Don’t Buy In To The Hype – Home Prices Are At Best Levelling Off
Property Market Update for Week Ending 21 May 2017
Key Property Market Highlights:
- Auction supply surged but demand appears to have kept pace.
- Melbourne just recorded its lowest auction clearance rate for the year.
- Capital city home prices are still falling week on week.
- The recent headlines are overly hyped. Demand is strong, but it’s not quite as competitive as agents would like you to think.
This Week’s Preliminary Auction Activity (Week Ending 21 May)
Supply surged again this week, with the number of auctions across the combined capital cities increasing from 2,409 last week to 2,794 this week. The preliminary clearance rate jumped significantly, despite the higher volume. Initial reporting shows 77.2 percent of this week’s auctions found a winning bidder. Last week the final clearance rate was 72.8 percent. Over the same weekend last year, both supply and demand was weaker, with 68.9 percent of 1,920 auctions clearing successfully.
Sydney looked strong with 1,053 homes taken to auction and agents reporting a preliminary clearance rate of 80.7 percent. Last week, the final clearance rate was 74.5 percent across 960 auctions. During the same week one year ago, sellers offered up 735 homes at auction with 73.2 percent finding a winning bidder.
The Melbourne market was most active. Auction volumes rose to 1,323, up from 1,098 last week, and nearly double the number of auctions held two weeks ago. The preliminary clearance rate in the Victoria capital was 79.2 percent. Last week’s final clearance rate of 75.0 percent was the lowest of the year so far. One year ago, the clearance rate was 70.0 percent across 843 auctions.
Last Week’s Final Auction Results (Week Ending 14 May)
Don’t put too much faith in Sydney’s preliminary result. Last week, the clearance rate fell about five points from Monday to Thursday after all results were reported. If the same holds true for next week, this week’s result will end up at around 75.5 percent.Sydney’s preliminary result. Last week, the clearance rate fell about five points from Monday to Thursday after all results were reported. If the same holds true for next week, this week’s result will end up at around 75.5 percent.
In fact, every other capital was also adjusted down by Thursday last week. Here are final auction results from last week, according to CoreLogic:
For the historical data of weekly auction clearance rates, click here.
Recent Price Movements
Home prices in Sydney and Melbourne have been trending down for the last few months. The median home price in Sydney has now fallen to late-February levels, having lost 0.52 percent over the past week. Melbourne prices fell a dramatic 1.18 percent since last week. At this pace, quarterly gains for the two cities will be wiped out within the next two weeks.
Both Brisbane and Adelaide home prices rose over the past week, 0.11 percent and 0.50 percent respectively. Perth fell 0.19 percent over the same period.
Here’s CoreLogic’s most recent data for all the capital cities:
Property Market Analysis
Though supply rose considerably over the past two weeks, plenty of buyers have been showing up to keep auction clearance rates elevated. Falling prices in Melbourne and Sydney indicate that vendors are happy to accept a little less money to lock in a sale before prices fall any further. It’s also likely that recent supply increases are spreading out buyers amongst more properties, meaning prices are not being bid up as high at each property.
It’s difficult to say whether seller expectations are softening primarily due to fear about falling prices in the future or in response to rising supply. Considering the price peaks in Melbourne and Sydney occurred in mid-April and have been falling rapidly ever since, I’m inclined to believe that a psychological shift has occurred, and many sellers represent the least optimistic segment of the market.
Brisbane and Adelaide appear to be the most resilient markets for now. This could be a result of investors looking for properties that they can afford. With tighter lending restrictions for investors now in force, it’s much tougher to gain finance at the elevated prices in our two largest cities.
The resilience of our smaller capitals might also simply be due to prices there already being more in line with the fundamentals of wage-price growth. If housing demand wanes, prices there won’t have as far to fall to meet the market.
What It Means For Investors
Reading some of yesterday’s hyped property market headlines, like the ones here and here, investors may be inclined to think the talk of slowing price growth is premature. But the numbers don’t lie. Prices in Sydney and Melbourne are falling.
Of course, the million-dollar questions are how far will they fall, and will they start rising again. With interest rates at historic lows, auction clearance rates in the 70s, and population growth strong, Sydney and Melbourne may very well have enough demand in the pipeline to support current prices. Assuming that’s true, we may see the price floor soon.
As I’ve said countless times before, home prices are ultimately in the hands of our regulators. It all comes down to the RBA, APRA, and policy-makers in Canberra.
The latest job numbers looked moderately encouraging. Unfortunately, though, wages haven’t even grown as fast as our weak inflation over the past year. That means most people are financially worse off than twelve months ago, which doesn’t bode well for the property bulls.
That said, the slow wage growth may indicate the RBA will be cutting rates yet again. Credit Suisse just forecast multiple rate cuts by the end of this year. That would be bullish for home prices, unless of course, APRA steps in to lock even more investors out of the market.
Scott Morrison just announced more powers for APRA to start regulating the shadow banking industry more tightly. That makes me think the back-room talks have been going something like this:
Philip Lowe: “I’m really hoping the Fed hikes rates, but if not, I’ll definitely need interest rates lower to try to fuel some wage growth. I’m really getting tired of all the whinging from first homebuyers in Sydney and Melbourne.”
Wayne Byre: “Hey, we’re trying to do our part over here at APRA, but all these smaller lenders are undercutting the Big Five on interest rates. I wouldn’t be cutting rates unless you plan to give us a little more control over the little guys.”
Scott Morrison: “We have no intention of crashing home prices on our watch. If we do, we’ll all be out of a job. Glenn Stevens created this mess, so it’s up to you boys to fix it. I’ll tell you what though, if more power and money is all you need, I can certainly help you out there.”
As it turns out, APRA may not need those extra powers just yet. S&P Global Ratings just downgraded the credit scores of more than 20 smaller lenders, warning of the risks of a property market downturn. Why were the big banks spared? The market knows our Government would step up to use your tax dollars to bail them out. They have become “too big to fail.”
Expect interest rates at Bank of Queensland, Bendigo & Adelaide Bank and AMP Bank to rise, among others. So much for a competitive advantage after that bank levy. It makes me wonder if ScoMo had been talking to his boys down at the rating agency.
There’s one thing we do know for sure. If home prices fall too far, or if they continue rising much more, a lot of people will be screwed. It stands to reason then that the three amigos – Philip, Wayne, and Scott – will be doing everything they can to try to flatten out home price growth.
If you’re looking to enter the market soon, educate yourself so you can pursue an investing strategy that gives you more ways of winning than just speculating on generic capital growth. Otherwise, fast forward ten years, and you may find yourself no better off than you are now.
What’s your read on the property market?
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