The internet and newspapers are awash with stories of properties selling for amounts wildly above reserve. Such news can create FOMO and fuel buyer demand. But buyer overexuberance is rarely sustained for long periods of time. My feeling is that price growth will level out this year and I set out the reasons why below.
Properties can sell above reserve for many reasons
Last month, a property located in the Eastern suburbs of Sydney (
209 Edgecliff Road, Woollahra) sold for $1.5 million more than the reserve. Of course, this is an extreme example, but stories of properties exceeding reserves suggest the market is running away. I’m not suggesting these results aren’t noteworthy. They are. However, we must remind ourselves that multiple factors can contribute towards a property selling for more than its reserve.
Firstly, of course, it could be that the demand is so strong for the property that multiple bidders push the price higher. Some of these bidders may be driven by emotion, particularly home buyers. They might fall in love with the property or their ego might kick in because they don’t want to “lose” at the action. Whatever the motivation, “paying more” contributes to high prices.
Secondly, the reserve might be too low. Not all vendors are motivated to maximise their sale price – there might be other factors. Also, they might have an unrealistic expectation of current value (too low). Or maybe the selling agent was keen to quote the lowest possible reserve to attract more potential buyers.
Finally, interest rates have a big impact on affordability, particularly for higher-value property, as buyers tend to borrow more. Fixed home loan interest rates of less than 2% p.a. make spending “a little more” on a property more affordable than it was 5+ years ago.
Remember, prices have been stagnant for 3 years
Median house prices in most capital cities haven’t really changed since early 2018. The reason being is it’s been a pretty tumultuous period for the property market.
Tightening in credit (borrowing capacity) occurred throughout 2017 and 2018, which reduced the volume of property buyers, particularly investors.
In 2018 and 2019, the ALP’s federal election policy of banning of negative gearing and hiking the rate o
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