Soft House Prices or Unrealistic Vendors?

There’s been a bit of discussion in recent months about a softening housing market around Australia but I wonder how much of it is more indicative of unrealistic expectations on behalf of sellers? In futures work we think in terms of Assumptions and Expectations and aim to test our understanding and so I offer this isolated example of the housing market in action for you to think about whether ‘softening’ prices are a reality. Around three years ago a two bedroom brick veneer house in Cummins Rd, East Brighton sold for approximately $440,000, which was pretty much market value at the time. The new owners subdivided the land and about a year ago built a three bedroom townhouse of a pretty high standard on the rear of the property. The style of house is likely to be attractive to a more limited market and there’s no outside space to speak of. So what would you say would be a fair price to expect at auction?

Potential bidders were pretty clear. The Real Estate Agent (Buxtons) did a great job at talking the property up and highlighted everything that was good about the property. But I wondered if the agent knew he was flogging a dead horse so to speak because he asked for an opening bid of $800,000 and eventually kicked the auction off with a vendor’s bid of $700,000. When no further bidding emerged he placed another vendor’s bid at $750,000 and the property was passed in.

Now I’m not too sure what pricing strategy the vendor had. I know that the vendor has also done a fair bit of work in the front property in which they live and I wondered if their price was based on not only what they paid for the original property, and what they spent building the subdivision, but also was an attempt to recoup money spent on their own home? But for me, having paid $440,000 three years ago and having spent perhaps another $200,000 or so adding a sub-division property out the back, expecting what is believed to have been a sale price of well over $800,000 seems an example of unrealistic expectations.

Right now entire single block double story dwellings a few years old are selling in the area for about $850,000. Some would say that even in a warm housing market, a realistic and fair price for the new Cummins Rd dwelling out the back is closer to the $600,000 mark. I’m sure you know of similar examples around Australia and beyond. When we consider real estate as an indicator of social and economic health, we need to be careful about placing too much emphasis on auction outcomes, unless we also consider how realistic the expectations for sale prices also are. And that perhaps something for lenders to also consider