Auctions are back!

Despite the auction clearance rates being relatively moderate, segmenting our market tells a different story. Auction clearance rates are firm for inner suburbs and while it may still be too early to tell, 2023 does have a different buzz about it…. a more competitive one.

Reports overnight support this feeling for our Melbourne inner-suburbs market. Tough crowds, competitive bidding and heightened motivation to buy were hallmarks of yesterday’s auctions.

Our low volumes of stock are certainly contributing to our supply and demand ratio, but as too is consumer sentiment.

The chart above shows that our current ‘new listings’ volumes are significantly below our prior five year average for this time of year.

And our most recent rate hike may have been anticipated to add to buyer jitters, but evidence is to the contrary. Maybe buyers are pushing hard against the threat of further rate rises eroding their borrowing capacity, or maybe buyers can sense that our cash rate is nearing equilibrium.

The chart below shows an increase in consumer confidence for family finances over the next twelve months, (albeit under 100 points). It also shows that the index for ‘time to buy a dwelling’ has increased since December last year.

Interestingly, the ‘house price expectations’ index is still over 100, which signals that more people believe prices will increase than those who believe they will decrease.

Our first auction for the year was scheduled to be today, but an aggressive early offer on a superbly presented family home in Brunswick eight days ago brought forward the auction to an online zoom ‘boardroom auction’. My busy Saturday in Geelong on 4th Feb was punctuated at midday with an auction on the side of a quiet street with half-decent 5G so that I could stream the auction and participate. Four of us fought it out and the property sold for $110,000 above reserve.

Little did I know that the following weekend would feel just as hectic.

Yesterday was a two-auction day for us. A beautiful renovated double storey terrace in South Melbourne attracted more bidding than the agent had anticipated and I consoled my clients before heading to the next auction in Collingwood.

This property had stolen more than a few hearts and the agent’s forecast of six buyers, (including two advocates) was accurate.

The property was marketed last year to selected buyers and any one of them could have secured it for $1.6M, however their jitters got the best of them in 2022 and they let the opportunity pass.

The vendors bravely took the property to market officially early this year with a four week auction campaign and an auction date scheduled for 11th Feb. The bidding was fast and furious and the property was called ‘on the market’ at $1.61M when the agent had a moment in between frenetic bids to make it clear to the crowd that reserve had been eclipsed.

The hammer fell at $1.82M, more than $200,000 over reserve.

Comparable sales didn’t quite indicate a price at that level, however our methodology for appraising newly renovated properties potentially needs revisiting in this tough construction climate. Builder delays and material cost increases have plagued renovators and developers over the past two years since our Federal Government introduced the HomeBuilder scheme. Costs have blown out and renovations and developments have been deemed by many as unfeasible.

As a direct result, many buyers have been adamant about buying newly renovated stock. This has indeed pushed such properties to premium price levels and we do need to be prepared to factor in this demand, and in particular, to be prepared to overlay the heightened potential cost of renovating when selecting an original dwelling in need of a renovation. Aside from adding a higher materials surcharge, we also need to factor in the cost of the delays for tradespeople. This delay translates into holding costs, rental payments while constructing, and project overruns. Amplified by the higher interest rates, buyers in the know understand the implication of buying a renovator these days.

The property in Collingwood that sold for more than $200,000 above reserve may not have shocked us all if we’d calculated the likely cost of the superb renovation in today’s dollars, and overlayed that cost with a sales result some three doors down, on nearly identical sized land.

This original little terrace in the same row sold for $1,080,000 earlier in the day.

The way that we appraise sparking new renovations likely needs to be changed in light of today’s building challenges.

Either way, auctions in the inner-ring suburbs felt heated yesterday and unless we see a dramatic uplift in stock volumes, we can anticipate these conditions to persist.

I am prepared to boldly say that our most lucrative buying conditions over this past year were in October to early December. And I think they are behind us now.