Hammer Falls on Australia Home Auctions as Bids Scarce in Faltering Market
A year ago, when Sydney property agent Peter Green’s clients decided to sell, half opted for auctions, betting competition among buyers would deliver them the best price. Today, less than one in five take that chance.
“The vendors don’t want to embark on the potential of failure,” said Green, 55, principal at property broker Laing+Simmons in Miranda, a suburb 25 kilometers (16 miles) south of Sydney’s center. “In the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”
Homes sold via auctions in Sydney, Australia’s most populous city, fell to 12.8 percent of total sales in the three months ended November, from a peak of 15.7 percent in the quarter to Nov. 30, 2010, according to real estate researcher Australian Property Monitors. Half of the homes that went to auction in December failed to sell, APM said.
Unlike the U.S., where auctions are used to sell distressed properties such as those in foreclosure, their use in Australia is a barometer of the market’s strength, with newspapers devoting sections to sale results. The declining use of auctions after home prices fell the most in at least 12 years in 2011 may foreshadow another year of prices going down.
“People’s preference for moving away from the auction format is reflecting demand on the ground,” said Ben Jarman, a Sydney-based economist at JPMorgan Chase & Co., who expects prices will fall another 3 percent this year as concerns about the global economy outweigh interest-rate cuts by the central bank. “We’ll see some demand resume, but supply will come on line as well.”
The number of homes listed online for sale across Australia jumped 18 percent in December from a year earlier to 385,036, according to Sydney-based SQM Research.
Stockland (SGP), Australia’s biggest listed residential land developer, slipped 11 percent in Sydney trading last year and remains 62 percent below a 2007 high, while Australand Property Group (ALZ), a unit of Singapore’s CapitaLand Ltd., tumbled 18 percent in 2011 and is 73 percent below its 2007 peak. Both Sydney-based companies are among developers selling smaller homes and plots to preserve margins as the housing market falters.
The six-member S&P/ASX 200 Banks index lost seven percent in 2011 as mortgage lending growth weakened to the slowest pace since World War II. Still, loan delinquencies declined to 1.42 percent in September, according to a report from Fitch Ratings last month. That compares to 8.15 percent in the U.S. in November, according to Lending Processing Services.
Australia escaped the housing rout 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. Housing prices in the nation’s eight state and territory capital cities surged 11.1 percent in 2009 and 4.7 percent in 2010, according to figures from RP Data. They fell 3.7 percent in the first 11 months of 2011, set for the biggest drop since Brisbane-based RP Data began compiling the figures in 1999.
About 70 percent of Australians own their homes, compared with 66.3 percent in the U.S., according to census data. The quest to own rather than rent has contributed to surging household debt, which, as a proportion of disposable income, tripled over the past 20 years to 150.8 percent in the quarter ended Sept. 30, according to central bank data. That compares with 133 percent in the U.S. at the height of the subprime- mortgage boom.
The median price for houses and apartments across all regions in Australia was A$315,000 ($327,000) as of Nov. 30, according to RP Data. That compares with $147,800 in the U.S., Zillow.com figures show.
“Australians’ love of property has made auctions popular here,” said Amanda Lynch, chief executive officer at the Real Estate Institute of Australia. “Auctions are a spectator sport as well as a way to buy, and they can create an atmosphere where there’s some momentum in a hot market.”
The Sunday editions of the Sydney Morning Herald, Melbourne’s Age, and the Brisbane Times have a section with addresses of properties listed for auction the previous day, results and prices achieved of those successfully sold.
The typical home auction in Australia follows six-to-eight weeks of advertising and “open house” displays, where potential buyers are able to view the property and its building plans. On the day of sale, often in a front-yard for homes or an offsite location for apartments, interested buyers must register with the selling agent if they plan to bid.
When the auction starts, bidders nominate prices or signal acceptance of levels dictated by the auctioneer. Once the seller’s pre-determined minimum level has been passed, the property will be sold to the highest bidder after final checks with the owner and a “going once, going twice, sold” cry and gavel blow from the auctioneer which marks a binding contract.
The Block -- one of Australia’s top-rated television shows -- highlighted the housing market’s malaise in 2011. The series followed four couples as they renovated homes to attract the highest price at auction over set targets. More than 3 million watched the finale on Aug. 21 as just one of the four homes sold, for A$855,000, versus its A$840,000 asking price.
“Auctions are designed to take advantage of competition amongst buyers,” Andrew Wilson, Sydney-based senior economist at APM, said. “When there are competing buyers, auctions maximize the market value of a property, but when there’s not a lot of competition, it’s the buyers who hold the whip hand.”
The rate of successful home auctions in Sydney slumped to 49.4 percent in December, the lowest since January 2011, as purchasers at the middle and top ends of the market stayed on the sidelines, according to APM. The rate dropped from a 2011 high of 58.8 percent and a six-year peak of 71 percent in February 2010.
In Melbourne, about 12.2 percent of properties, or 8,396 homes, sold in the three months to Nov. 30 were by auction, compared with a high of 19.6 percent in the November quarter of 2010. Auctions in Sydney dropped to 7,956, from an 8,754 peak. Those numbers exclude canceled auctions and those that fail to meet the seller’s reserve price and are then sold privately, APM’s Wilson said.
Laing+Simmons’ Green, who opened his office with his wife nine years ago, sold 48 homes priced between A$330,000 and A$1.2 million in 2011, he said. More clients opted to set a listing price rather than risk an auction as the market deteriorated, Green said, with only about a quarter of his successful sales resulting from auctions.
Even when a property goes to auction, fewer buyers are bidding, and they’re more conservative in the prices they’re willing to pay, said Matt Lahood, general manager for sales at Sydney-based real estate broker McGrath.
“Bidding at auction hasn’t been as bullish as last year,” Lahood said in a telephone interview. “Owners are getting roughly close to their prices now, whereas, a year or two ago, we might have seen people going way above the expectations of owners.”
McGrath, which only operates in New South Wales and Queensland states, had a 60 percent sale rate at its auctions in the December quarter, Lahood said.
The Reserve Bank of Australia reduced the benchmark rate by a quarter percentage point on Nov. 1 and again on Dec. 6 as inflation pressures eased and global risks increased. It said Dec. 20 that conditions in the housing market are “subdued.”
Swaps traders are betting on another 25 basis-point cut next month and 1.02 percentage points within 12 months, Credit Suisse Group AG indexes show.
UBS AG Sydney-based bank analysts Jonathan Mott, Chris Williams and Adam Lee wrote in a Jan. 13 report that they don’t expect the rate cuts to boost the housing market as “over- leveraged borrowers” leave repayments unchanged.
“The big thing for the property market, consumer confidence, isn’t there yet,” said Angus Raine, chief executive officer of Sydney-based real estate broker Raine & Horne, who expects sellers to avoid auctions again in 2012. “That’s the key missing piece of the property puzzle.”
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