Here Come the Headwinds
Australian Property Market Update
March 1, 2018
- Auction supply spiked to well above 3000 for the first time this calendar year.
- Only Melbourne managed to clear more than 70 percent of auctions this week.
- Home prices have fallen over 1 percent for the quarter across the aggregate of our five largest capital cities.
- High household debt levels have economists questioning whether the RBA can raise rates anytime soon, but let’s not forget who really determines mortgage rates.
Housing Supply and Demand
Sellers were back in full force last week as the number of auctions across the country soared to 3,275. After the final reports came in this morning, almost 67 percent of sellers nationwide were successful. Sydney barely cleared 65 percent, and Melbourne peaked at just over 70 percent.
Here are all of the capital city results, as reported by CoreLogic:
In Sydney, the City and Inner East, Eastern Suburbs and Northern Beaches performed strongest, with clearance rates above 70 percent. In Melbourne’s North East, where Asian demand remains strong, vendors managed to clear almost 80 percent.
The Geelong market appears to be pumping, where a whopping 86 percent of auctions were successful.
Recent Changes in Home Prices
As you can see in the following chart, Sydney home prices started a downward trend. Tighter lending restrictions imposed by APRA, stricter capital controls from China, and weak wage growth here at home are all putting a strain on housing demand. Even in Melbourne, where the population is growing fastest, home price growth appears to be flattening out.
CoreLogic’s daily home value index shows the latest quarterly changes. Sydney home prices have declined 2.35 percent since November, and all capitals except Brisbane and Adelaide have fallen.
The latest data for the month of February shows Sydney prices falling 0.59 percent and Brisbane, Adelaide and Melbourne holding mostly steady. Unit prices in Sydney have been more resilient than house prices, but they too fell slightly in February.
What It Means for Investors
With supply rising, auction clearance rates softening, and home price growth topping out, it seems the winds of change are upon us. We’ve had a great run with the wind at our backs, but as Steve McKnight indicated in his recent property market special report, signs of some significant approaching headwinds are evident.
The greatest threat to investors is, of course, rising interest rates. We owe our good fortune over the past few years to the RBA who has suppressed interest rates to ultra-low levels. Low borrowing costs encourage short-sighted homebuyers to overextend themselves and unskilled investors to speculate on unending capital growth.
The result is a household debt to discretionary income level which has surged to over 200 percent – one of the highest in the world.
Source: ABC News
So where will interest rates go from here? Eventually, they will go up. It’s a statistical certainty. The more prudent question for investors to answer is “when?”
A growing chorus of economists are questioning the RBA’s ability to raise the cash rate this year. Anaemic wage growth and fears of mortgage stress from rising interest rates will be bearing down on any reserve bank hawkishness.
That said, it’s important for investors to remember that the RBA can only control short-term interbank lending rates. Mortgage rates are more directly tied to bond prices (and yields). While central bankers like to think they are presiding over the bond market, the truth is supply and demand within the bond markets is a function of the free market.
As I instructed my mentoring clients at a recent workshop, here are seven points a prudent investor will be sure to follow:
- If you’re buying for generic growth, time your entry wisely. Generic growth is as much about timing the market as time in the market.
- Give yourself more than one way to win. If you don’t get the generic growth you hope for, can you still win through positive cash flow or a future manufactured growth opportunity?
- Factor in higher interest rates before you buy. Only buy what you could afford to hold if the market turns against you.
- Consider a strategy with limited exposure to the market. An example would be to renovate or subdivide to sell.
- Leave yourself a margin to break even. Don’t embark on a manufactured growth venture that requires generic growth to get an acceptable outcome.
- Have a Plan B that you can afford. If your primary exit strategy goes wrong, make sure you’re not one of the forced sellers.
- Be careful sitting on the sidelines. While we know interest rates will someday rise, if the RBA cuts rates or your bearish outlook turns out to be wrong, your cash in the bank may lose considerable buying power.
Are You Prepared to Sail into the Wind?
As the headwind metaphor indicates, investing in real estate is a little like sailing a boat. There are times when the winds are at your back and very little skill and active focus is required to reach your destination. There are other times, however, when you must sail into the wind with significant effort and an intelligent strategy to reach the same destination.
Unfortunately, many investors today are sailing the seas of the property market with only a tailwind level of skill. Their only approach is to board the boat, put up the sail, and hope for favourable winds to carry them toward property profits.
The market has been very generous, and many of these investors have done exceptionally well. But as the winds change, property profits in the coming years will likely come only to investors who develop the skills required to sail into the wind.
How will you develop the skill required to navigate the approaching headwinds? If you’d like my 1-on-1 help applying Steve McKnight’s systems in the property market trenches, follow this link to schedule a complimentary mentoring session with me and learn more about the huge advantage and added safety that Steve and I can provide you on your way to your property investing goals.