Move up buyer frenzy!

As I discussed earlier in the week, Domain has recently been trying to get first home buyers excited about the return of a weak pulse to that segment of the housing market.

Today they take this conceit to the the next wave queuing up to buy: the “move up” group:

Now could be a good time to climb some rungs on the property ladder, writes Antony Lawes.

Families looking to upgrade to a bigger house have been noticeably absent from the Sydney real estate market for much of this year but that might be about to change, experts predict.

Agents are starting to see more of these buyers at open houses and in some of the more affordable upgrader areas – where these properties sell for less than $1 million – they are very active. This is in contrast to more affluent suburbs, where interest has been much more subdued.

The chief executive of LJ Hooker Real Estate, Janusz Hooker, says the catalyst for upgraders re-entering the market has been the Reserve Bank’s interest rate cut.

”What that’s done is given a lot of people extra cash in their future cash flow,” he says. ”So at our open for inspections over the past couple of weeks since the RBA’s announcement, we’ve seen an increase in activity of about 10 per cent [in these buyers], which is pretty significant.”

This activity is spread across Sydney but is being felt strongly in areas such as Parramatta, where upgraders dominate the market, Hooker says. ”In that sub-$1 million market, we’re seeing a lot of activity with upgraders because people are seeing opportunity now.

”At our Parramatta office, almost all sales last weekend were to upgraders.”

Just as in the case of the recent first home buyer article, we have no data to back up these assertions. Perhaps the rate cut has stimulated some new interest, that’s what it is designed to do. But we as yet have no data suggesting a national bounce in borrowing for existing house purchases beyond Sydney.

Now, don’t get me wrong, Domain is working from precedent and logic. After all, as the article itself argues, move up buying activity does follow surges in the first home bracket as earlier first home buyers cash out there gains and go for nicer homes. And there is actually a note of sobriety from Andrew Wilson:

The senior economist at Australian Property Monitors, Andrew Wilson, says upgraders are confining themselves to areas with stronger growth relative to more expensive suburbs, such as the hills district. But overall, he says their numbers are still quite low and probably won’t start to pick up until about the middle of next year after several months of interest-rate stability and confidence in the economy builds.

If that happens, these buyers will move back into the $1 million-plus areas – classic upgrader territory.

Wilson says upgrading tends to be a product of a rising market, given that part of the motivation is that property seems to be a solid investment.

”Except, perhaps, in the outer north-west, I don’t think we’re seeing much upgrading at the moment,” Wilson says. ”The upgrading cycle is at the bottom and, in a general sense, we’ll start to see more activity next year.

”Sentiment is still fragile and it would not take much for people to start postponing those upgrade decisions.”

And that is the problem with the entire article. Wilson is right, upgraders are very much a rising market entity. Without a rising market the only way upgraders can increase their equity to make the jump to a higher bracket is through paying down the mortgage, which takes a long time. Moreover, in a falling market, which is what we have, upgrading can become very subdued indeed. That is because as entry level prices fall, many of the first buyers that hoped to get onto the “move up ladder” suddenly find themselves with negative equity and can’t sell even if they want to. The ladder stalls and can do so for a long time.

This is especially the case after governments intervene in property markets with first home buyer subsidies. After the post-millennium FHOG surge in Sydney prices, the entry level homes in the mortgage green belt of Sydney fell back to former values and some below. With the subsidy and rampant market conditions, many first home buyers had over-stretched themselves paying goosed prices and when those prices fell the negative equity was that much worse. This stalled the Sydney move-up ladder for five years and the market went nowhere until it was bailed out by a second FHOG:

And here’s a map of Sydney mortgage delinquencies from earlier this year showing exactly the same pattern this time around:

I watched the first leg of precisely the same phenomenon transpire in the 2009/10 Melbourne buyers panic as outer suburbs boomed then inner suburbs followed as the sellers became buyers. I expect exactly the same result for Melbourne as experienced by Sydney in 2003 on the downside of the slope. And remember, the 2009 FHOG surge was national this time. Looking for an up-grader surge of any magnitude in these conditions is fool’s gold.

Comments

  1. From my side of the Tasman I can pass on an observation. The lower interest rates went/go ( Kiwibank has 4.99% out yesterday for 6 months fixed), the more people are ‘paying off the mortgage; paying off debt’. The aim of stimulating spending…of any sort!…through lower lending rates appears to have missed the mark. Well, at least at these levels…

    • This is my concern, not that a lowering of rates will spark another round of borrowing. I don’t we are there yet, but this paradox also feeds into itself – lower the interest rates and people will save more, because they need larger amounts of capital (deposits) to maintain their return.

      The only people in that environment, who benefit from such low rates are skilled speculators.

      • Surely some class of future house-buyer also benefits from low rates (and presumably lower house prices) under that environment. Perhaps those with large deposits and solid employment?

      • Yes, but in this piece I’m obviously debating about up-graders.

        I expect lower rates to support the market generally, but only in so far as they limit declines.

        But who knows!

      • I’m puzzled why you included delinquencies when in a falling interest rate enviroment that is usually a self curing issue for most marginal borrowers.

        I realise that we have only had one rate cut, but with rates commonly in the 7.1% to 7.24% bracket earlier this year, borrowers who were struggling can seek relief by fixing at 5.99% which is more than 1% lower. In fact a borrower with a mortgage of $450,000 would be $5625 better off annually, or $468 better off monthly. (I used a figure that may have some relevance to the Sydney market, other markets could adjust that accordingly)

        Borrowers could either use that to dull the payment burden, or pay down the debt faster (the preferred option of course)

        I agree with your “who knows” prediction although no doubt I’m a tad more bullish, but taking the edge off commitments does tend to reduce the number of homes on market, which helps keep price falls in check.

        But if you feel that I am wrong, please tell me.

      • dumb_non_economist

        Well, my cash, which is waiting for a house at the right price is getting 6%. The opposite of opportunity cost is opportunity loss!

  2. The surprising thing for me is the negative comments of Andrew Wilson! He has previously seen many green shoots, signs of buyers returning, clearance rates showing signs of rising and a rebound variously evident, imminent, expected in February,Easter, after the holidays, after the footy season,spring or early next year.

    Not sure I’ve seen him make such downbeat comments before. Perhaps the spruikers are tiring?

    • Perhaps the spruikers are tiring?

      That’s worth watching. Industry voices can still be heard talking of “healthy correction” and “temporary pause” and “buyer’s market won’t last” etc. — they have not slowed down. Their energy has been renewed, at least for now, by the rate cut. But if these cut(s) fail to excite the market …

    • Perhaps Doc Wilson is a bit miffed that this Antony Lawes guy is about to steal his thunder by out-spruiking!

  3. Interesting to see what happens to the Sydney market after the NSW $7,000 First Home owners Scheme finishes on 1st Jan 2012. Although continues on new homes only.

    Possibly a little pick up in the market between now and end Dec 11.

    • $7000 grant is not going, only the stamp duty exemption on existing properties, and any effects of that you would have seen from September onwards. The word from friends who are in the FHB category is that competition at auctions is up, but no-one is getting stupid (yet).

  4. I Love this comment from one of the readers:
    “for half a million dollars plus commissions, stamp duties and moving costs you could put the relatives up in a very nice hotel. You could even take them all overseas every year and stay with them in a five star resort !!!”

    So true !!… writing a whole article trying to convince someone of paying half a million more just to have one extra bedroom sounds so ridiculous…
    Even though today seems like half a million dollars is not a “big amount” like it used to be for us while growing up, it’s still a heck of a lot of money..
    specially if you have to ask for it to the bank since you’ll repay twice as much…

    • I love it! Million bucks buys a lot of vacations!
      Most upgraders I know are fearless. Like going out for a walk and end up putting in an offer on house down the road type of fearless.
      They’ve done so well for so long they’ve no reason to assume the good times won’t continue …

  5. Jumping jack flash

    As far as I knew for every upgrader there needs to be a greater fool willing to buy the original property at the required inflated price

    Is the tiny rate cut and the urgency of free taxpayer money deadlines enough to lure them back?

  6. As much as I hate to admit it, I just bought a house… But I think I got an absolute bargain so I’m not too phased.

    • I think many people said the same in the USA a couple of years ago. But prices continue to fall. Hope you are right for your sake.

  7. RaglanParade if he has bought for a family home and prices go down so what?

    Good for him and don’t forget owning your own home also brings other intangible benefits.

    I say good luck to him we all know caveat emptor.

    So be nice and wish him the best a market of one is hardly the ‘property lobby’!

    Good on ya RaglanParade I wish you the best.

    • dumb_non_economist

      I agree with you TM, but having divorced I’m going to wait until prices fall further, but your own home is just better!

  8. Went to two advertised auctions this morning, in Sale, Vic. No buyers at either. I just went to see how flagrantly the agents and auctioneers bs the public. In discussion both agents said the market is really flat by comparison to other times and the upgrader market is down more than FHBs. The auctions are used to identify a possible buyer and don’t usually result in a sale.

  9. I’ve been looking at buying in a regional area myself for some time and I’ve noticed a huge surge in listings in the last couple of months. Reflects the sort of surge that was being discussed here in the last few weeks (ie a doubling of the Victorian listings compared to the same time last year). I wonder if this will transpire into reduced prices eventually?

    • Yes, it will.

      I think on average only around 7% (UE would know better/more than me though)of total housing stock changes hands annually.

      I think that if we compare this Y/Y (2001 to 2011) in 2012 we will see a pretty big exponential jump in stock!

      TM.

  10. Gary North, who picked the bubble in “the USA” years ahead of time, also picked that it was restricted to certain markets, especially in California. He advised at least one person who took the advice, to sell his home in California and move to a city in Texas where he could buy seven houses with his money, rent out 6 and retire.

    I note there is another MB thread now about people leaving Australia. Now is the time for Australians to follow the Gary North proposal, I suggest.