Auction Market Booming, But Will Prices Follow?

Results for week ending August 14.

Sydney, Melbourne and even Perth posted auction clearance rates at or above 80 percent this week, and pushed the combined capital city result to a calendar year high of 77.8 percent. Auction volume continued trending down as only 1,444 homes were taken to auction, compared to 1,540 last week.

The Stats

Sydney continued to reflect a boom-time clearance rate as preliminary reports show 81.6 percent of auctions clearing successfully. The number of sellers has remained relatively constant over the past month or so. Auction volume this week was 610.

Based on preliminary figures, Melbourne’s clearance rate spiked this week, rising 5.7 percentage points to 79.9 percent. Auction volume was however down considerably from 724 last week to 604 this week.

Believe it or not, Perth led the way this week with a whopping 83.3 percent of vendors finding successful bidders. Auction volume ticked up slightly with 33 homes presented this week, compared to 30 last week.  Perth’s clearance rate last week was just 36.0 percent, so the jump to 83 percent this week was huge. Last year the clearance rate for this same week was 30.4 percent, further highlighting what an anomaly this week’s result was.

Adelaide deserves an honourable mention for posting a clearance rate of 72.7 percent. Supply was also low with only 56 homes auctioned, nearly half of what is typically expected this time of year.

The Graph

The Preliminary Numbers

The Analysis

The strong auction clearance rates are clearly a result of unseasonably low supply. The following chart from CoreLogic shows the nationwide clearance rate and auction volume trends for the last five years. Notice how the volume bars haven’t been this low in August since 2012 and 2013.

Looking more deeply into Melbourne’s numbers, we can see that there were 537 successful bidders last week and 482 this week. So even though the clearance rate spiked, the number of buyers actually declined, because supply dropped more than demand.

Based on the 2016 trend, auction volume will likely remain lower than usual through the spring. If demand continues to outpace supply, auction clearance rates will remain strong, and we may very well see continued moderate growth in home prices through the spring.

What It Means For Investors

The big four banks only passed on around half of the recent RBA rate cut to borrowers, but homebuyer optimism remains at an all-time high. Glenn Stevens doesn’t seem too concerned however, as he expects an oversupply of units in Melbourne and Brisbane and ongoing regulation from APRA to reign in sentiment.

The recent housing finance data doesn’t seem to agree. The value of investor loans in June grew by 3.2 percent compared to only 1.8 percent growth in the owner-occupier market. With owner-occupiers not living up to expectations, I believe this data calls into question the sustainability of current demand. There are only so many new deals investors can speculate on.

Keep an eye out for more restrictions to come from APRA later this year to indirectly let out some steam from the housing market. If prices get too out of control, we may also see higher stamp duty kick in for investors at some point, just like in the United Kingdom.

My opinion continues to be that no one but speculative investors wants home prices to keep rising. Expensive housing makes life more painful for would-be homebuyers, it make’s the RBA’s job harder, and it makes negative-gearing-loving politicians look bad. Considering where the regulatory power to influence prices lies, my money’s on a flattening market at best.

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.