- October 15, 2019
- Posted by: Ding Financial
- Category: Finance
By business reporter
As house prices start taking off again, especially in Australia’s two biggest cities, many first-time buyers are wondering how they can break into the market.
But what if there are tricks to save tens, or even hundreds, of thousands of dollars on a home, without trading off size, location or quality?
Behavioural economics offers some hope to astute buyers who can exploit other people’s unconscious biases to snap up homes at a discount.
On the other hand, it also offers clues to savvy sellers about how to maximise their return.
It turns out that, despite housing being the biggest single investment most people make in their lives, we generally aren’t completely rational in our decision-making.
“We are just people, we don’t have a finance background or any sort of mathematical background,” says Adrian Lee, an associate professor from the School of Property and Real Estate at Deakin University.
Professor Lee describes the cumulative effect of this irrationality as “shocking”.
“It does mean that you are susceptible to your behaviour and on aggregate this does mean that prices can become erratic,” he tells RN’s The Money.
So, what kind of seemingly irrational factors can affect how much people will pay for a house?
Sunny weather for sellers
Professor Lee’s research shows even the weather on auction day can have a substantial effect.
“It’s roughly in the thousands of dollars, the difference between a cloudy or sunny day or a very cold or a very hot day,” he observes.
“So, it’s not insubstantial.”
To be precise, Professor Lee’s paper shows a 1 per cent increase in prices on very sunny days when compared to overcast ones, which equals about $9,000 on a typical Sydney house.
Going to auction at all, rather than buying by private treaty, also tends to ramp up the price, especially when the property market is on the way up.
Professor Lee’s work shows auction sale prices in Sydney were 6.9 per cent higher than private treaty sales, even after controlling for the fact that auctions are more commonly used to sell larger homes in more expensive neighbourhoods.
He says it’s likely that he couldn’t fully control for the fact that agents typically auction the more desirable properties, but there’s still likely to be a “winner’s curse” where people who buy at auction overpay.
“This pressure that you have on buying and there is no cooling-off period, it makes you vulnerable,” he warns, offering this advice: “Don’t have your feelings affect the auction, think of the price that you can afford and set that price.”
Making a killing on your purchase
You obviously can’t control the weather on auction day and if you make a private treaty offer before the auction there’s no guarantee the vendors will accept it. So what other tricks are there to get a cheaper home?
Dr Anastasia Klimova from the Economics Discipline Group at UTS says crime can offer a buying opportunity.
While ongoing property crimes, especially visible ones like vandalism and graffiti, do lower prices, that is because they also reduce the long-term amenity of living in an area.
But Dr Klimova’s research shows a one-off serious crime, such as a murder, can have the same effect but for a limited time.
“The impact will be short-lived, for about one-year only, and we find that, overall, prices fall about 5 per cent within 0.2 miles from the murder house,” she tells me.
Dr Klimova is currently working on a paper about the effect of new public housing on real estate values in the surrounding area, finding it has a similar “shock” value to prices.
“The idea came after an announcement by the ACT Government in March 2017 to build public housing in certain areas in Canberra, so that allowed us to have a quasi-experiment,” she explains.
What they found was a 4.9 per cent decrease in prices over the following year in areas where the new public housing was to be built.
The effect was even larger in more affluent areas.
“We observed a fall in housing prices as much as 7 per cent, compared to poorer neighbourhoods where the decline was only 4 per cent,” Dr Klimova says.
While the public housing will be there for a long time, Dr Klimova believes the sizeable price discount may only be temporary, as existing residents overestimate negative effects from their prospective public housing neighbours.
“That could be just a shock response from the public,” she hypothesises.
Dr Klimova plans to revisit this research to see whether prices later recover after the initial shock and once the public housing has been in place for some time.
She expects the longer-term effect on home values will depend on the design of the public housing, with some overseas studies showing no negative effect.
“[It depends on] what type of public housing, how it is built … do we have a concentration of public housing in one place,” she says.
“Also, management of public housing is very important — so if it’s managed well, if it doesn’t create problems for people and to their lives, then the effect will be even positive.”
Planes crash prices
There’s also a lot of more rational, long-term factors affecting home prices that can be much more valuable to certain groups of buyers than others, creating an opportunity to save money.
“I know for a first home you’ve got to compromise on some stuff, right? Like plane noise, or rail noise or high density,” prospective buyer Mason tells me after visiting an open home in the inner-Sydney suburb of Enmore.
His priority is convenience, so he is willing to consider trading off other features such as peace and quiet — a common trade-off in Sydney’s inner-west, within a few kilometres of the airport and directly under the main flight paths.
Economic studies differ greatly on the estimated price effect of aircraft noise.
One QUT study commissioned by Brisbane Airport, perhaps unsurprisingly, found almost no effect.
However, an independent study of Melbourne’s Essendon Airport found prices were about 10 per cent lower for properties within 1 kilometre of the end of the main runway compared to those a little further away and less affected by noise.
That more closely aligns to international studies, some of which have shown house price and rent discounts of as much 1 per cent per decibel of aircraft noise once a baseline threshold is crossed.
Educate yourself on school zones
If you like your tranquillity and that means you don’t plan to have children — or if your children have already moved out — then you should consider school zones when looking at homes, particularly avoiding popular ones.
“A 5 per cent increase in school quality scores [as measured by NAPLAN testing] increased house prices by around about 1 per cent,” says Daniel Melser, from Monash University’s econometrics discipline.
But his study is based on data from Sydney, which has a lot of selective schools where entry is based on test scores not catchment area.
Real estate agent Daniel D’Assisi says, anecdotally, the effect is much larger in his part of Melbourne around Doncaster East — so much so that some developers deliberately target properties within top school catchments.
“If this home was only a couple of streets away, outside of the school zone, we would anticipate probably 30-40 per cent less inspections and inquiries, which in turn would result in probably a sale result somewhere between 5 and 10 per cent less,” he says.
Of course, if you do have children, then buying into an area with quality public school could be an excellent investment.
“That’s a one-off payment — you just pay that when you buy the house and move into a particular area,” Mr Melser says.
“That’s much, much less than the cost of sending a child to private school, which probably is in the order of $10,000 or $20,000 per year.”
When you add it all together, prospective buyers could save tens, or even hundreds, of thousands of dollars by thinking carefully about attributes they don’t value and avoiding them.
So, if you’re struggling to afford a home, try negotiating a private treaty on a rainy, cold winter’s day, for a house under the flightpath, in an unpopular school zone, next to a new public housing development, somewhere near a recent murder.
Or just keep renting.
To hear more about how our irrational economic decision making could be costing us thousands of dollars when buying a home, listen to The Money on ABC RN at 5:30pm on Thursday and 1:30pm Friday or on the ABC Listen app anytime.
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This content was originally published here.