Have A Panadol And Sit In The Corner
Results for week ending 29 March
Sydney and Melbourne markets were again at full throttle and Perth bounced back from an extremely low performance last week.
The Stat
Auction clearance rates report the number of properties sold compared to the number of properties offered up for auction. A figure of 80% and above indicates a strong performance. The real estate industry aims for 70%.
The Graph
The Numbers
The Analysis
The markets in Sydney and Melbourne remain at elevated levels. They continue to fuel six year high clearance rates Australia wide. Rates remain steady elsewhere around the country. The exception is Perth. Perth’s performance rebounded 34% to normal levels after a dramatic low last week. And while overall auctions held in Perth are low, and prone to volatility, there is a growing trend to take properties to auction in that city.
What It Means For Investors
“Have a panadol and sit in the corner” was buyer advocate David Morrell’s advice following another frenetic weekend in Melbourne. Looking at the numbers you can sure understand the sentiment (parts of Melbourne were clearing auctions at a rate of 94%). Rather than popping a pill, I think the trick is to make sure you know that your numbers work!
Sydneysiders too could have received the same advice given to Melbournians. Sydney stayed strong when there were many reasons the market should have come off its high. Increased supply of 32%, the distraction of a state election, and messages from a nervous reserve bank were all feeding downward pressures into the market. But the underlying fundamentals and record low interest rates kept the market buoyant.
Looking ahead we are coming in to a holiday season. The Easter weekend and school holidays have already significantly lowered auction listings for next week. ANZAC day falls on a Saturday this year too so there will be lower auction volumes for much of the next month. This will give the market time to pause for a breath but won’t change the settings underpinning the market going forward.
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84.8% of 1330 which means if recent finance reports of 42% of loans being investment properties means that there were 450 investment properties purchased on Saturday.
Now for the million dollar question…….how many of them were making more than 3% rent before costs (or delivering better than break even after council/strata fees + mgt fees + insur + int)
Repeat after me……Capital Gains are great….but they don’t service the mortgage.
Rents service the mortgage…..if rents don’t go up….prices cant continue going up.
Thanks for your comment DeanCollins. It’s an interesting point you raise. I agree there has to be a limit on house prices somewhere. The thing is though that other sources of income are used by many investors to help service their mortgage. This improves serviceability beyond just a property’s overall yield. Investors are also buying with value add in mind, whether that be through renovations or development. So their price isn’t limited by yield as it comes off the auction room floor. That good old mechanism of supply and demand will also have its way. So when auctions are clearing at such a frenetic pace there’s plenty of upward pressure for capital growth in the stock being sold. And this is what we are seeing.
I think to Dean’s point, rent (and more importantly, income) isn’t growing at anywhere near the rates of housing and hasn’t done so for a good many years now. The only thing keeping the cash flow equations in check are falling interest rates so owners/investors have not yet felt the pinch.
As soon as growth slows down (which we are already starting to see) a ton of investors are going to realise they are sitting on an asset which is way too negatively geared with the potential for 5-7 years flat growth as we move towards the consolidation phase of the property cycle.
With weakness in China’s economy, growing unemployment here in Australia, and interest rates which can’t get much lower, I’m struggling to see the upside (Sydney in especially).
Hi Karl, you make some good points. Business and consumer confidence is down too which doesn’t bode well for an enthusiastic turn around. I do wonder though what impact the new lending credit code is going to have on the buyers you’re worried about once rates start to rise. Has the new law saved people from themselves? The thing that would concern me in relation to house prices is if local councils started to free up land across the board and drop development restrictions.