How a bottle of Veuve comes with a $1.6 million price tag, no joke

There’s an old saying that it’s time to get out of the share market when the cab driver is giving you stock tips. Well, an equivalent may have just been found in the property market.

I went to an auction on the lower north shore of Sydney recently and was surprised by what I found.

Setting the scene

It was a bright sunny Saturday afternoon. Gradually, prospective home buyers and investors made their way into a three-bedroom semi on Sydney’s lower north shore.

The property was open for one last 15 minute look-through before it went on the market.

The agents decided to hold the auction in the family living area… partly because that was where the air conditioning system was located. It was hot and as bidders filed into the room there was a growing sense of anticipation.

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There were three agents: a lady taking last-minute bidding registrations; a tall, serious-looking agent gauging the mood of the room; and an exceptionally well-groomed auctioneer.

A quiet hush came over the room and the auctioneer started on his script. He was very well versed.

It wasn’t long before the tall, serious-looking auctioneer suddenly walked across the room to the kitchen table to pick up a bottle of Veuve Clicquot.

The auctioneer explained that this expensive bottle of wine was going to the first bidder. But that wasn’t the end of the Veuve sales pitch.

He went on to explain how uncomfortable it would feel if you were the second bidder and “just missed out” on that lovely bottle of champagne.

Not a peep

Well the auction got underway… and… nobody bid.

The auctioneer kept going, and still… nobody bid. The bottle of Verve was held up a bit higher and … not a peep.

The taller agent then ‘worked the room’, and encouraged the registered bidders (only three) to roll the dice. No one was game.

It was now getting a little awkward. The agent in charge of last-minute registrations started making some sideways glances. She was looking noticeably uncomfortable.

The tall agent made his way around the room a second and a third time... still nothing. The auctioneer was forced to wind it up.

The reserve price for this three-bedroom (though I would debate there was a third bedroom), “contemporary family home”, with easy access to all amenities, was $1.6 million. The property was ultimately passed in.

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Have we seen the top?

The crowd started to move out of the living room. A few stayed back. The tall agent was giving the hard word to two of the three registered bidders but they still looked uninterested.

The third registered bidder was a young lady who had managed to avoid the tall agent the entire time. She looked absolutely delighted. She approached the auctioneer.

Post-auction deals

I like the example above from the lower north shore because it’s a part of Sydney that’s wealthy.

I suspect if property investors on the north shore are thinking twice before parting with their money, it’s likely to be worse out west and down south.

So is this a developing trend? …where bidders simply hold out and wait to deal directly with the vendor, knowing they then have the power to make a significantly lower offer? Why would you bid when you don’t need to, especially when you’re likely to get a much reduced price after auction with the vendor?

I suspect as the market peaks, and then falls away, more and more auctions will be like this. It’s ironic, isn’t it, that a bottle of “Verve” is offered for the first bidder?

The word verve means “enthusiasm”. I didn’t see any enthusiasm at all at that auction.

I put the word out on social media that this property was passed in with no bidding.

Other people responded that they had witnessed similar auctions. At the very least, this is anecdotal evidence that the heat has come out of the market. The next question is will it last, or even gather momentum?

Latest economics

That question is best answered with a forecast for Australia’s unemployment rate.

I can’t tell you where the jobless rate is going, but I can tell you that the property market is far more likely to turn down as people fear for their jobs, rather than if interest rates start rising.

I don’t see interest rates in Australia rising until well into 2017. The unemployment rate could easily start rising at 2016 gets underway, however. That said the latest “official” stats show the jobless rate moving lower!

And the Federal Reserve… yes there’s a connection to the property market

One final topic I wanted to touch on is US interest rates.

Partly because it has implications for the global economy, and hence Australia’s economy, but even more so because it’s one of the strongest themes influencing the Australian dollar right now… and that has implications for interest rates (and hence property demand).

Late last week the Federal Reserve decided to leave interest rates unchanged at close to record lows.

Importantly, chairwoman, Janet Yellen, signalled to markets that there would only be two more rate hikes in 2016, not the four the market was originally expecting.

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Well the longer the US Federal Reserve keeps rates at these levels, the more upward pressure there will be on the dollar.

At these levels, certainly above 76 US cents, the Reserve Bank will feel pressure to lower interest rates. That would push the dollar back down, and help buffer the economy.

The RBA may also be forced to counter out-of-cycle interest rate rises by the big four banks as they pass on the burden of higher funding costs.

At least one researcher I spoke to last week predicted two interest cuts by the Reserve Bank. That would only further fuel property demand.

Big picture

Pulling it all together, I see an extra-ordinary period ahead for the property market. On the one hand you have exhausted bidders – unmoved by a bottle of Verve just for sticking their hand up in the air.

These property investors are looking for value, and, currently, that’s hard to find.

On the other hand, the two elements that would cause a correction in prices: a spike in the jobless rate; or a sudden, and sustained lift in interest rates, don’t look even remotely possible in the short term.

Would I invest in property right now? Not a chance. Is it now easier for first home buyers to enter the market? Not at all. Is ‘cheap’ money likely to hang around for a bit longer? Absolutely.

Epilogue

You might be interested to know that the owners of that lower north shore “semi” mentioned above weren’t put off by the lack of bidders.

They’ve recently put the property back up for auction. This time, believe it or not, for a higher price. I kid you not.

David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.