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Spring Headwinds a Threat to Sellers

Date: 04/09/2018

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:

Source: 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:

 Source: CoreLogic 

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.

Tight Credit

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.

Increasing Supply

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?

What are your practical tips for investors in light of the current market conditions?

Profile photo of Jason Staggers

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.


  1. Profile photo of Benny

    Hi Jason,
    Good article! I wondered just what the “base value/timeframe” was, so I went looking. Like, I knew this was an Index, thus each number likely started life as “100” – but when? I was a little surprised with what I found – the quote below from CoreLogic themselves:-

    “The base figure is usually assigned an arbitrary value of 100 at a particular base date (all of CoreLogic’s indices have a base date of 31/12/2009) and the values for all subsequent dates is expressed in relation to this base figure.”

    So, this tells me that, since 1 Jan 2010, (that’s nearly 9 years) Brisbane house values have gone up just 14.5%, and unit values have dropped 9.5% – wow !! Over that same time, Sydney houses up 70% and units 57%, and Melbourne houses up 60% and units only 31% – another wow.

    I reckon Brisbane will continue to “tick away” even as things tighten up – it still remains a way cheaper place to live than Sydney, with a climate that suits older bones, and houses can almost be afforded…. :) So, even though banks’ lending rationales are tightening, I’d think Bne will continue to play “catchup”. There is a lot to catch up !!

    I don’t know either place, but based in the figures, both Perth and Darwin must become attractive destinations for people struggling to buy a place in other major cities – both of these have either dropped in value or stood still over the last 9 years.

    • Profile photo of Jason Staggers

      Hi Benny,

      Good insights. I do believe there will be a big shift in affordability in Sydney relative to Brisbane, but it will be interesting to see what that means for the Brisbane market. In other words, will Sydney fall while Brisbane remains flat or rises, or will Sydney fall with Brisbane falling by a smaller percentage. Either way, investors who bought last year in Brisbane should fair better than those who bought at the same time in Sydney. In fact, they already have.


  2. Sam

    The statistics in that table about rejection were mind blowing, in some cases the amounts are 14 – 18 times higher than just a year ago!!! Crazy!!!! The refinance stat especially stood out to me, if that doesn’t epitomize and ascertain the increased stringency in lending practices I don’t know what does!

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