What differentiates buyers markets from sellers markets?

Earlier this year I penned a piece about 2022’s buyers, and how they were different from those who tackled the heady rush of the COVID-market boom. For many, the focus shifted dramatically from “just get it” to “I’ll take my time to buy carefully and I’ll apply scrutiny”.

Now that interest rate rises are upon us and the intended impact of tightening our belts is washing through, it’s fair to say that many buyers are nervous, particularly those who are uninitiated to the concept of rising interest rates.

For eleven comfortable years, property owners enjoyed static or falling interest rates.

The market is no doubt presenting us with some challenges, but these challenges are varied and we find ourselves in quite a multi-speed market. The reality is that the market trough is not as great as previous downturns, and the market drivers for this particular trough are not directly linked to the increased cost of funding.

Fear and sentiment accounts for much of this current downturn.

Many buyers are worried about purchasing now and facing price falls later, and those who are feeling pessimistic about the state of the market into 2023 are taking the opportunistic approach of waiting it out for the market to bottom out. Some are just sitting it out altogether.

It’s fair to describe Melbourne’s current market as a Buyer’s Market. Our auction clearance rates are lower, prices have (overall) contracted mildly, and buyer/vendor behaviours being exhibited are typical of the conditions we are facing.

So how do things differ, from a bull market to a bear market?

Market segmentation – first and foremost, not all properties are impacted by a downturn. Our major capitals account for much of the data points, but regions represent their own market, and within each we have sub-markets also. As a Victorian property specialist it’s obvious that our major city and large regions are exhibiting varied segmentation, and for Melbourne in particular, it’s the lower-priced properties that have shown the tell-tale signs of a jittery buyer demographic.

First home buyers are scared and their participation has not only reduced, but is tainted by a reluctance to take on risk. Some of the great townhouse and unit markets within our capital are currently offering great value when contrasted to previous years. For those who are prepared to take advantage of this now, the opportunity could be considered an exciting one. We were thrilled to help two dear clients with their Fitzroy North townhouse purchase only last week, securing it at a price that seemed incongruent with last year’s demand for sub-million dollar townhouses in the area.

Auction participation – This has changed significantly, although it has recently stabilised as listing volumes have failed to meet Spring market expectations.

Unlike recent years when quality properties could attract ten (or more) bidders, the quality properties in 2022 are attracting far less active bidders. The reasons for this are twofold; not only are buyers sitting it out or applying higher levels of scrutiny, but plenty are vague about their actual borrowing capacity. The constantly changing interest rates, combined with lenders updating their Household Expenditure Measure (HEMS) is wreaking havoc for those who are bidding to their borrowing capacity limit. The fear of a lack of visibility into their exact capacity constraint is changing how buyers wish to purchase property.

Bidding unconditionally for many is a bridge to far.

Campaign types – Buyers are challenging auction participation and their comfort level associated with signing unconditional contracts. Agents know it, vendors are feeling it, and the switch to “Expressions of Interest” style campaigns is evident across the jittery markets. An Expressions of Interest campaign is essentially a private sale with an end date. Like an auction date, the limited timeframe aims to bring a sale to a head. What is different from last year’s seller’s market is that we have many more of these types of campaigns now. They enable a buyer who has a requirement for a finance clause to participate in the showdown.

While it doesn’t assure a vendor of an unconditional sale, it delivers them a far greater number of participating buyers.

Agent approach – gone are the days of chasing an agent for a phone call back, or grasping to get a quick thirty second opportunity to ask them some key questions at the door. Agents have more time to spend with buyers now, (particularly in Melbourne, where the poor things had to juggle COVID-safe, one on one private inspection appointments en masse), and they are having to spend time gently coaxing buyers to make purchase decisions in this current climate. They’ve experienced a vast change in one year; from multiple frenzied buyers hurling offers at them to a much more tentative, and reduced group of buyers. Days on market are longer, vendors are requiring a lot of attention and agents are also having to grapple with a higher number of deals tumbling over as buyers fail to secure their finance.

Buy/sell vs sell/buy – this is a classic “chicken and egg” situation. In a hot market, upgraders/downsizers will be keen to buy first and sell later in an effort to time the market well and secure in today’s dollars, while reaping the reward of selling at an elevated price in tomorrow’s market. Buying activity spurs on selling activity, and so on. Listing volumes remain buoyant.

The problem sets in when market conditions hold vendors back from listing. Those who have plans to upgrade/downsize will be reluctant to list their home for sale if they fear not being able to find their future home in time. We currently have insufficient stock available many prospective vendors who are keen to secure a property in a timely fashion following their sale.

For those who don’t have a burning need to move immediately, they’ll sit back and wait.

Buyer attitudes – plenty of buyers are semi-active right now, as opposed to committed-active. They aren’t trawling the auction results like some did in previous years, and they aren’t shortlisting and bidding on properties regularly. Some are doing the rounds at the open for inspections, casually canvasing premium properties and opting out of auction participation “unless it passes in for a bargain”. Low ball offers are being fielded and it’s now agents who are encouraging pre-action offers, as opposed to 2021’s general resistance to allowing a premium property to sell prior to auction.

While there are some highly committed buyers out there, the air feels quite different. For those who are certain about their budget and borrowing power, the opportunity to buy well is stunning. And by well, I mean that they can purchase A-grade, quality property with far less competition, possibly at a discount, but certainly not at a premium.