Sydney and Melbourne are done - I called it all the way back in April. So let’s move on and see what actually happens after an area booms.
Firstly, the ridiculous prices paid for properties disappear. That $800k house may achieve $900k in a Booming property market due to desperate buyers, but this desperation quickly vanishes when a market cools.
The first sign of this cooling is disappearing Auction sign boards. The "For Sale" board returns. Auctions are great only when 4 or 5 bidders knuckle it out. But with one or no buyers, the fact is auctions are simply boring & embarrassing for the agent!
And if you haven’t noticed, it’s all about agent image!
Buying property is all about mind games, as a buyer’s agent and major investor; I play these mind games every house I put offers on. Think about it, if a house sells well above the “Reserve” then you will no doubt receive marketing from that agent blowing their own trumpet about how good they are. The reverse happens when they can’t sell a house too!
So if an agent only has one interested party they will try and close the deal before the auction. By putting desperation in the minds of the buyer they can get an offer prior to auction day.
That’s why I only bid at auction if I am the only bidder!
So the next six months is a real estate agent’s worst nightmare. This is the calm after the storm. Buyers are thin on the ground and vendors still believe their house is worth $900k, because that's what Joe down the road got 3 months ago.
So the agent pushes the vendor to reduce their price: "So John, the markets changed and you really should consider adjusting your price to meet the market". And the vendor says, "why would I, my house is better than Joe’s and I believe it's worth $950k, you just need to find me a buyer at this price".
And like a married couple arguing they give each other the silent treatment. Both now wanting to prove each other wrong.
So time goes on and not much happens. Patience runs thin. Quite often, the vendor will switch agencies to try their luck elsewhere. And it's at this point something starts to happen. The new agent will only sign the vendor on if they agree to their terms, one being an adjusted sale price.
This agreement means everything. Why? Because the power in the vendor/agent relationship has just switched from the vendor to the agent. And like many movies the agent often becomes an evil villain abusing their power. A term in the industry known as "vendor bashing".
Vendor bashing is continually coercing the vendor to drop their selling price to meet or beat the market. How aggressive this behavior is can be dictated on how desperate the agent is to making a sale too. You see the agent makes nothing without a sale. Meaning they now work for themselves, not the vendor, not the buyer but themselves. Like a starving hyena!
At this point the market starts to see some movement. A price adjustment here, a price adjustment there. Then bam, our first discounted sale occurs. But then nothing again. Prices adjust some more and a few more discounted sales occur.
This price dropping can keep going for 3-5 years and during this time hundreds and hundreds more houses hit the market creating a huge oversupply. It’s a buyer’s market.
And like a huge day at the fruit and veg markets, agents are running around mad trying to beat the other agents and vendors to the bottom of the market.
Oh yeah, you guessed it, it's at this point I go shopping!
What better time to buy than when there a too many houses to choose from, agents chewing at the bit for a sale and vendors dying to take my offer. Perfect time to throw in some low ball offers and really test the market! Makes for very interesting times as a buyer indeed.
That all said we have Sydney and Melbourne about to enter this part of the cycle and Darwin and Perth well and truly in the throes of a downturn.
The sure sign this is starting to happen - look out for the disappearing auction signs.
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, visit the wHeregroup blog.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.