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Australians Incite Bidding Wars as Rates Spur Rebound: Mortgages

April 24, 2013

Australians Incite Bidding Wars as Rates Spur Rebound

James Keenan, eastern suburbs real estate auctioneer, right, takes bids during a multi-million dollar house auction in Sydney on May 8, 2010. More than three-quarters of homes that went to auction in the city last weekend sold successfully, while in Melbourne, the proportion is at 65 percent, APM figures show. Photographer: Torsten Blackwood/AFP/Getty Images

Australians selling properties are increasingly turning to auctions as interest rates matching the lowest in 50 years fuel demand for homes in the country’s largest cities.

In Sydney, the most-populous city, almost two-thirds of homes offered at a public sale found buyers in February and March, the highest level since April 2010, according to data from researcher Australian Property Monitors. In Melbourne, the second-biggest city and largest market for auctions, the proportion rose to 68 percent in February, the highest since May 2010, the figures show.

Unlike in the U.S., where auctions are frequently used to dispose of distressed properties, home sellers in Australia are more likely to try them when the market is strengthening and there’s the prospect of higher prices, a probability that’s growing after the Reserve Bank of Australia cut rates to a half- century low. A private index of housing market sentiment surged in the first quarter to the highest level since 2010.

“There’s now an emerging sense of urgency, that the market is on the rise,” Angus Raine, chief executive officer of Raine & Horne, a Sydney-based residential, commercial and rural property broker founded in 1883, said in a telephone interview.

The rate of successful auctions has continued to climb this month, particularly in Sydney. More than three-quarters of homes that went to auction in the city last weekend sold successfully, while in Melbourne, the proportion is at 65 percent, APM figures show, after dipping to 64 percent in March.

Falling Rates

Australia and Canada, both resource-dependent nations, have increased interest rates after the global financial crisis that started in 2008, driving demand for their currencies as commodities prices gain. The International Monetary Fund said in November the high number of central banks buying the two currencies indicates they should be added to a category of reserve assets that includes the U.S. dollar and Japanese yen.

While the Australian central bank cut rates six times since November 2011, Canadian policy makers have left borrowing costs unchanged for more than two years.

Policies in both nations are also making entry into the housing market more difficult for first-time buyers. Australian states have shifted incentives away from first-home purchasers to buyers of new homes, and in Canada, with a population about 50 percent bigger than Australia, tighter mortgage rules priced out many first-time buyers over the past two years.

Two-Speed Economy

Glenn Stevens, governor of Australia’s central bank, is trying to rebalance a two-speed economy, where mining regions in the north and west thrive while manufacturers, builders and retailers in the south and east struggle.

Australia’s standard variable home-loan rates have fallen to a three-year low of 6.45 percent, while three-year fixed- mortgage rates are at 5.45 percent, the lowest level since the central bank began collecting data on fixed rates in 1990.

Core consumer prices rose 0.3 percent in the first quarter of 2013 from the prior three months, government data today showed, the slowest pace in 14 years and less than economists’ forecast for a 0.5 percent gain. Traders are pricing in a 51 percent chance that the RBA will cut rates to a record-low 2.75 percent at its May 7 meeting, up from 40 percent seen yesterday, according to swaps data compiled by Bloomberg.

The economy in China, Australia’s biggest trading partner, grew 7.7 percent in the first quarter from a year earlier, missing analysts’ expectations and capping the longest streak of expansion below 8 percent in at least 20 years.

Rising Expectations

A National Australia Bank Ltd. housing market survey of real estate professionals, developers and investors found that in the quarter ended March 31, respondents on average expected price growth of 3.6 percent in the next two years, compared with a forecast of 2.1 percent in the previous three months.

David Buttel, managing director at the Raine & Horne franchise in Neutral Bay, an affluent suburb on the lower north shore of Sydney Harbour, auctioned a four-bedroom waterfront home for A$3.27 million ($3.35 million), slightly higher than the seller’s expectation. The result was better than what he would have achieved a year ago when a lower price through a private sale would have been the most likely outcome, he said.

Still, Buttel doesn’t expect a return to the boom days of 2009, when fierce competition among multiple buyers led to auction sale prices that surpassed vendors’ expectations.

During the heyday, potential bidders, curious onlookers and neighbors often overflowed onto sidewalks or crammed into living areas to take part or witness the process. Auctions are usually held at the property itself following several weeks when the home is open for inspection.

Serious Buyers

Serious potential buyers register their interest and fast- talking auctioneers solicit offers. If bids reach the minimum price sought, the auctioneer declares the home “on the market” and bidding continues if there’s further interest or sold to the highest bidder if there isn’t. If the maximum bid is below the seller’s lowest price, the home is “passed in” and remains unsold.

The boom in auctions in 2009 and 2010 was followed by a decline in the number of interested buyers showing up and an even bigger drop in those actually bidding. Excluding January, which is traditionally a slow auction month, Melbourne and Sydney hit bottom in December 2011, when more than half of all properties up for auction failed to sell, according to APM.

That’s reversing, with 12 bids placed by the four serious buyers who’d registered their interest in the Neutral Bay home, Buttel said.

Stronger Market

“We’re encouraging auctions because it’s a stronger market place now,” Buttel said. “But the rate of growth we saw then, we’ll probably never see again.”

Still, while the rising confidence makes auctions “much more palatable,” buyers should approach them with caution, said Christopher Koren, director at Melbourne-based buyers’ agent Morrell & Koren.

“One of the problems is there’s been a lot of under- quoting of properties, when the final sale price is considerably more” than the price indication given to potential buyers by property agents, Koren said in a telephone interview. “That’s a great frustration to buyers.”

The RBA reiterated in minutes from its latest meeting on April 2 that the inflation outlook gives it room to reduce borrowing costs to a record to help the economy as a high exchange rate cripples some industries, such as manufacturing, and growth in mining investment slows.

“Additional easing will be required to sustain the recovery at a pace sufficient to offset the drag that’s going to come from the mining sector,” Matthew Hassan, senior economist at Westpac Banking Corp. (WBC), said in a telephone interview. “The message from a range of indicators is that this is a recovery, but not an all-systems-go upturn like we’ve seen in previous cycles.”

Urban Crowd

Australia, the world’s sixth-largest country by size with a land mass of 7.7 million square kilometers (3 million square miles), is the driest inhabited continent, with more than 70 percent of land arid or semi-arid. The nation had two-thirds of its population of 23 million living in its eight state and territory capitals, which occupy 0.5 percent of the total area, according to government data.

In Melbourne, auctions accounted for about 30 percent of all home sales in February, compared with 14 percent a year earlier, figures from Sydney-based APM show. In Sydney, they began regaining favor in September, with the level of auctions remaining at or above 22 percent of sales in all months since then except January, according to APM.

They’re less popular in Australia’s smaller capital cities such as Brisbane, Perth and Adelaide. In Brisbane, the proportion rose to 7 percent of all transactions in February, up from about 2 percent a year ago, APM said.

“When the market saw the RBA continuing to cut, that indicated that there was potentially another cut, so there was a bit of a wait-and-see,” Matt Lahood, general manager for sales at McGrath Estate Agents, said in a telephone interview.

Record Sales

McGrath set a new Australian record in September 2008 with the A$45 million sale of a waterfront home in Vaucluse, a high- end eastern Sydney suburb, according to its website. Among its current non-auction listings is the eight-bedroom, 10-bathroom waterfront Altona estate in the eastern Sydney suburb of Point Piper, which was last year reported by the Sydney Morning Herald to have an asking price of A$54.5 million.

Australia’s housing market managed to avoid the steep collapse seen in the U.S. and U.K., in part due to government measures to boost demand in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008. Home-price declines in 2011 and 2012 followed surges of 11 percent in 2009 and 4.7 percent in 2010, according to Brisbane-based researcher RP Data.

Prices climbed an average 4.7 percent in Australia’s eight biggest cities in March after they bottomed in May, according to figures from RP Data. That followed a 7.4 percent drop from a peak in late 2010, the group said.

Reaping Gains

As prices rise, more home sellers have reaped gains. Almost 32 percent of properties sold for double their original purchase price in the three months to Dec. 31, up from 31 percent in the third quarter of 2012, RP Data said.

House prices will rise as much as 5 percent in nominal terms in 2013, led by Sydney and Perth, John Meredith, real estate analyst at Morgan Stanley, wrote in a report April 15.

Developers such as Stockland (SGP), which had a loss of A$147.1 million in the six months to Dec. 31, and cut its full-year profit forecast, will benefit from the recovery, he wrote.

“The historical relationship between house prices and multiples for Stockland and other developers remains intact,” Meredith wrote. “New residential projects coming on-stream will support an improvement in margins.”

Stockland shares have climbed 11 percent this year, compared with a 9.8 percent gain in the benchmark S&P/ASX 200 Index. Mirvac Group (MGR), Australia’s second-biggest listed housing developer, has advanced 19 percent this year.

Patchy Recovery

At McGrath, the number of auctions in the Sydney metropolitan area in the first three months of 2013 rose to 697 from 559 a year earlier, according to Lahood. About 70 percent of properties that went to auction sold successfully, he said.

While vendor confidence is rising, the recovery is patchy, with Canberra, Melbourne and Adelaide still seeing declines in asking prices, Louis Christopher, managing director of Sydney- based SQM Research Pty, said in an e-mailed release.

Economic indicators too remain mixed. While retail sales rose four times faster than economists expected in February and business confidence improved in March, Australia’s unemployment rate climbed unexpectedly to a three-year high of 5.6 percent in March and a private consumer confidence index slipped 5.1 percent this month.

“Households still remain cautious in their spending and borrowing behaviors,” Alan Oster, chief economist at National Australia Bank, said in the bank’s residential market confidence survey report. “This is likely to keep demand for housing somewhat contained.”

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Rob Urban at robprag@bloomberg.net


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