How much leverage do buyers have?

Vendor discounting is a measure of the difference between the price that a property is initially listed for compared to the price at which it ultimately sells. The result is measured as the percentage change in listing price.

It is pretty rare that a property will sell for its initial listing price, generally the ultimate selling price will be between 5% and 6% lower than what the seller was originally asking. As market dynamics change, you’ll generally notice that vendors take some time to become aware of the change and the amount of vendor discounting will increase.

As the Global Financial Crisis hit during September 2008, vendor discounting blew out to -7%, indicating that vendor pricing was well and truly not adjusting to falling property prices and few active purchasers. As at April 2010 and on a national capital city basis, the average level of vendor discounting for houses was recorded at -5.4%.

As we know the last 16 months has been characterised by increasing property values, a fact that clearly most vendors were acutely aware. As a result, the average level of vendor discounting fell as low as -4.8% nationally for houses in late 2009. This result was indicative of strong demand and high level of competition for available properties.

Across the unit market average discount levels were recorded at -4.6% during April 2010. Discount levels had been as high as 6.6% during 2008 and since the end of 2008 they have fallen to levels as low as -4.0%.

On a capital city by capital city basis the levels of vendor discounting have varied greatly however, in most instances during April 2010 the level of discounting has increased. This result is likely due to the slowdown in market conditions that has dampened effective demand from buyers.

Across the country’s capital cities you can see that in most cases the average level of vendor discounting has begun to increase and currently sits at much higher levels than it did at the end of 2009.

For houses, Brisbane recorded the greatest level of discounting during April at -6.2% which supports the fact that house values in Brisbane recorded the greatest fall in the month at -1.2%. The lowest level of discounting for houses in April was recorded in Canberra at -4.0% despite the fact that house values fell by -1.0% over the month. This is perhaps the result of the Canberra market quickly reacting to a change in market dynamics over the month, realising that prices were softening.

Across the unit markets the greatest level of discounting during April 2010 was surprisingly recorded in Melbourne at -6.5%. This result comes despite the fact that unit values increased by 1.3% over the month.

The result indicates that the market is likely not moving as quickly as vendors anticipate and as a result they may be setting unrealistic initial asking prices on these units. This is an understandable trend given the rapid increase in Melbourne property values over the last year. The lowest level of average discounting for units is currently recorded in Canberra at -3.1%. The fact that both house and unit discounts are lowest in Canberra suggests that Canberra vendors are perhaps more in touch with current market conditions and as a result, they are setting compelling initial prices on their properties.

RP Data has been forecasting a slowdown in the rate of property value growth for a number of months now and it now appears to be coming to fruition. As conditions slow we would expect that vendor discounting in the market will increase over the coming months.

For real estate agents it will be important to educate sellers about the slower conditions and lowering their price expectations. For those looking to purchase, the scope for negotiation is likely to improve with fewer buyers in the market and softening value growth. Should this occur it is likely that purchasers may be able to obtain more competitive prices on those properties available for sale.

Tim Lawless is the Director of Property Research at RP Data.