Sydney Softens as Melbourne Stands Strong
Property Market Update
for Week Ending 6 August 2017
- We saw a slight fall in auction volume across the country.
- House price growth leveled off this week in Sydney but surged in Melbourne.
- Morgan Stanley says Chinese overseas direct property investment could drop 84 percent in 2017.
- Recent CBA stress test reveals what a 30 percent fall in home prices would look like for its bottom line.
This Week’s Preliminary Auction Activity (Week Ending 6 August)
There were fewer sellers in the market this week, with auction volume coming in at 1,846, down from 1,987 last week. The preliminary clearance rate lifted accordingly, as buyers competed for fewer properties.
Sydney’s preliminary result was back above 70 percent despite it being a bank holiday long weekend, while Melbourne continued its reign as the hottest property market. Auction sales in Perth, Adelaide and Canberra were strong, but Brisbane failed to clear the 50 percent mark.
Here are the latest preliminary stats from CoreLogic:
Last Week’s Final Auction Results (Week Ending 23 July)
After all auction results were reported last week, only Melbourne and Canberra sellers managed to clear over 70 percent. Sydney fell to the mid-60s, as did Adelaide.
Here are all the final capital city results for last week:
Sydney’s Eastern Suburbs were the standout again this week, with 88.4 percent of auctions clearing, but South West sellers continued to battle, barely clearing 40 percent. In Melbourne, it was the Mornington Peninsula taking out the top spot.
For the historical data of weekly auction clearance rates, click here.
Recent Home Price Movements
With auction volume falling slightly, we saw home prices rebound, especially in Melbourne. In Sydney, the median house price rose 0.17 percent, and in Melbourne, prices rose 0.50 percent week-on-week. Other markets remained mostly flat.
Property Market Analysis
This week’s price movements in Sydney and Melbourne continued to highlight the impact of supply on home prices. As supply increased over the previous week, prices fell. As supply decreased this week, prices rose.
Demand appears to be moderating, especially in Sydney, where clearance rates are far lower than Melbourne and house price growth is slower. Lower demand is likely due to investors having a tougher time borrowing money. APRA’s macroprudential measures are having a greater impact on the Sydney market, primarily because home prices are already higher there.
CoreLogic didn’t report on the upcoming auction numbers for next weekend, so we won’t know until tomorrow what volume will look like. If there are fewer sellers again, assuming demand remains consistent with previous weeks, expect more competition amongst buyers and another uptick in home prices.
What It Means For Investors
Broadly speaking, prices should remain fairly steady, although the Melbourne market will likely continue to outperform Sydney. As long as the clearance rate remains in the 70s, expect price growth in the range of 0.50 to 1 percent per month. If we start to see a Sydney clearance rate below 60 percent, prices will likely begin falling.
There’s no indication that a property market collapse is imminent, but that didn’t stop the CBA from stress testing a dreadful scenario in its latest investor discussion pack. Assuming over a three-year period…
- home prices crash 31 percent,
- unemployment spikes to 11 percent and
- the RBA slashes the cash rate to 0.50 percent
…the bank would write off about $4 billion in bad loans. After LMI recoveries, total losses would amount to $2.9 billion. Considering the bank’s total profit last year was just short of $10 billion, it wouldn’t “break the bank” as they say, but shareholders would take a big hit.
Here’s the slide from the CBA detailing the analysis:
What would a 30 percent drop in home prices look like for you? If the CBA is considering it, perhaps you should stress test your own portfolio as well.
Other than credit markets overseas drying up, one of the greatest risks to the Australian property market is the impact of tighter capital restrictions in China. As Beijing attempts to keep more and more of its people’s money at home, Chinese investors are having a more difficult time investing overseas.
According to Morgan Stanley, Chinese overseas direct property investment could decrease by 84 percent this year and fall another 15 percent by the end of 2018. We’ve already begun to see some of the impact of this in the Australian market, but we seem to be absorbing it well so far.
For the time being, as long as the RBA can keep interest rates low, we’ll see a floor under home prices as homebuyers are able to afford to borrow to buy expensive property. In light of our weak wage growth, I don’t see the RBA voluntarily cutting rates anytime soon.
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