested that LVRs haven’t changed much.
      Using Stapledon’s house prices (RP Data for 2010) and the ABS loan sizes we get the average loan size to median house price to be:

      Oct 1975 – 60%
      Oct 1980 – 58%
      Oct 1985 – 55%
      Oct 1990 – 50%
      Oct 1995 – 63%
      Oct 2000 – 61%
      Oct 2005 – 62%
      Oct 2010 – 62%
      It doesn’t tell us the average LVRs directly but it is a like-for-like comparison over the years.

      • The LVR, as mentioned here many times, is not a good indicator of the level of prices, as it is a derivative of the underlying value.

        The price to income ratio is also similarly, not the best indicator as there is a relationship between the two (a rise in house prices increases disposable income).

        The best is serviceability – the proportion of after tax income required to service the mortgage, and the robustness of household finances (i.e does it require 1 or 2 incomes and what would happen if either income falls or stops completely).

        The former is easy to measure, the latter harder and more subjective, but it is clear that inflationary pressures over time have increased the non-housing costs of most households in comparison with the 1970s (i.e transportation, heathcare, education, food are all more expensive).

  2. We are living in a bubble where school holidays are cited as a reason for the weak market conditions.

  3. Terry Ryder should go to the first home buyer hotspot of cabulture and write an articel from there.

    2500 properties for sale and are selling about 3 per week.

    • Friend of mine just bought a house in a FHB area in Cairns. Advertised for $290k…paid $225k.

      If I remember correctly, three years ago the average price was around $350k. There’s carnage in the FHB set in the north.

    • A couple I know bought a unit in Caboolture in early 2008, admittedly after his parents encouraged him to “Get a start in the market” and threw $30K at them.

      Due to changed work circumstances they’re now renting at Logan and trying to sell the unit at Caboolture for $25K more than they paid in 2008. Five months on they’ve received no enquiries or interest in a couple of recently held open days. None. Zip, sero, zip. :/

      They’re talking about renting it out until the market bounces back, but I said they should cut to what they paid for it and accept it as a zero-sum game because the risk of being underwater for a good few years is too great and they don’t really have the money to sustain a loss making rental property. He’s skeptical of the market dropping much more but agreed it’s looking likely they’ll be waiting a while to get any equity on the place. Unfortunately his parents are quite incensed by the suggestion that the place isn’t worth more than it was in 2008 and berated him for daring to throw away the investment they’d made in his financial future. I really do feel sorry for this couple, not a happy place to be. 🙁

      My attitude thus far has been “Stuff the boomer parents, they don’t know what they’re talking about”. Even though mine haven’t thrown any money our way to buy a house I’d actually knock it back if they did because:
      a. I think it’s too risky to buy at this point in time unless you have a mega deposit and
      b. I like to be a free man, unencumbered by the whims of the silly older generation.

      Rant over.

      • Torchwood,
        I recently advised my FHB nephew and wife NOT to buy in Caboolture at this time unless they can buy at least 30% below currently accepted market value, and unless they can also buy it on 20% deposit and no more than 30% of income in repayments.
        I’m a boomer and have made a lot of money buying and selling houses over the last twenty years. We are OUT of real estate and sitting in cash. The boomer parents are not necessarily silly, but just out of touch with the new reality of a property bust, which they have never experienced before.

    • I’ve been surprised by the prices I’ve seen in really ‘strong’ suburbs – no flood, good location, ‘moderately’ priced. I’ve started noting places that have a big real or even nominal loss on prices paid in 2007/08/09.

      Look at the 2009 price and the 2011 sold price, plus such a difference between the asking and sale price: http://www.onthehouse.com.au/buy/property/49922207?PageNr=1

      Again 2008 and 2011 sale prices: http://www.onthehouse.com.au/buy/property/49922684?PageNr=1

      This is a real loss, but not a nominal loss: http://www.onthehouse.com.au/buy/property/49919330?PageNr=2

      A nominal gain of $1K over 3.5 years: http://www.onthehouse.com.au/buy/property/49716670?PageNr=3

      No gain in three years: http://www.onthehouse.com.au/buy/property/49716234?PageNr=4

  4. Very few of the properties that were affected by floods have sold (whether or not they are even on the market yet, I haven’t checked). I have struggled to find more than a handful of flood affected properties sold in the suburbs I know well.

    Indeed, it would be easy to see how a higher median sale value has eventuated in flood affected suburbs as other than the expensive riverfront properties, a lot of the most valuable properties are on the ridges (good elevation, views and breezes), so those properties that are in flood affected suburbs that were spared would naturally be the more expensive ones. This is not conclusive, but from the limited investigation I have done, it would seem to be quite a reasonable theory.

  5. There is no reason why Brisbane can’t flood again this year.
    Many parts of NSW and Vic got hit 3 or 4 times this last 12 months or so.

    • Agreed, the catchments are soaking wet still, dams full, La Nina is still “on”.

      Wonder how much the insurance bill has gone up on these properties? That is, I’m betting the holding costs have gone way up, no mention of that of course.

  6. I would like to make a short note about the flooding. My husband is a professional in the area. According to his books this type of floods are quantified as “50, 30, 100 years wave” but that doesn’t mean the next flood will be after 50, 30 or 100 years. It can occur the next year and after the next year etc.

    • Yes, one would think that the good people of the real estate industry who bang on so much about averages to sell there product would have an understanding on how averages work.

  7. And, not to mention that people should EXPECT the occasional pickups in buyer activty, as prices slide – people are picking up “bargains”!

    They are dead cat bounces, but they are still genuine pickups, and should be expected to occur regularly as people find the “right place at the right price” for them.

    Instead, we get surprised and wonder if “back to normal” is going to occur; no, it’s not (it can’t), but it is still a genuine bounce.

    • Absolutely, it happened about 6 months into the US decline. Similar falls to what Australia has thus far seen and then a small increase before it fell off the cliff.

  8. the issue is also the banks not accepting the previously flooded property as security for a loan unless they have an insurance policy covering floods … but thats now hard to get …

  9. My neighbours,have had thier house in Albany Ck. on the market, for close to 3mths.With lots of lookers but no buyers,as the price the realestate agents told them to list at, was $449,000+ current market value,it seems that the market aren’t willing to pay the price,so they have reduce $10,000 off the price, and I still think it’s way over the local market value.I would be happy to give them $360,000,as the amount of work, in fixing the place up is easliy around the $60,000 to $70,000. So is it just greed on the realestates side of things, or do people expect to much for their property.Houses in the street have sold for $410,000 & $400,000 that where renovated inside,and others in the area are around the same, some $389,000+ are on the market.Why so greedy,and will they continue to loose,while they wait for a BS price?

  10. Stinky, nobody wants to realise a loss unless they have to, that’s why the rental market gets saggier by the day. Unable to sell your house at the price you want? Rent it out till the market improves. As Torchwood observed, its a good solution while waiting for the market to recover – however, there’s also a chance that it might not (at least in the immeadiate future). It also appears to be making the rental market a lot softer as I’ve observed recently in my own neighbourhood here in Melbourne… there are three houses I can count within five doors of my own that have been empty for months, can’t find tenants (at least not at their advertised prices).