Is the Melbourne Property Market Finally Rolling Over?

Auction Results for week ending March 19, 2017.

Sydney stock levels remain relatively weak, but auction activity lifted significantly across the combined capital cities with 2,844 homes taken to auction, up from 1,473 last week. Over the same weekend last year, volumes were much higher, with 3,540 homes taken to auction.

The preliminary clearance rate for the capital cities was 76.2 percent, higher than last week’s result after being revised down to 75.1 percent. One year ago, the clearance rate was 68.8 percent.

The City Stats

Demand in Sydney continues to be red-hot. Preliminary results show 83.9 percent of auctions were successful, considerably higher than last week’s final report of 77.8 percent. Auction volume increased only slightly, up to 962 this week from 803 last week. This time last year, 1,114 homes were taken to auction and 71.8 percent of those were successful.

Volume in Melbourne surged after the Labour Day public holiday, with 1,415 homes going under the hammer. The preliminary clearance rate dropped to 75.9 percent. Last week, the final clearance rate was 79.6 percent across 385 auctions. Last year, there were quite a few more sellers, when 72.1 percent of 1,788 auctions were successful.

The Graph

The Preliminary Numbers

The Analysis

The Melbourne property market may be showing some initial signs of softening. The preliminary clearance rate in the Victorian capital last week was reported at 84.3 percent, but was then revised down to 79.6 percent after the final numbers came through. That’s still strong, but this week, the preliminary reports show that only 75.9 percent were successful.

A result in the mid-70s is nothing to sneeze at, but typically the final numbers tend to be weaker, so a final report in the low 70s would not surprise me. That would make this week’s result like last year’s, but the difference then was volume was higher. In other words, a clearance rate at last year’s level but with this year’s supply would mean demand is moderating. Next week, volume will increase in Melbourne, which will put more pressure on the clearance rate there to fall.

Following are two charts from CoreLogic showing Melbourne’s four-week average clearance rate compared to Sydney’s just below it. You can clearly see a divergence of trends over the last month or so.

Keep in mind, we’re nowhere close to seeing an apocalypse in the Melbourne housing market. Un-renovated dumps like this one are still selling for $1 million plus, even in Melbourne’s west.

What It Means For Investors

Whether Melbourne’s latest clearance rate result is a blip on the screen or a foreshadowing of things to come is impossible to know for sure. It’s conceivable that recent heightened restrictions on investor lending are starting to take effect, or at least impacting investors psychologically.

A recent report from JP Morgan suggests that banks will be forced by APRA to increase capital levels on certain types of investor lending by three or four times current requirements, and that these changes could have “extreme effects.” For some investors, this could mean out-of-cycle interest rate increases by as much as 3 percent, the report says. That could create major cash flow problems, especially for already negatively geared investors.                                                             

Last week’s jobs report looked rather bleak, which fuelled speculation that the RBA will not be raising rates anytime soon. In fact, Credit Suisse believes the poor employment report means another cut is likely this year. Our strong Aussie dollar isn’t helping out the RBA’s cause either.

The Federal Reserve in the U.S. did hike its overnight funds rate, which, regardless of any RBA moves, will put further pressure on banks here to increase borrowing costs. About 40 percent of the money our banks lend out to investors comes from the overseas wholesale lending market. If they pay more to borrow, you can expect banks to pass those costs onto mortgage-holders.

Rising interest rates would be bearish for our economy, and for home prices. If interest rates rise, mortgage-holders will have less money to spend, which will negatively impact retailers, and therefore jobs.

If investors get squeezed too tightly, in the words of RBA assistant governor Michele Bullock, “investors can be the first ones to get out if things turn down.”

These out-of-cycle rate hikes by banks give the RBA room to lower rates further if house prices start to look a little wobbly. Our economy seems to have become dependent on cheap credit.

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The results listed here are based on preliminary reporting by CoreLogic, which is likely to be revised once a full reporting is made. The final results will be detailed in next week’s post.

For the historical data of weekly auction clearance rates, click here.

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.