Supply is Rising as Home Price Growth Takes a Breather
Property Market Update for Week Ending 23 July 2017
- We saw a boost in auction volume this week, which meant more choice for buyers.
- Auction clearance rates spiked, showing demand is solid and vendors are realistic.
- Home prices have been growing four to five times faster than wages.
- Swiss Bank UBS is warning of a property crash if the RBA hikes rates.
This Week’s Preliminary Auction Activity (Week Ending 23 July)
Demand appears to have spiked this week, evidenced by both auction volume and the preliminary clearance rate increasing across the combined capital cities. As usual of late, Melbourne pulled the majority of that weight, while Sydney and Perth didn’t look too shabby either. Though it’s not listed in the graph, Canberra also posted a preliminary clearance rate in the 70s.
Keep in mind, both Sydney and Melbourne’s final clearance rate results will likely be adjusted down once all the auction stats flow through from agents. Sydney may end up below 70 percent, while Melbourne is more likely to come in around 76 or 77 percent.
Auction volumes are expected to increase again next week in all capital cities. This will provide another test of demand, as buyers will have more to choose from, possibly leading to greater competition amongst sellers unless demand falls.
Last Week’s Final Auction Results (Week Ending 16 July)
While Sydney’s clearance rate has remained below 70 percent for the past six weeks, Melbourne hasn’t seen a clearance rate in the 60s since this time last year.
Here are all the final capital city results for last week:
The North West and Eastern suburbs were most in demand in Sydney last week, while the North East, Outer East and South East took out the top spots around Melbourne. Wollongong, south of Sydney, was the best performing regional area.
For the historical data of weekly auction clearance rates, click here.
Recent Home Price Movements
Home prices were climbing dramatically week-on-week in Sydney and Melbourne over the previous five weeks, but this week marked a shift in that trend. Home prices remained essentially the same as they were last week, which could indicate this recent mini-boom may be topping out or rolling over for the winter.
That said, based on today’s daily index, Sydney and Melbourne are up 2 percent and 4 percent respectively, for the rolling quarter. Brisbane and Adelaide both dipped, putting each of them negative for the quarter. Only Perth remains in the red for the year.
Property Market Analysis
Melbourne’s preliminary result was red-hot this week, nearly hitting 80 percent. Sydney also saw a boost from previous weeks. While these results are sure to fall with the final reporting, we will most likely see a combined capital city clearance rate this week above 70 percent for the first time in months.
The higher clearance rates and steady price action this week could be due in part to vendors setting more realistic reserves. In light of auction volumes beginning to trend back up, agents knowing competition would be stiffer surely played a part in conditioning down seller expectations.
As I look at the bigger picture and what seems to be impacting price movements the most, auction volume (supply) stands out. As we all know from the laws of economics, falling supply equates to rising prices, while rising supply leads to falling prices.
For this week at least, prices have leveled off. With supply increasing again next week, it will be interesting to see if prices slip a little further as well.
What It Means For Investors
If you see the trend as your friend, then you may find reasons to expect home prices in Sydney and Melbourne to continue rising. Both the long and short-term trends continue to be up. Melbourne is up over 16 percent for the year and Sydney nearly 13 percent.
With growth like that on the heels of the last five years, it’s hard to see the property market grinding to an immediate halt. Unless the RBA does the unexpected and lifts interest rates, it would be reasonable to expect a moderate amount of growth in 2018 as home prices flatten out in the second half of next year or in 2019.
If you instead take a more contrarian approach to the market, you may be quick to point out that home prices have been increasing four to five times faster than wages since 2012. It would also be reasonable to expect that growth like that can only go on for so long until demand falls, supply rises, and prices correct.
Speaking of a correction, an economist at Swiss bank UBS has warned that the Australian property market has peaked and that any interest rate hikes from the RBA could trigger not just a correction, but a crash in home prices.
But assuming rates remain on hold, he said, “Looking ahead, we still see price growth slowing to 7 percent year-on-year in 2017 and 0 to 3 percent in 2018, amid record supply and poor affordability.”
As I’ve said before, I can’t see the RBA raising rates. The Board knows what that would mean, not only for home prices but for our entire economy. But that doesn’t mean we should necessarily expect prices everywhere to continue rising.
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