Has the Property Market Parachute Finally Opened?
Australian Property Market Update
3 April, 2019
Dwelling prices are still falling, but not as fast as in previous months. Is the latest housing market data showing signs of a soft landing?
The Auction Market – Don’t Be Fooled, Sydney
We continue to see Monday morning headlines about rising auction clearance rates in Sydney, with this week’s preliminary result at nearly 66 percent. But don’t be fooled; remember it’s the final (not preliminary) results that tell the true story.
Check out the difference in the table below between the preliminary results (released Monday morning) and the final results (posted on Thursday morning). This week’s preliminary results only include about 60 percent of the total auctions, and because most late reported results are for properties that failed to clear, the final figure tends to be much lower.
Capital City Average
The data for the week ending 24 March is especially telling. Sydney’s preliminary auction clearance rate was 62.2%, but the final count comes in over 10 percentage points lower. That’s the widest disparity I’ve ever seen and indicates a final clearance rate this week of around 56 percent.
Melbourne’s preliminary results have been much closer to reality over the past few weeks. This may indicate that more properties are finding a winning bidder in the auction itself, rather than in post-auction negotiations.
If Sydney’s final result does come in around 56 percent, that does indicate an improvement from previous weeks. Melbourne’s final results are also trending upward through March, although this week’s preliminary result is several percentage points lower than last week, due mainly to an increase in auction volume.
Looking at the nation as a whole, the clearance rate continues to hover around the 50 percent range. But considering that auction volume spiked significantly this week, a clearance rate that doesn’t fall is a sign of improvement.
Either there are more buyers entering the market, or vendors are succumbing to market forces and becoming more realistic with their sales price expectations. Given the recent price action (which I’ll cover below), I’m inclined to believe it’s a little of both.
Here are the latest preliminary auction results (for what they’re worth) for all the capital cities:
Home Prices – Will they flatten out soon?
Dwelling prices continued to fall in March, but not as much as in February. This was the second month in a row that the pace of decline slowed, meaning February’s price decline was not as great as January’s.
While it’s too early to be breaking open the champagne, it’s certainly a hopeful sign that the falling dwelling price curve could flatten out later this year.
It’s really only Sydney and Melbourne where there’s a clear trend of improvement. Brisbane price falls may actually be accelerating, and Adelaide, which has been subdivision paradise over the past year, seems to be softening.
Here’s CoreLogic’s latest monthly median house price data:
As you can see, all the capital cities, barring Canberra and Hobart, were in the red last month. Even Canberra seemed to be barely keeping its head above water with growth of 0.01 percent.
The rolling twelve-month declines are somewhat meaningless when we could be focusing on falls from the peak, so I’ll jump straight to those figures.
According to my assessment of CoreLogic’s back series of data, the Sydney median dwelling price has now fallen 13.96 percent from the market peak back in July 2017. Melbourne’s median dwelling price is now down 10.33 percent from the all-time high in November 2017.
If we average about half a percent decline over the next twelve months in Sydney before the market flattens out, the falls from the peak in Sydney will amount to around 20 percent. While that seems to be an optimistic outlook, given the current trend, it would still leave many 2017 Sydney buyers in a world of hurt.
Many of these buyers on an 80 percent LVR will have lost nearly all of their equity by year end. Buyers who qualified for a 90 percent LVR loan in 2017 have already been losing sleep at night for months.
Comparison website Finder just released results of a survey of borrowers. Their findings estimate that 4.8 million households across Australia are already experiencing mortgage stress. Forty percent of mortgage holders are living “month to month”, 7 percent are “barely able to make repayments each month” and 2 percent are “behind in repayments”.
RBA chief Philip Lowe’s comments about how “prices are still 75 percent higher over the decade” will do little to console homebuyers who purchased at the peak. For their sakes, let’s hope the Sydney and Melbourne property parachutes have indeed opened.
Interest Rates – WTF is Phillip Lowe doing all day?
Speaking of Philip Lowe, he and his central banking cronies met this week and decided yet again to leave the cash rate on hold at 1.50 percent. That’s a record 32 consecutive months without a benchmark rate change.
While the cash rate may remain the same, the tone of his monetary policy statement has shifted. He hasn’t quite gone as hard-core dovish as his American and European peers, but his closing statement was different this month than previous months.
Previously, he had been ending with words to the effect of, “leaving the cash rate unchanged is consistent with sustainable growth in the economy and achieving the inflation target over time.”
This month, however, he shifted the wording. “The board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”
It seems they are now “monitoring developments.” I’m not sure what they’ve been up to for the last few years, but it’s good to hear that developments are now being monitored.
Expect a lower cash rate by year-end, especially if Labor comes into power. The future tax cuts that Scott Morrison and team are proposing likely won’t make it into a Labor budget, which would put more onus on the RBA to stimulate the economy.
Credit Growth at a Snail’s Pace
Housing credit growth ticked up ever-so-slightly in February by 0.3 percent. That’s better than moving backwards, but it brings the annual growth rate of credit to a meagre 4.2 percent, the lowest growth rate on record.
We have tighter lending restrictions in part to thank for that, but the reality is there is only so much debt a nation can carry. According to the latest RBA data, total household debt to income has risen to 189.6 percent, as of December 2018. It seems we are approaching that ceiling and at some point we’ll need to deleverage.
Because housing demand depends primarily on the availability of cheap credit, the rate of credit growth is the most important leading indicator of home price movements. Changes in housing credit growth tend to lead home prices by about six months. That means that six months from now, home prices will likely still be falling. The pace of those falls will depend on other factors.
Woohoo! Building Approvals Just Spiked 19.1%
It’s been a rough couple of months for the building industry, with the recent summer months marking some of the worst approvals data since the GFC. January saw a slight bounce, but February’s data far exceeded expectations.
Analysts were expecting another drop in February of 1.7 percent. Instead, approvals for the construction of new homes jumped by 19.1 percent.
Again, we need to pause to look a little deeper before cracking open the bubbly. Looking back over the past year, total building approvals to February is still down 12.5 percent.
We also need to consider the finer points of the report. Approvals for houses fell 3.6 percent in February, but the “other dwellings” category, which includes apartment blocks and townhouses, soared by 64.6 percent. In other words, houses fell and units rose alot. That’s not a particularly great sign. Sustained growth in both sectors would be a promising sign.
March’s building approvals data will be important to watch. It’s not uncommon after a big jump like this to see a correction lower again in the following month.
What does it all mean for property investors?
While the rate of price decline seems to be slowing in Sydney and Melbourne, it’s important to keep in mind that prices are still falling, and according to credit growth data, will likely still be falling six months from now.
If you’re a manufactured growth investor, factor that into your offer price. Make sure you discount your anticipated sales price from current comparison sales. If your renovation deal has a 10 percent ROI based on today’s prices, don’t expect that profit by the time you sell. Perhaps a 15 percent RO on a three to six month turnaround time would be a better target.
If you’re a buy and hold investor, be sure to read Steve McKnight’s latest article which he’ll be posting soon. He offers some great insights on how to invest in a down market.
If you’re currently searching for deals in South Australia or Queensland, be aware that tigher lending restrictions and buyer sentiment seems to be negatively impacted by falling prices in Sydney and Melbourne. While prices outside our largest two cities have not fallen considerably, properties are taking longer to sell, which will likely increase your holding costs and diminish your profit outcome.
Wherever you are investing, be prudent, focus on the numbers, and don’t get emotional.