Spring Headwinds a Threat to Sellers
Australian Property Market Update
4th September, 2018
The Auction Market
Saturday marked the first day of the Spring selling season, but someone apparently forgot to let both the buyers and sellers know.
The nationwide preliminary clearance rate of 58.2 percent was essentially on par with (only slightly higher than) the previous week’s preliminary result. Auction volume was 8.5 percent lower, with only 1,752 homes presented at auction.
When the clearance rate remains essentially the same and auction volume (supply) falls, it points to a decrease in demand, or fewer buyers in the market.
Expect the final clearance rate for this week (released Thursday after all results are tallied) to be about three basis points lower, in the mid-50s. This time last year, just before home prices began to fall, the nationwide auction clearance rate was near the mid-60s.
Here’s the latest preliminary auction data for our capital cities, as reported by CoreLogic:
Home Prices Still Trending Down
Home prices have now fallen for eleven consecutive months, bringing the year on year aggregate decline to just over 2 percent. Sydney has led the way, with dwelling values there falling by 5.64 percent, followed by Darwin at 4.02 percent and Perth at 2.05 percent.
Of our five largest capitals, only Adelaide saw prices rise in August.
Here is all of CoreLogic’s latest median house price data:
As traders like to say, “the trend is your friend,” so odds are the 5 capital city aggregate decline will continue, with Melbourne and Sydney leading the way.
The Spring Headwinds
As we get deeper into Spring, sellers will be hoping that with warm weather will come more buyers. Unfortunately, there are some headwinds that will continue to put a damper on demand.
What began over the past few years with APRA lifting bank capital requirements and capping lending to investors turned this year into a full inquisition into bank lending practices. Unless you’ve been living under a rock, you know that banks have now significantly raised the bar for property investors (and owner-occupiers for that matter) trying to borrow money.
The following chart shows the total numbers of loans rejected over the past year:
Source: Digital Finance Analytics
When you dig a little deeper into the numbers, you learn that only 60 percent of refinance applications are now being approved. That figure was 95 percent this time last year. That means that people who once qualified for a loan to buy their property no longer meet the standard under the new criteria, to borrow for the exact same asset.
That seems to indicate that 35 percent of the population has a loan that they can’t really afford to pay back. They’ve borrowed too much relative to their income, and if interest rates rise or the economy hits some turbulence, these loans could unwind in a not-so-orderly fashion.
Referring back to the chart above, the upward trend of rejections remains steep and doesn’t appear to be levelling off. Many would-be-buyers who would like to get a loan to purchase a property this Spring will not qualify, which will lead to disappointment for quite a few sellers.
We tend to think about supply of properties primarily in terms of auction volume and new listings. Spring is generally the time of year when many sellers present their properties in the market, so supply usually increases through September and October. With the warmer months have also come in years past a slew of new buyers.
But there’s another factor that leads to increasing supply, which Steve McKnight will be highlighting in his article scheduled to post tomorrow. With fewer people able to qualify for loans (fewer buyers), homes tend to stay on the market for longer. With every new home listed for sale, if a large percentage of last month’s properties are not selling, then the overall supply in the market begins to increase each month at an exponential rate.
According to CoreLogic, the level of advertised supply is already 7.6 percent higher than it was this time last year. As more properties are listed for sale later this month and next, expect the downward trends in Melbourne and Sydney to continue, leading to further price falls as a growing number of sellers compete for a limited number of buyers.
Rising Mortgage Rates
Although the RBA decided today to leave the cash rate on hold today (for a record 25 consecutive months), banks have started raising rates out-of-cycle.
I’ve been beating the drum for the last few years that the RBA has a much smaller impact on mortgage rates than we might think. The greater influence is global bond yields. The reason is that banks must borrow from overseas wholesale money markets. This where they get most of their capital to lend to out to homebuyers. Bank deposits are not an adequate source of capital to meet demand, nor to hit bank profitability targets.
As the Federal Reserve is raising rates in the United States, bond yields are rising, which means it becomes more expensive for our banks to borrow money. In order to continue propping up their share prices, banks must pass their higher borrowing costs on to consumers.
Westpac just announced a 0.14 percent increase in its variable interest rates for both owner-occupier and investor loans. Suncorp sooned followed with a 0.17 percent hike. Word on the street is ANZ, Commonwealth and NAB aren’t far behind.
Where mortgage interest rates go from here is mostly out of our control. The RBA may be able to provide short-term relief through further cash rate cuts, but factors overseas will have the greatest impact. Because households have chosen to increase our collective debt-to-discretionary-income level to over 200 percent, the financial destiny of anyone carrying debt is in the hands of bankers overseas.
A few practical tips…
So what does all of this mean for investors?
If you’re a buyer, be selective and manage your risk. In some places around Australia home prices are likely to continue falling.
If you’re a seller, be realistic and meet the market, unless of course you don’t really need to sell and can hold out and hope for a higher price.
If you’re on the sidelines, cash up, focus on your education, and figure out how to get returns on your cash that exceed the loss in buying power you will face while you wait.
Anything else you would add?