- Eaten a bikky for brekky
- Attended a footy and baracked for my favorite team
- Lodged an enquiry
- Realized that driving a Holden whilst listening to Iron Maiden would make me a bogan
- Had snags and a few coldies with my mates in the arvo
- Invited the relos over for a barbie
- Earnestly replied “fair dinkum” during a business conversation
- Had a lamington
A few months after arriving in Oz, I got to see a world class spruiker in action. Every aspect of buying and selling property here differs from the States. To this Yankee, it seems like every step of the process is designed to appeal to the emotion of the buyer rather than reason or logic. If one were to buy a house or condo in the States; one would start by identifying their price range, desired neighborhood, rough size they were looking for, etc. The perspective buyer could either go online or contact a realtor and start with a list of properties that meet the bare requirements. From there, they could go and take a look at the properties and make an offer or not. In Australia, on the other hand, about half of the properties are listed WITHOUT prices. What’s more about 30-40% of properties are sold at auctions. I have never seen anything quite as bizarre as an Australian real estate auction.
The condo next to our old place on Stokes Street was sold at auction. I walked out of my living room to see a gathering of 30-40 people standing on the street for the auction. It seemed more like a Baptist revival than a business transaction as the auctioneer began spruiking.
“Ladies and gentlemen, we are here today to auction off this magnificent property here at 38 Stokes Street. This is truly a once in a lifetime opportunity. Imagine being steps from the beach, steps from shopping on Bay Street, and just a few minutes from the CBD (Central Business Distrect or downtown Melbourne) by public transport. This will not last long as we are going to auction off this property to the highest bidder right here (pause for dramatic effect) today. You will not want to walk by this property in ten years and think to yourself, ‘I could have bought it when it was affordable.’”
The spruiker paced about as he babbled in a full stream of consciousness. The underlying message was that the situation was urgent, action needed to be taken right here right now - TODAY, and that one would be a fool not to bid on this property. The foreplay portion of the auction consisting of the spruiker talking up the wonderful opportunity to the mostly disinterested crowd lasted for a full fifteen minutes. It was time to get serious.
“Let’s start the bidding, ladies and gentlemen. The bidding will begin at $900,000. Who will make the first bid on this amazing piece of property? This property will not last long. You do not want to miss this!”
Complete silence.
“Ladies and gentlemen, how can you afford to pass on this opportunity? If you do not buy this property, you are going to regret it for years to come. At 900 - going once.”
Silence.
“At 900, going twice.”
Awkward silence.
“At 900. Going three times with no bidders. Ladies and gentlemen, I am absolutely shocked that you would fail to see this opportunity. My associate and I are going to go inside and await further instructions from the vendor (seller of the property).”
The spruiker disappeared inside the unit. The crowd on the street murmured a bit and waited.
The spruiker came back and admonished the crowd like a preacher who felt their congregation was falling prey to sin. He then started the bidding, which I though had ended when no bids were received, at 900. A man sitting on the sidelines then put in a bid for $900k. It was the only bid and the unit was sold. At the selling price, the monthly mortgage cost was DOUBLE what we were paying in rent for the unit directly next door to it.
In my half year here, in addition to picking up a new language, I have realized that my tastes are starting to change. When I first got here, I failed to appreciate the Victorian architecture that many of the houses maintain. Homes that were made of bricks and featured wrought iron failed to excite me. Instead, I preferred a newer area of Port Melbourne that featured condos made from brightly colored stucco. The locals mockingly referred to it as “Lego Land” as all the houses looked nearly identical brightly colored Lego blocks all snapped into a neat little grid.
Now we are living in a Victorian style house and I am trying to figure out how long the real estate Ponzi scheme can continue. Our new rental is four bedrooms and has 270 degree views featuring a park, the port, and the city. We have a patio big enough to comfortably accommodate a table for eight outdoors where we entertain and look at the water. We are one block from the beach and roughly a kilometer (a little over half a mile) from Lego Land. We love our rental enough that Julie and I would probably consider buying at the end of our two year lease so long as the price is reasonable. In trying to assess “reasonableness” I decided to attend an auction of a four bedroom house in Lego Land.
The auctioneer was the same spruiker I saw at my first auction. The crowd was bigger this time and I walked through the home prior to the auction. To be fair, the house did have four bedrooms (a bit of a rarity) and a decent layout. I felt like it was a model home in a Newport Beach, California neighborhood instead of a charming Victorian unit. It was missing the intricate crown moulding, wrought iron fixtures, and fine craftsmanship I have come to appreciate. The kitchen/entertainment room offered a 180 degree of a parking lot. Location-wise, the unit was located next to a good park for the kids, close to Port Melbourne Primary School, and about four blocks to the beach. Anyone who lived there could get on the tram and be downtown in about twenty-five minutes.
The spruiker began by talking about the location and the “once in a lifetime opportunity”. Again, his spruiking was all about emotional appeals and although he was full of passion, anyone listening logically would realize that he contradicted himself several times. He started the bidding at $1.6M. I found it particularly interesting that he said, “We sold a similar unit to this for $2 million. (pause) Of course that was in 2010.” To the logical observer, one would realize that the bidding was starting at 20% lower than what similar units sold for just two years ago, that real estate prices were in fact DECREASING at an alarming rate, and maybe waiting would be the better strategy.
The other interesting contradiction was when the spruiker declared, “Even if you’re not ready to live in this amazing property, it would make an incredible ‘investment’. We have managed this property for the last several years and have demonstrated that it can maintain a rental income of between $1,000 and $1,050 per week.”
I was flabbergasted that the spruiker could call this an investment property with a straight face. At $1.6M the monthly mortgage repayment would be $10.5k per month. With a rental income of $4k per month (which did not include a significant “property management fee”) that would leave a shortfall of over $6k per month. Even if the magic of negative gearing made that shortfall $4k per month, that’s still a lot of money to fork over for an “investment” on an asset that is depreciating rapidly with no end in sight.
Would anyone logically buy into an investment that is difficult to sell, had large transaction costs associated with it, would cost $50k per year to keep, and is depreciating rapidly? I didn’t think so and apparently, neither did the crowd.
The auctioneer seemed a bit more defeated and put a little less effort into soliciting a bid than I saw at the first auction. The auction closed without any bids and the property is now listed as a private sale POA (price on application - wouldn’t want buyers to be too informed before making a decision like this).
My point in attending the auction was more than just gawking at the spectacle. I was trying to establish “fair value” for the neighborhood and a four bedroom home. I have written before about Apple stock and how, by traditional measures, if anything it is undervalued. On any market driven purchase, the concept of fair value can be very difficult to accurately assign. Homes or shares of stock will trade at exactly the price a seller is willing to accept from a buyer. However, I am going to take a stab at what I perceive to be fair value taking into account the property’s location, size, style, and potential rental income.
Given that the property is reasonably close to the beach and the CBD and is in a desirable neighborhood, lacks beach/port views, and has the potential to bring in $4,000 - $4,200 in rental income per month; I believe it would be fairly valued at roughly half the asking $1.6 million. At $800k with a mortgage payment of around $5,250 per month it would still be cash flow negative. However, a few years of steady rent increases could bring it to a self sustaining level. From there, so long as real estate continues to rise with inflation, it should bring a decent return by the time the mortgage is paid off.
Just as deciding fair value for Apple stock is difficult, so is concluding fair value for this piece of property. However, I am willing to state that Apple stock MIGHT be undervalued. I am stilling waiting for ANY evidence that Australian property will appreciate at any time in the near future in real terms. Any argument relying on the argument from authority (trust the RBA and the government), past performance (Greater Fool Theory and Extrapolation Errors), and Australia somehow being magically different will be summarily rejected.
Sounds like they do things in a pretty exciting way down under! Many of the Australians that I've met have been pretty eccentric and very easy to get along with. It's definitely true that they have a language of their own sometimes. Thanks for sharing your experience!
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