We are currently in the fastest property decline I’ve known in my 15-year career, and that’s on the back of the greatest boom we’ve had in the history of real estate. This much is clear — what lies ahead is less so.
We’ve passed the transition phase of the market, which is good news. The first three months of a market decline are always the hardest, whether you’re an agent, buyer or seller. Everyone is struggling to get to grips with the new environment, largely because there’s no feedback for buyers and sellers — other than what agents see on the ground.
What we were seeing was so dramatic it was almost too unthinkable for our sellers to comprehend: we went from an average of fifteen people per open home to two in a matter of weeks and could no longer close deals. We were forced to tell sellers, “Look, the market’s turned on us. I wish I had good news, but buyers are at a lower price point than where we currently sit, and we need to reduce the price now because it could be worse later.”
That kind of feedback, when it’s not being corroborated in the media, is met with significant loss aversion. Sellers are biased to try and avoid a “loss”. But unless they bought recently, this perceived loss is based on their expectations, not on what they originally paid for their home. In other words, it’s not a loss at all.
Yet, to us fallible humans, it feels like it is and we are prone to making bad decisions because of it. It’s even harder to come down off that ledge when there isn’t any feedback about the change in the market from anyone other than an agent who has a vested interest.
It is only once the statistics start to flow through and it becomes widely known that the market has declined, that’s when the media exposure kicks in. This does two things: it amplifies buyers pulling back, which is not helpful, but it also educates sellers about the market.
October last year was when the market started to turn but it wasn’t until February that sellers started accepting this. We call this a transitional market. It was very difficult to transact in that period because sellers who were used to an unprecedented bull run did not accept the market had turned.
For those with an interest in how markets work, it was a fascinating experience to see it turn so quickly. Buyers disappeared almost overnight. This was either because they couldn’t access credit anymore, given the introduction of the Credit Contracts and Consumer Finance Act that makes banks restrict their lending; or higher interest rates meant that someone who previously could have afforded $1.3 million could suddenly only come up with $1 million. This double hit turned the demand on its head.
Fast forward to today, and we are now in a classic bear market where prices are still declining. However, sellers are now more willing to meet the market.
How much more will it fall? Nobody knows, but most economists predict up to another 10% drop by March 2023, then a long period of stagnation where prices stay flat. That scenario will mimic post-GFC in 2008, but prices look likely to fall further this time.
There are two main reasons for this. Firstly, prices boomed harder and faster than the boom before the GFC, so a correction is also likely to be larger. Secondly, in the GFC central banks cut interest rates, yet this time rates are going up as they fight inflation.
Thankfully, the subsequent fine-tuning of the Act has led to a loosening of banks’ policies.
However, the ability to get a loan only started to improve after the psychology of the marketplace had already changed. It’s people’s expectations of the future that drive markets after all.
With interest rates rising at exactly the same time as house prices are falling — the reverse of what happened during the GFC - and with inflation the highest it’s been in forty years; it seems unlikely that governments will be cutting interest rates in the short term.
When the boom began, it was initially because of fundamentals like cheap money, and psychology or the “fear of missing out”, took hold.
The same is true on the way down. It starts with fundamentals, like interest rates going up and difficulty getting loans, and then psychology takes it down harder and faster than it should … before setting up the conditions for an eventual recovery – albeit far into the future.
So far, the only green shoots we’re seeing is a willingness of sellers to meet the market if they can. Sellers now largely accept that prices are declining. Of course, some people just can’t sell for a loss because they bought at the peak. But if you’ve owned a house for five years or more, you could sell today and still lock in most of the gains of the greatest property boom we’ve ever had.
And if you’re trading up, a declining market is good for you because you can buy more for your money. If a million-dollar house goes down by 10%, it goes down $100,000; but a $1.5 million house goes down $150,000, making trading up a better deal than if the market had risen.
We are all prone to getting this wrong — we tend to feel good about our house price going up, but if we want to purchase a bigger house in a better location in the future, it is the opposite of what we should wish for. Not to mention the social problems and unrest that resulting inequalities have the potential to cause if left unchecked. No one should want prices to boom like they did last year.
The true bottom of the market is impossible to know, and most likely some way off. But it is easier to sell now than it was three months ago. Not because there are more buyers coming into the market but because sellers are more willing to meet the market, making it easier for sales to occur.
The role of agents is to help the market turn by bringing buyers and sellers together.
This increasing seller acceptance is helping to calm and steady the marketplace. People are adjusting to a bear market and getting on with their lives — even if it’s too soon to be bullish about the future.