We’re Doing It All Wrong

The property market over the last seven years has been anything but stable. A period of steady growth kicked off in 2016 culminating in the black swan event that was Covid. And after the dizzying heights of 2020/2021, it seems like we’re having a particularly hard landing this year. So I ponder. When it comes to making price predictions in an ever-changing market, is the traditional method of coming up with a price using recent comparable sales the right way to go? Or should we be looking for alternatives? This very question calls into account the validity of my university degree and anything I ever learnt during my six years spent as a registered valuer. A question nonetheless worth asking.

Comparable Sales

In its most basic format, a market assessment is conducted by researching recent sales which are roughly comparable to the property to anticipate what the market may pay. This method is flawed from the outset as, to predict what may happen in the future, we are forced to rely on what has happened in the past.

It is not uncommon for potential vendors to reference sales that transacted more than a year ago to justify the potential range of their own. The problem with relying on sales that old, is that it is unlikely the same buyer pool is operating in the current market. And sales that old do not factor into the current buyers’ market knowledge.

The truth about making market predictions is that no one really knows what the final number will be. So what is the alternative?

What Can They Spend

Companies that sell products understand their price point. When constructing a price point, they factor in what their target market is able to spend. Could this method be relevant to the world of real estate? Understanding what a buyer can spend versus the comparable sales method may allow us to better predict an end result, especially in the current market where bank-imposed lending is ever present.

Although we consider ourselves individuals, we are also statistics. Average salaries, life expectancy, average Kiwisaver balances etc. What this means is that most buyers have a similar capacity to make a purchasing decision. Take for example first home buyers in Wellington. They are likely to work for a government department in an approximate salary band, have similar Kiwisaver balances and similar outgoings. Most won’t have children. The end result? Similar approval levels from the bank.

Last week I decided to test my theory and so took a visit to a local mortgage broking firm. They have developed an algorithm which generates approximate lending bands for the various banks by inputting the variables for individuals and couples. The numbers below assume a 20% deposit.

Example –

Professional couple with a joint income of $150,000

Assuming two cars, no children and a credit card with a limit of $10,000

Max borrowing across the major banks $619,838 – $781,794

Bank imposed purchase range including deposit $743,805 – $938,152

For those of you not familiar with market pricing in the last year, to be successful in purchasing a first home in 2021 you would have needed lending in the region of $1.1m+. And they did. 

The moral of the story is, if you’re selling a property and your highest and best use is for first homes buyers or professional couples, then in the current market the price is heavily dictated by how much those first home buyers can borrow. That lending bears little relevance to historic sales or last year’s benchmarks.

Of course, there will be outliers, just as in any model, but as a vendor the ability to consider bank-imposed lending bands may provide the confidence to accept the ‘market’ when it comes to Tender day. And if you’re buying and selling in the same market, it all comes out in the wash.

It Will Never Happen Again

A lot of people have been surprised by just how far the market has fallen. But if you compare the current OCR of 3.5% to the 1% OCR at the start of the year, it all makes sense. The last time the OCR was higher than this was in 2008, and we all know what happened then.

The cost of living due to inflation is a hot topic across the globe with central banks furiously attempting to tame that tiger. The blunt tool is to keep pushing interest rates up, cause pain and stop consumer spending. And it’s certainly having an impact on the housing market.

I’m open to being proven wrong, but given the benefit of hindsight, it is unlikely the Reserve Bank will ever drop interest rates to those historic lows again. No governor will want to have egg on their face once more. So what does this mean for prices? It means that we are likely to be in for a long flat road once prices level out.

The Wellington Market

Stock levels in Wellington remain low as many vendors sit back and wait for signs of an improving market. As mentioned last month we have noted a distinct increase in buyer activity at open homes and numbers of offers coming in at deadline, although recent announcements have put a bit of a damper on sentiment. This demand/supply imbalance is holding sales up and as long as the vendors are willing to accept the market, they will be able to move on.

With only seven weeks left in the year we can’t see those stock levels increasing significantly, so why not take advantage of the lack of competition and try selling now.

Wellington Market Quick Stats

What’s On This November In Wellington?

Go Green Expo, TSB Arena, 5th – 6th Nov

A large, diverse range of companies and brands will be there, ready to help you transform your life in favour of the environment. Participate in a free yoga class and learn about home waste solutions in the morning, unpack all things plant-based, detoxing and boosting your immunity in the afternoon, and finish off your day with a talk on the benefits of organics or a guided meditation. Categories include everything from eco homes, building, and transport to health and wellness, food, and beauty.

Click here to find out more info

Royal New Zealand Ballet Season, St James Theatre, 24th – 26th Nov

Three extraordinary short works by inspiring and internationally celebrated choreographers will take the stage in November in partnership with the Aotearoa New Zealand Festival.

Aurum by Alice Topp glows with inner light and profound peace. Meditative and moving, this award-winning ballet, created in 2018, is shaped by kintsugi, the Japanese art of healing cracks with pure gold – celebrating the beauty of the broken.

Click here to find out more info

Andy C – All Night Arena Rave, TSB Arena, 18th Nov

Andy C, drum and bass legend, is bringing his iconic All Night sets to the country at the end of 2022.

The DJ and record producer is considered one of the main forces that brought D&B into popular culture, and has made fast mixing, often with three analogue turntables, his signature style.

The muso’s skills have led to many fans around the globe and sold out shows throughout his homeland of the UK and abroad, including selling out Wembley Arena twice. To date, the artist has more than 40 awards to his name, and has helped bring up other stand out acts including Wilkinson and Chase & Status.

Click here to find out more info

If you, or anyone you know, could benefit from a considered market assessment by Wellington’s only licensed agent and registered property valuer, please do not hesitate to call. We are always happy to help.

Click here to book your free appraisal today. 

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